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National Journal: How Should Climate Change Be Taught?

This weeks’ topic on National Journal’s Energy Insiders: How Should Climate Change Be Taught?

The battle over climate science in schools is heating up.

Earlier this month, a coalition of national science-education advocates released a students bill of rights asserting that students across the country should be taught the scientific consensus on climate change. The consensus view held by 97 percent of scientists, according to reviews of the academic literature, holds that the planet is heating up and human activity is the primary cause.

Currently, however, a patchwork of state science standards exist that do not mandate the consensus view is taught, leaving the door open for controversy over climate change to get equal airtime in many classrooms.

My response:

States should decide how best to teach issues like climate change and climate change policies.

Like any important issue–evolution vs creationism, national defense and health care policy–it is critical that students understand all sides of the debate. It was an honor for me to help present an economic perspective on the climate change debate to a group of middle school students in Atlanta, Georgia. See more about this athttp://www.thorningforum.com….

For instance, it’s important for students to understand that climate change is a global problem and that developing counties like China are responsible for most of the growth in GHG emissions. Without their participation, nothing the developed countries do to reduce their own GHGs will make much difference, see Figure 3 inhttp://accf.org/wp-content/u…

Students also need to understand that cost/benefit analysis should be used to evaluate government policies to reduce GHGs emission growth in the U.S. For example, the regulation of GHGs by the U.S. Environmental Protection Agency should be subject to peer review. EPA’s analysis of the costs and benefits of the 1990 Clean Air Act Amendments was seriously flawed. See http://accf.org/wp-content/upl…

Last, renewable energy costs substantially more than that produced by conventional fossil fuel or by nuclear power and states with renewable portfolio standards have significantly higher electricity costs than other states, see Table 3 and Figure 2 in
http://accf.org/wp-content/upl…

Today’s students are tomorrow’s leaders, so it is imperative that they understand the full picture of issues like climate change and the solutions to address it. When armed with the facts, rather than one-sided rhetoric, our youth of today are smart enough to make their own conclusions.

Act On LNG Video Release

Today, ACCF is releasing a new video – narrated by the Honorable Harold Ford, Jr. (D-TN) – telling the story of the Main Street benefits available to the United States through the export of liquefied natural gas.

The U.S. energy reality has changed drastically of late, driven by game-changing advances in the production of natural gas from shale. Annual production ofnatural gas and oil from shale has grown by more than 50 percent since 2007, helping the United States to assert itself as a global energy superpower. The U.S. is now the world’s leading producer of natural gas, and the domestic and geopolitical implications of this feat are tremendous.

LNG01The U.S. is now producing more natural gas than any other nation – recently overtaking the former global leader, Russia. And global production dynamics demonstrate that this is not an isolated or temporary condition. In 2014, conservative estimates from the Energy Information Administration (EIA) project that the U.S. will produce approximately 24 trillion cubic feet of natural gas and that Russia is on a downward slope at closer to 21 trillion cubic feet of natural gas.

The United States has the capability and ingenuity to produce at even greater levels and to reap even greater economic benefit. But until energy and trade policies in Washington are revised to reflect the new energy reality and our new role as a global leader, we risk leaving much on the table.

Legislation supported by both Republicans and Democrats – H.R.6 and S.2083 – would increase the benefits Americans receive from our vast resources, encouraging greater production at home and better enabling us to capitalize on the geopolitical power of our ample domestic energy. Given extensive debate and a clear and growing body of favorable research on the topic of LNG exports, both of these bills deserve urgent, strong, and bipartisan support.

LNG02Reserves: According to the EIA, in 2012 the U.S. consumed approximately 25 trillion cubic feet of natural gas while our proven reserves are estimated at at 334 trillion cubic feet.

We have sufficient capacity to export LNG while satisfying our domestic needs – and the more our businesses invest in this burgeoning sector, the more reserves are uncovered and greater production is achieved. What’s more, exporting our excess supply of natural gas would enable us to bolster our international allies by delivering needed energy and diversifying their sources – yielding direct benefits to American national security.

The 50% annual increase in U.S. shale oil and gas production noted by McKinsey Global Institute’s report, “Game Changers,” is evidence of what is possible in a new American energy reality. And the economic benefits of this boom are unmistakable.

LNG03Economic Development: This shale gas revolution is revitalizing the heart of small town America, already supporting 1.7 million jobs, according to a study by IHS Global Insight. Those numbers grow to 3.5 million in the next twenty years.

These jobs reach far beyond traditional “oil states,” and far beyond the wellhead. A recent McClatchy piece titled “Energy boom feeds other business, too,” published in the Kansas City Star, examines the way that the boom has energized Main Street. The piece notes: “A rust-bucket town near Buffalo is a perfect example of the transformation that fracking has brought to American business, where new life has been breathed into manufacturing and the nation’s railroads, even as much the economy bumps along at a subpar pace.” The article goes on to note how Kansas businesses are finding economic benefits from natural gas production in other states. States like Ohio, Arkansas, Pennsylvania, and countless others are at the heart of the boom.

Economic Benefits: According to study commissioned by the Department of Energy and conducted by NERA Consulting, the U.S. would experience net economic benefits from increased LNG exports. In fact, the report notes, “for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased.” The academic and economic case for exports is abundantly clear.

Organizations like the National Association of Waterfront Employers and Associated General Contractors of America are coming out in favor of H.R.6 and S.2083 because the thousands of members they represent throughout the United States benefit from increased energy production here at home.

Conclusion: The U.S. economic recovery – built on a rebirth of industries, job creation, leveling the trade balance, and regaining our global standing – is at our fingertips. As former Representative Harold Ford Jr. says in our newly released video: “Shale oil and gas development is a game changer. The U.S. is an energy power player, and we have to work hard to make sure it stays that way, because there is a lot at stake.”

If we are unable to move beyond the current status quo characterized by years-long delay and failure to act, the progress and benefits available through our vast energy resources will be stifled. It is important that our energy infrastructure is improved now in order to continue development and keep global prices competitive.

U.S. ingenuity is flourishing and unlocking new economic realities; we need bipartisan policy decisions to allow us to work hard to keep it that way. We need to Act on LNG.

 

New Video: Energy Exports Benefit “Main Street USA”

The American Council for Capital Formation’s (ACCF) ActOnLNG campaign has launched a new video highlighting how important liquefied natural gas (LNG) exports are to revitalizing Main Street, powering key industries, and strengthening U.S. manufacturing.  The short video, narrated by former Congressman Harold Ford, Jr. (D-Tenn), also urges the Obama administration to speed up LNG export approvals.  The video complements efforts in Congress to boost LNG exports to America’s allies through legislation, including the Domestic Prosperity and Global Freedom Act (H.R. 6).

“This video captures the sense of urgency that use needed to ensure that the United States continues to lead the world in the development of energy resources–particularly natural gas,” explained Dr. Margo Thorning, ACCF Chief Economist and Senior Vice President.  ”Exporting LNG would be a real game changer for the nation’s economy and would help America sustain its natural gas boom.  We hope this video will spark further conversation around natural gas exports–especially the need to cut through the bureaucratic red tape holding back development.”

CAP Critique Ignores Facts, Obscures Reality on Energy and Taxes

It’s becoming a quarterly tradition as reliable as the seasons: the oil sector releases its earnings, and the Center for American Progress contorts itself into a misleading critique of the industry, its tax treatment, and its outsized role in the American economy.

Unfortunately, repetition has not made CAP’s argument any more factual, any more persuasive, or any more founded in the common sense tenets that make for sound energy and tax policy.

The crux of CAP’s argument is, as ever, that the oil and gas industry’s earnings are too high. And because of these high earnings, the oil and gas industry should be taxed more heavily. They assert that the oil sector fails to carry its share of the burden, that it is a drain on the economy, and that policymakers should act in a manner that artificially shifts the American energy portfolio away from traditional fossil energy and toward preferred, “green” energy projects.

Not a single aspect of this line of reasoning holds water.

Earnings, Expenses, and Returns

Let’s start with the earnings. Earnings in 2013 for the “Big Five” oil companies clocked in at $93 billion – an objectively large number, but around thirty percent lower than last year. How does that figure stack up against the level of investment required? And how profitable is the sector?

Among the most capital intensive enterprises in the modern economy, oil and gas production occurs on a global scale and requires immense investment. And the cost of conducting this business is growing even more imposing as recoverable reserves grow more difficult to reach, and supply becomes more difficult to replace. A recent Wall Street Journal analysis found that three of the largest oil and gas companies – ExxonMobil, Shell, and Chevron – spent more than $120 billion in 2013 in their efforts to boost output. More, the Journal notes, than it cost to put a man on the moon – and around a half trillion dollars in capital investment in the last five years.

Indeed, as the oil and gas industry endeavors to keep providing the low-cost energy that our economy and every economy worldwide relies upon, cost recovery measures such as those bemoaned by CAP are more important than ever. Calling for the repeal of provisions like the Section 199 manufacturing deduction or protections for dual capacity taxpayers intentionally ignores the realities of today’s energy sector.

The topline earnings numbers reported by the industry, moreover, are not a reflection of excessive profit margins or inflated returns. Rather, as we recently chronicled, return on investment in integrated petroleum companies is 11.7 percent, and 12.8 percent for producing companies. For all industrials, returns average 12.5 percent. The oil industry, then, is in line with all other sectors.

“Special” Tax Treatment: Section 199 and Dual Capacity

CAP’s line of attack – much like its allies in Congress and the White House – points to provisions like the Section 199 deduction and dual capacity protections as evidence of special tax treatment for the oil and gas industry. Ironically, their selection of these two provisions serves as evidence of quite the opposite: a proclivity on the part of a misinformed Beltway contingent to seek to single out this industry with punitive tax treatment.

Section 199 is not a taxpayer handout, and CAP’s assertion that the industry and its refiners don’t deserve the deduction is a rhetorical stretch. The deduction is freely applied to nearly 1/3 of all corporate activity in the United States. Film producers, software companies, renewable energy producers: they all take Section 199. But CAP rarely labels these groups as tax scofflaws, despite the fact that they take the deduction at a rate of 9 percent, while oil and gas companies are limited to a 6 percent deduction.

Far from an example of the industry’s preferential treatment, the domestic manufacturing deduction is an example of a tax policy that has already punitively singled out the oil sector in a negative and costly manner.

Proposals to alter dual capacity rules, meanwhile, are similarly and terminally flawed. CAP – along with the President – would seek to disallow oil and gas companies from taking a credit for taxes paid to a foreign government. Without this credit, American oil companies producing overseas would face a tremendous financial disadvantage, and a drastically higher tax rate.

Until the United States reforms its outdated “worldwide” system of international taxation, protections for dual capacity taxpayers are essential to American competitiveness. Dual capacity protections do not amount to a subsidy for American producers operating overseas. They serve to even the playing field for American companies seeking to keep pace with  foreign – often state-owned – competitors that do not face the same onerous international taxation regime as American companies.

The rules as written have helped American producers grow and create jobs – but they are far from a subsidy. Repealing or modifying them, however, would simply make it easier   for  foreign competitors to gain access to the resources at the expense of U.S. companies.

An Attack on Exports

Also buried in the CAP piece is an attack on energy exports – an attack that is rooted in the claim that exports “could raise gasoline prices.” Exports and taxes are two very different policy debates, but CAP’s line of reasoning concerning this issue is no less misguided. Consensus is growing – on both sides of the aisle – regarding the prospect of American crude oil and LNG exports. From the Department of Energy to leaders on Capitol Hill, there is a recognition of the benefits that global exports can provide to our economy – from stabilized domestic production to job creation. As for the impact on gas prices? On the very same day that CAP posted their piece, Resources for the Future released a study indicating that lifting the export ban may in fact reduce prices at the pump.

CAP references data from Barclays in asserting that exports would press consumer prices upward. But their data is outdated and not reflective of the opinion of Barclays at large. Analysts from elsewhere within Barclays released a new assessment just yesterday indicating that, in fact, they expect that the consumer will benefit from lifting of export bans thanks to enhanced refinery efficiencies.

Conclusion

The latest CAP attack is, regrettably, more of the same politically charged venom that we have come to expect in recent years. But while the CAP message has stagnated, the energy debate has evolved. The oil and gas industry sports the highest average effective tax rate on the S&P index. The sector supports 10 million jobs, and continues to create new jobs at a breakneck pace.

It’s time to move past talking points and start dealing in facts.

 

 

 

Oil Industry Profitability, Investment and Tax Policy: What are the Facts?

Background:

A recent article by Daniel Weiss of the Center for American Progress tries to make the case that because the net income of large, integrated U.S. oil companies has risen in recent years, these companies should lose the federal income tax provisions they currently use.  A quick look at Weiss’s article reveals several serious analytical and methodological flaws which make his conclusions about how tax reform should impact the oil and gas industry inappropriate and, in fact, harmful to U.S. job and economic growth.

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Stunning New Propaganda From Anti-LNG Exports Group

The Industrial Energy Consumers of America circulated to Capitol Hill this week a document entitled, “Five LNG Export Facilities; Natural Gas Prices Up 35.6 Percent; Cost of $25.8 billion”.  The document contained talking points built on cherry-picked data that is so misleading you have to see it to believe it…

ANTI-LNG MYTH #1: Natural gas prices are on the rise and therefore the department of Energy must delay LNG export applications.  Pasted below is ICEA’s graph it uses to justify further delay of LNG export approvals.  It looks like gas prices are on the rise… right?

LNG1

Wrong!  Natural gas prices often reflect short-term seasonal and political changes; however, the huge increase in supply in recent years has brought natural gas prices down to the low levels of the early 2000’s as shown in the  graph below:

LNG2

Source: http://www.eia.gov/dnav/ng/hist/rngwhhdd.htm

ANTI-LNG Myth #2: The Department of Energy must redo its study.  ICEA writes, “DOE is basing its LNG export decisions on domestic demand assumptions that are now three years old, and do not take into consideration that the EPA GHG rule will restrict use of coal in the power generation sector.”  This statement is misleading; according to data from the EIA, even if a large number of coal fired plants are retired, there will be only very small impacts on domestic natural gas prices. EIA also notes that future levels of natural gas prices depend on many factors, including macroeconomic growth rates and expected rates of resource recovery from natural gas wells.”  And in the 2013 Annual Energy Outlook, the Department of Energy projected that natural gas prices will not rise above $5.00 until 2030.

LNG3

Source: Annual Energy Outlook 2013

America has a plentiful supply of natural gas, enabling exports and more than enough supply to fuel our chemical, manufacturing and residential demands. And natural gas reserves are at record levels, surpassing the global leader Russia for the first time ever.

Consequently, there are no circumstances under which the Department of Energy should delay natural gas exports.  To do so would be in violation of the World Trade Organization and at-odds with the best economic interests of our country.

 

 

Pass the Cost/Benefit Test to Determine if the Price is Right

This week, National Journal posed the question about determining the right price for energy, whether it’s powering your car or house or weighing diverse issues like the renewable-fuel standard and forthcoming regulations controlling greenhouse-gas emissions from electric power plants.

My thoughts: cost/Benefit analysis should be the test by which policymakers craft sound energy policies.  Regulating GHGs through the Clean Air Act fails that standard. As I noted in my testimony before the Senate EPW Subcommittee on Clean Energy and Nuclear Safety, “In sharp contrast to EPA’s $2 trillion estimate of the ‘economic value’ of the CAAA, EPA’s own simulations with its macroeconomic model show that the CAAA has significant negative impacts on U.S. GDP growth over the 2010- 2020 period GDP declines by $79 billion in 2010 and by $110 billion in 2020 relative to the baseline forecast. In other words, the already implemented CAAA regulations have real, quantifiable costs to the economy.”

 Also failing the cost/benefit test is the use of tax credits and subsidies to promote the use of renewable and alternative energy in the U.S. This misguided policy adds costs to business, households and the government without delivering commensurate economic or environmental benefits. Data from DOE’s EIA show that new electric generating capacity using wind and solar power tends to be considerably more expensive than conventional, available and secure natural gas and coal resources. In 2012, an 81% of the $16.6 billion in federal tax incentives went to renewables for energy efficiency, conservation and for alternative technology vehicles.  Conversely, only 19% went to fossil fuels according to the Congressional Research Service (CRS). The tax credit structure is so lopsided that some renewable electricity sources enjoy negative tax rates: solar thermal’s effective tax rate is -245% and wind power’s is -164%.

Environmental regulations and policy guidelines such as the Social Cost of Carbon, the Renewable Fuel Standard and the regulation of GHGs under the Clean Air Act can raise the hurdle rate for new investment and slow new development and job growth just as can taxes. All regulations should be subject to a transparent cost/benefit analysis with broad stakeholder involvement and the market should determine energy prices.

The U.S. Has a Shortage of Jobs, Not Energy

Despite what some policymakers may assert, the U.S. is not facing a shortage of energy.  Domestic oil production has increased by 25 percent over the 2005-2012 period and oil imports are down sharply. Natural gas production has increased even faster, rising by 33 percent over the same period. Wind and solar power have also made strong gains as well thanks to renewable portfolio standards in 30 states as well as subsidies like the production tax credit (PTC) and investment tax credits for renewable energy. As policymakers confront the sluggish U.S. economic recovery and slow job growth, they need to consider the impact of tax, budget and regulatory decisions that promote the use of costly renewable energy compared to the expansion of conventional fossil fuels or nuclear power for electricity generation and for transportation. Another factor to consider as policymakers debate subsidies for new energy technology deployment is that, as is widely understood, the impact of U.S. reductions in GHGs will have almost no impact on the growth in global GHG concentrations since most emission growth is in developing countries like China, India, Indonesia and in Latin America (see Figures 1 and 2).

Furthermore, according to recent EIA data, new electric generating capacity using wind and solar power tends to be considerably more expensive than conventional natural gas and coal. For example, the total cost of offshore wind, at $222 dollars per mega watt hour (MWH) is almost 240% higher than for advanced combined cycle natural gas–fired plants which cost only $66 per MWH. The cost of solar thermal, at $261 MWH, is almost 300% higher than natural gas-fired electricity production. Similarly, advanced nuclear costs an estimated $108 per MWH and advanced coal costs only $123 per MWH.[1]

Thus, especially in times of tight budgets, careful cost/benefit analysis should be applied before taxpayer dollars are spent on incentivizing the deployment of renewable technologies. The recent federal government technology deployment failures of many projects like Solyndra and Fisker Automotive demonstrate that government project managers are generally not very good at picking technologies that will succeed in the market place. According to a report by the Congressional Research Service, the U.S. Department of Energy has spent $39.9 billion dollars on energy technology development 2003-2012 period.[2] Approximately half of that amount was spent on renewables; energy efficiency and electric systems technology development (see Figure 3).

According to a new CRS report, “Energy Tax Policy: Issues in the 113th Congress, energy related tax expenditures and tax provisions for fossil and renewable energy and energy efficiency total $84.5 billion dollars over the 2013-2017 period. [3] Reducing federal spending and the deficit will require going over these expenditures and eliminating the ones that do not meet the cost benefit test. For example, the cost of the 2.3 cents production tax credit (PTC) for wind, closed-loop biomass and geothermal energy is $9.7 billion over the five year period.[4] In addition, according to a recent report by the National Academy of Sciences, “Effects of U.S. tax Policy on Greenhouse Gas Emissions,” the tax system is an ineffective mechanism for combating climate change.[5] As a result, “current tax expenditures and subsidies are a poor tool for reducing greenhouse gases and achieving climate-change objectives.” The NAS study, which assumed that all tax policies in place or expiring in 2011 would be renewed through 2035, found that the PTC actually has very little impact on U.S. greenhouse gas emissions. Over the last several years, production tax credits for renewables have greatly increased the rate of wind and solar energy deployment, but for greenhouse gases, “the impact is small.”

Also, provisions in the tax code which allow oil and gas companies to deduct items like intangible drilling costs, geophysical and geologic expenses and percentage depletion should not be called subsidies but should be considered the same as the tax code provisions that allow a fast food chain to deduct its labor cost and using LIFO for inventory expenses. When companies drill for oil or gas, they incur IDCs which are largely the labor costs of locating and drilling wells. IDCs are costs that cannot be recovered as they have no salvage value (in contrast to the drill pipe and casing itself, which is a “tangible asset” and is subject to depreciation). It is noteworthy that all other natural resource industries (e.g., minerals and coal production) have almost precisely the same rules as apply to oil and gas and other industries, such as software development and pharmaceuticals, are able to expense research and development costs. Similarly, geological and geophysical costs are expenses that include the costs incurred for geologists, seismic surveys, and the drilling of core holes; like IDCs, they have no salvage value. Further, percentage depletion, available only to small, marginal independent oil and gas companies, is analogous to a fast food chain using LIFO (last in first out) accounting for the cost of hamburger meat since if the price of oil or gas rises the producer will have to pay more to replace its reserves and maintain production levels once the marginal well is exhausted.

Finally, the best way to provide a level playing field for the deployment of all types of energy technology, both conventional as well as renewable and alternative technologies is to allow expensing of all new investment. Research comparing the impact of a consumption tax under which all investment is expensed shows that it would provide the strongest boost to economic and job growth.[6] If that type of tax reform cannot be implemented at present, many public finance experts suggest that the tax code should provide the same provisions for all types of industries and activities so as to avoid advantaging one industry over another. If markets are allowed to select the energy technologies that are deployed rather than government officials using tax incentives, subsidies or a clean energy standard mandate, costs to consumers and the federal government’s budget will be reduced.



[4] Ibid.

[6] See http://accf.org/news/publication/switching-to-a-consumption-based-tax-from-the-current-income-tax and Joint Committee on Taxation, “Tax Modeling Project and 1997 Tax Symposium Papers,” November 20, 1997. https://www.jct.gov/publications.html?func=startdown&id=2940

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Regulatory Uncertainty Keeping Capital Investment on Sidelines

In today’s Washington Post, Robert Samuelson discusses sluggish capital spending and the recovering economy:

In the struggle between capital and labor, capital is winning — and that’s hurting the feeble economic recovery. To simplify slightly: Labor (wage-earners and consumers) can’t spend, and capital (businesses and shareholders) won’t spend. Without a powerful growth engine, the economy advances haltingly.

Samuelson highlights a number of reasons for sidelined capital spending: globalization, new technologies, weaker unions, financial market pressures and more.  Read Samuelson’s entire column here.

But, there are some critical explanations overlooked by Samuelson on why U.S. investment is still sluggish four years after the recession.

Uncertainty about key policy issues has made business cautious about investing and raises the hurdle rate that new investment must achieve. Real non-residential fixed investment is still almost $30 billion below the fourth quarter of 2007 when the recession began. The primary drivers of corporate uncertainty today include Dodd/Frank implementation, the Affordable Care Act, reform of the federal tax code, as well as fiscal and monetary policy.

Top at the list of uncertainty for many corporations is environmental and energy policy regulations from agencies such as EPA and DOE.

Until the federal government offers a clearer regulatory path, corporations will rightly continue to be cautious and keep capital investments on the sidelines.

LNG Export Permit Delays: What’s At Stake?

Last week the U.S. Department of energy approved a third application to export LNG after two years of regulatory limbo.  With the approval of Lake Charles LLC’s LNG exports to non-FTA countries, the U.S. will now have the ability to export up to 5.6 billion cubic feet per day of natural gas.

 Opponents to natural gas exports claim this export capacity represents a  “sweet spot”  for natural gas exports – although a government study concluded no such sweet spot exists.  To the contrary, every major study has found that the more LNG is exported, the better for America. In fact, expanding natural gas exports will be an economic “win” for the United States.

 “Across all these scenarios, the U.S. was projected to gain net economic benefits from allowing [liquefied natural gas] exports. Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased,” concluded a 2012 major study commissioned by the Energy Department (DOE).

The U.S. produced an average of 65.9 billion cubic feet of natural gas per day in 2012, and the global market for natural gas expected to grow over the next decade.    With 19 applications still under consideration, the slow permitting process at the Energy Department is undermining the America’s ability to develop and export our natural gas on the global market. The infographic below highlights the high stakes of prolonged permitting delay:

LNGInfoGraphic_d2

Long term, the biggest challenge for U.S. LNG markets is competition from the 63 international projects to export gas.  The Energy Department’s fragmented approach to approving applications risks ceding America’s natural gas energy advantage to other exporting nations.

 To learn more about the status of the outstanding LNG export applications, visit www.actonlng.org.