The Senate Finance Committee heard from a panel of experts about the pros and cons of skewing energy tax benefits toward one technology, such as wind power, at the expense of another.

At a hearing Thursday on technology neutrality in energy tax, Finance Committee Chairman Max Baucus, D-Mont., noted the Senate’s sour experience when it altered the Tax Code to favor certain types of materials and technologies. “Consider the credit that Congress enacted in 1980 to stimulate oil shale, tar sands, and synthetic fuels from coal,” he noted. “The idea sounded good at the time. But many companies exploited the credit. Some sprayed coal with chemicals for no reason other than to line their pockets.”

However, as the Obama administration encourages Americans to reduce their dependence on foreign oil and clean up the environment by providing tax incentives and a cap-and-trade system that favor clean energy technologies, Baucus (pictured) acknowledged that a technology-neutral approach could “provide more bang for our energy buck.”

“The government might just set a performance standard, regardless of the technology employed,” he explained. “We could encourage things like reduction in greenhouse gas emissions, improvement in efficiency, or increased energy content. And then we would leave the job of picking the best technology to the competition of the market.”

Ranking member Charles Grassley, R-Iowa, noted the difficulty of reaching agreement in the Senate on energy policy. “Simplifying the energy-tax incentives by creating technology-neutral tax incentives is a noble ambition,” he said. “However, getting consensus on what goals should be used in developing energy tax incentives can be a little like herding cats. Even if lawmakers agree on what goals should be used, which is a big ‘if,’ controversial issues arise. For example, whether nuclear energy should qualify for technology-neutral energy tax incentives would certainly be a controversial issue.”

Grassley noted that some of the energy tax incentives developed by his committee have been successful at developing domestic energy industries, even though they favored certain technologies, such as the production tax credit, which benefited the wind industry, and the volumetric ethanol excise tax credit for the ethanol industry.

One of the witnesses, Gilbert Metcalf, a professor at Tufts University in Medford, Mass., pointed out in his testimony that tax subsidies can play an important role in supporting both fossil fuel and renewable energy production. “They play a smaller role in supporting nuclear power production though this could change over the next decade,” he added. “Production tax credits for new nuclear power production put in place in the Energy Policy Act of 2005 could significantly increase federal tax expenditures for this source of electricity.”

David Greene, a corporate fellow at the Oak Ridge National Laboratory in Knoxville, Tenn., spoke in favor of technology neutrality. “For most energy and environmental policy goals, performance-based, technology-neutral incentives and standards are superior to those that target a specific technology,” he said in his testimony. “Performance-based incentives allow the widest scope for innovation, and permit market forces the greatest latitude to select and implement cost-effective solutions. Because of our limited ability to foresee technological solutions that are possible but do not yet exist, it is almost always more effective and economical to specify the energy or environmental objective rather than a specific means of achieving it.”

John Urbanchuk, a director at the consultancy LECG in Wayne, Pa., cautioned against letting companies exploit particular energy technologies simply because a tax benefit is available. “Common sense dictates that the incentive should be structured in a manner that makes an activity economically viable but does not provide an unintended windfall for recipients,” he said. “In addition, the value of the incentive should not create perverse incentives that encourage activities counter to responsible energy policy, or those that impede achievement of national energy policy goals.”

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