The US government has new plans to spend tens of billions of dollars on energy. Taxpayers deserve to know how much energy this investment yields.
The American Recovery and Reinvestment Act of 2009 (ARRA) directs at least $65 billion to energy through 2019. Of that total, $22 billion is tax relief. President Barack Obama wants to spend $15 billion/year on wind and solar power, clean coal, advanced biofuels, and vehicle fuel efficiency.
The outlays will add to existing spending programs targeting a wide range of energy sources and uses. In 2007, according to an Energy Information Administration study conducted that year, US tax expenditures on energy totaled $10.444 billion. Big items on EIA’s list of special tax treatment in 2007 were the alternative fuel tax credit, $2.37 billion, and alcohol fuel exemption, $2.99 billion.
Oil, gas breaks
For oil and gas in 2007, the biggest tax breaks were the expensing of exploration and development costs, $860 million, and the excess of percentage over cost depletion, $790 million. The value of those breaks topped out at $10.9 billion (2007 dollars) in 1981, a feverish drilling year. Since then, tax-law changes have restricted use of percentage depletion.
Well before the current spate of energy spending, therefore, the US was increasing governmental outlays on energy and conservation overall, with a tilt toward noncommercial energy. Recently enacted laws will amplify the effect.
The Energy Policy Act of 2005, according to government estimates, added about $14.5 billion in tax expenditures on energy over 11 years, including $4.5 billion for renewables, $3 billion each for coal and electricity, and $2.6 billion for oil and gas. The act also set a mandate for ethanol in gasoline, which the Energy Independence and Security Act of 2007 expanded to a peak of 36 billion gal in 2022. Because ethanol blenders receive a tax credit of 45¢/gal, the growing mandate will raise tax expenditures if Congress continues to renew the subsidy.
So the ARRA’s preferential spending on energy is nothing new. It’s just more—much more. The government has been spending tax dollars on energy for a long time and lately has favored sources other than oil and gas.
Promoters of ethanol and other energy from renewable sources argue that new energy forms deserve favorable treatment similar to past subsidies for oil and gas. The proposition is fair, as far as it goes. But recent treatment is anything but similar.
In their peak year for tax breaks, oil and gas contributed the equivalent of 38.1 quadrillion btu to US energy supply. The $10.9 billion in tax breaks thus were worth 29¢/MMbtu. In 2007, according to EIA, tax expenditures for alcohol fuels totaled $3.2 billion, and ethanol production represented 550 trillion btu of energy, making alcohol tax breaks worth $5.82/MMbtu. So a unit of alcohol energy in 2007 cost taxpayers 20 times what a unit of oil and gas energy did in an aberrant year when tax breaks were at their highest level in at least 3 decades.
There’s nothing inherently wrong with spending by the government on energy. The US needs new supply from diverse, domestic sources, which characteristically need help in their early years. As the comparison between alcohol and oil and gas tax breaks shows, however, it’s possible to spend a lot of money on relatively small increments of energy supply.
Dollars and supply
Taxpayers should know how much—or little—their investment in energy contributes to total supply. Most of them would be disappointed by the record. Most taxpayers have no idea how much their government spends on energy or how little usable energy results from the expenditure. This condition makes energy fertile ground for waste, at best, and corruption, at worst.
In his push for an economic stimulus law with energy spending at its core, Obama emphasized transparency. He’s right. Americans deserve a regular accounting of what unprecedented government outlays really achieve. The accounting should relate dollars to real supply of usable supply for every politically favored energy source. It also should say who gets the money. Anything less straightforward isn’t transparent enough.
