WASHINGTON – IER Senior Economist Dr. Robert Murphy will testify today before the House Energy and Commerce Subcommittee on Energy in a hearing titled, “Federal Energy Related Tax Policy and its Effects on Markets, Prices, and Consumers.” The hearing begins at 10:15 am ET and will be live-streamed on the House Energy and Commerce website.
Below is the executive summary from Murphy’s testimony:
Economists generally agree that decentralized markets, operating through private property and the profit-and-loss test, allocate resources better than top-down central planning. In the context of tax policy, this principle means that policymakers should try to raise the desired amount of revenue in a manner that distorts consumer and producer behavior as little as possible.
This principle is routinely violated when it comes to tax policy and energy markets. A recent study estimates that from 2016-2020, the federal tax code will provide artificial support through energy-specific provisions that cost the Treasury (in the form of forfeited revenues) $82.7 billion, with the renewables provisions of the Production Tax Credit and Investment Tax Credit holding the #1 and #2 spots, receiving 47.5% of the total subsidy between them.
According to the Energy Information Administration (EIA), in Fiscal Year 2013 direct federal financial interventions (a measure that includes, but is not limited to, tax expenditures) for 2 electricity production directed $5.9 billion to wind and $4.4 billion to solar, yet only $901 million for coal and $690 million for natural gas and petroleum electricity production. The difference in federal support is even more striking when adjusted for the level of output: On a per-megawatt-hour basis, in FY 2013 solar received $231 of support and wind received $35, while natural gas and petroleum received 67 cents and coal received 57 cents.
As these figures amply demonstrate, federal tax policy currently provides artificial encouragement to some sectors (such as wind and solar) at the expense of other energy sources. The popular slogan “all of the above” to characterize a sensible U.S. energy policy is defensible, if it means that policymakers will foster a level playing field. Artificially promoting the development of wind and solar actually raises the true cost of electricity generation, because it is currently much cheaper to produce electricity (all things considered) through coal and natural gas plants, rather than new wind and solar.
As these newer technologies develop, the market may gradually shift to a greater reliance upon them. However, if policymakers continue to use the tax code (as well as direct spending and regulations) to artificially promote the expansion of some energy sources, this will further distort behavior, reducing consumer welfare and in particular making the energy sector less efficient.