Energy Politics Boils Down to Oil and Taxes

 | Oct 19, 2012 | 6:30 PM EDT  | Comments
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While they agree on many items, presidential candidates appear to have very different views on energy and energy production. Both candidates claim they want energy independence. One candidate wants to eliminate federal incentives for wind, solar and other power production technologies. The other candidate wants to continue tax credits for renewable energy and punish utilities burning dirty coal.

Energy can be broadly broken down into seven categories: petroleum, natural gas, coal, nuclear, electricity, renewables and energy efficiency. It may sound strange to count energy efficiency as a source of fuel, but it is becoming the centerpiece of energy policy no matter who wins the White House.

When it comes to energy independence, the U.S. is already self-sufficient in most of these categories, except petroleum. We don't need to import any natural gas. We don't need to import any coal. We don't need to import any nuclear fuels. Our electricity is already oil-free. Renewable energy and energy efficiency is by definition energy independent.

Nuclear power, coal, wind power plants and solar plants are mostly used to produce electricity, which already achieved energy independence. More nuclear, coal, wind or solar will not achieve additional energy security or energy independence.

Right now, energy politics is not about discussing "all of the above" options. For example, nuclear power was only mentioned once in the presidential debates and that reference was indirect and vague. The candidates' discussions about coal were confusing. One candidate suggested coal jobs are growing, the other linked coal production to gasoline prices.

Energy politics really boils down to two issues: oil and tax deductions. One candidate wants to drill more oil and gas wells, import more oil from Canada, and eliminate tax deductions for wind power and solar power. The other candidate wants to restore tax deductions for wind and solar power and remove them from oil and gas. Both candidates plan on stripping away intangible drilling costs, oil depletion allowances and other deductions.

It is a little surprising to hear a republican claim they want to raise income taxes for companies engaged in energy production. In the past, they've argued that increasing taxes kills economic growth and jobs.

They are right. Increasing taxes on energy producers will reduce production. Tax deductions actually boost marginal oil wells, gas wells, wind projects and solar projects. Marginal wells and power production projects would have been abandoned if the tax breaks were not present.

If producing more energy from domestic sources is the national objective, then taxing success will increase production costs, frustrate producers, sideline marginal wells and sideline power projects. It will also hurt small businesses; they are the nation's biggest risk takers who are working hard at the margins; they benefit the most when tax incentives remain in place.

It is a mistake to suggest all federal tax credits and deductions go only to large companies like Exxon Mobil (XOM), Chevron (CVX) and ConocoPhillips (COP). There are a lot of small producers who need the tax break to risk drilling marginal and difficult wells. A lot of the nation's production waiting exploration is sitting near the margin.

To be clear, tax credits and deductions on energy are not grants and they do not cost taxpayers cash. Without the tax breaks, many companies would not form. With the tax breaks, the government defers revenue on enterprises that otherwise would not exist.

The tax breaks actually stimulate other tax revenue. Employers are still obligated to pay federal, state and local government payroll taxes, property taxes and income taxes. New energy projects employ new workers, which mean governments spend less on unemployment and other social costs.

Tax incentives for energy production are limited. In the case of wind and solar, tax credits expire quickly. After year six, a solar farm begins to produce more tax revenue than any tax credit they received. After year 10, a wind farm has minimal operating expense and it is at the maximum possible income tax bracket. Both wind and solar not only produce energy, they also produce taxes for decades.

If the objective is energy independence, tax breaks for oil producers are in the national interests. But tax breaks for wind and solar producers do not advance energy independence goals.

But, if presidential candidates were truly in favor of, "all the above strategy," they would keep tax breaks for oil, natural gas, coal, wind power and solar power. In fact, they would consider expanding and streamline tax breaks for any investment that produces domestic energy, independent of the fuel type. This includes tax breaks for nuclear, biofuels, hydroelectric, hydrokinetic and energy efficiency.

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