Oil Independence is too costly-Hassett and Metcalf Aug, 07
KEVIN A. HASSETT, a scholar at the American Enterprise Institute, GILBERT E. METCALF Ph.D. Harvard University, M.S. University of Massachusetts at Amherst, B.A. Amherst College Aug. 07
A policy of energy independence that depends on boosting domestic oil and gas supplies through subsidies has several defects. First, subsidies reduce production costs and so do nothing to discourage oil consumption. Second, the policy encourages the consumption of high-cost domestic oil in place of low-cost foreign oil. A policy to encourage the United States to use up domestic reserves and thus become increasingly vulnerable in the future to foreign supply dislocations seems especially peculiar to us. Third, it is expensive. The five-year cost simply for the incentives mentioned above totals nearly $10 billion, according to the most recent administration budget submission.
We Cannot Drill Our Way to Energy Independence- Hassett and Metcalf Aug, 07
KEVIN A. HASSETT, a scholar at the American Enterprise Institute, GILBERT E. METCALF Ph.D. Harvard University, M.S. University of Massachusetts at Amherst, B.A. Amherst College Aug. 07
The single largest energy tax expenditure in the U.S. budget is the tax credit for alcohol fuels, with a five-year revenue cost of $12.7 billion. The 51-cent-per-gallon credit primarily benefits corn-based ethanol. The subsidies to corn-based ethanol are politically motivated, as evidenced by the 54-cent-per-gallon tariff on imported ethanol. There is even debate in scientific literature about whether ethanol takes more energy to produce than it contains.[4] Even making an optimistic read of the literature, corn-based ethanol is expensive and provides little new energy to the economy. One study indicates that shifting all of the current corn crop to ethanol production would replace just 12 percent of our gasoline consumption. This shift would reduce greenhouse gas emissions by less than 3 percent.[5]
In addition to the ethanol subsidy, the federal tax code provides investment tax credits for solar and geothermal power production and advanced coal-burning power plants under section 48 of the tax code. Recent research shows that the 20 percent investment tax credit for new integrated gasification-combined cycle coal plants makes this technology cost competitive with new pulverized coal plants. The subsidy for solar-generated electricity, however, it is not large enough to make solar energy cost-competitive with natural gas or other shoulder or peaking power plants.[6]
Section 45 of the tax code provides production tax credits for wind power, biomass, and other renewable power sources. The tax credit is currently 1.9 cents per kilowatt-hour (kWh). The section 45 and 48 tax credits are the second largest energy tax expenditure, with a five-year cost of over $4 billion. The production tax credit for wind and biomass makes these two power sources cost competitive with natural gas.[7] The problem with production tax credits is that they must be financed somehow, either with reduced federal spending elsewhere in the budget or with higher taxes. Presumably, the credits are in place to encourage non–fossil fuel electricity production. The credit, however, distorts behaviors among non–fossil fuel power sources.
A better approach on both of these counts would be to levy a tax on the power sources that one wishes to discourage. If, for example, the concern is carbon emissions, then a carbon tax is an appropriate response. A tax of $12 per metric ton of carbon dioxide in lieu of production tax credits for wind and biomass would make these renewable sources competitive with natural gas.[8] Unlike the subsidies, however, the tax would raise revenue, which could finance reductions in other distortionary taxes.[9] In units perhaps more familiar to most readers, a carbon tax of this magnitude would raise the price of gasoline by 10 cents if it were fully passed forward to consumers.
Other production tax credits in the tax code include a production tax credit for electricity produced at nuclear power plants (section 45J). Qualifying plants are eligible for a 1.8-cent-per-kWh production tax credit up to an annual limit of $125 million per thousand megawatts of installed capacity for eight years. This limit will be binding for a nuclear power plant with a capacity factor of 80 percent or higher, thereby converting this into a lump-sum subsidy for new nuclear power plant construction.
To summarize, alternative energy subsidies that are currently in place play political favorites and would be unnecessary if the types of energy that policymakers view as undesirable were taxed at an efficient rate.
Solvency-Alt Energy Reduces Oil Dependecne
Alternate Energy can reduce our oil dependence
Martin Feldstein Oct. 2001 Professor of Economics, Harvard University, and President of the National Bureau of Economic Research (http://www.nber.org/feldstein/oil.html)
Political leaders and expert commissions have been calling for a reduction in our dependence on oil imports at least since 1974 when President Nixon established Project Independence with the goal of achieving energy independence by 1980. In fact, however, our dependence on imported oil was still 42 percent of our consumption in 1980 and has risen to 52 percent in 2000. (3)
What can be done to reverse this trend? Increased oil production in the United States could help to reduce our dependence on imported oil. Some of the increased domestic production will occur as a natural response to a rise in the world price of oil that results from increasing global demand. A higher price will induce more exploration and more extraction from such higher cost sources as deep wells and off-shore sites. But even with these market forces at work, experts now predict that the oil imports of the U.S. will rise to 70 percent of our consumption by 2020. Relaxing some of the government restrictions on oil drilling can increase U.S. production further, but the impact on our dependence will be small. For example, although the Administration's proposal to open some of the Arctic National Wildlife Refuge to oil drilling would eventually increase production in Alaska by an important 600,000 barrels a day, that would only equal about 7 percent of what we now import from the rest of the world.
Our dependence on foreign oil can only be limited in a significant way if we reduce our consumption of oil. (4) There is substantial room to achieve such reductions since the consumption of oil per dollar of GDP is now more than 40 percent higher in the United States than it is in Germany and France. Politicians have generally been reluctant to pursue this goal aggressively because it has been assumed that doing so would require a European style gasoline tax. As anyone who has driven in France or Germany knows, an important reason for their lower consumption of oil is that their gasoline taxes cause gasoline prices to be nearly three times the level in the United States. The political impossibility of imposing such a tax was brought home very clearly by the abject failure of President Clinton's 1993 proposal for a general Btu energy tax.
Fortunately, it is possible to provide the incentives needed for a substantial reduction in oil consumption without any new tax by using what I will call tradeable Oil Conservation Vouchers. Before describing how such a voucher system would work, it is useful to review the primary policy tool that has been used by the federal government to reduce oil consumption: the Corporate Average Fuel Economy Standard. Under the CAFÉ standards, automobile manufacturers are required to keep the average number of miles per gallon on the entire fleet of new cars in each model year above some level set by the federal government. That standard has been 27.5 miles per gallon since the 1985 model year, up from 18 miles per gallon for the 1978 model year when the CAFÉ standards were first introduced by President Carter. A motor vehicle manufacturer may have some cars with lower fuel efficiency but these must be balanced by cars that get more than 27.5 miles per gallon so that the average fuel efficiency for all of the cars sold by the company in the year exceeds 27.5 miles per gallon.
Oil Prices – Up
Oil prices will climb due to demand in India and China – recent volatility is irrelevant
US News and World Report, 7-18-08
http://usnews.rankingsandreviews.com/cars-trucks/daily-news/080718-Oil-and-Gas-Prices-Dropping-But-Will-the-Slide-Last-/, Oil and Gas Prices Dropping, But Will the Slide Last?
CNN Money reports, "Fuel prices at the pump fell overnight, a nationwide survey of gas station credit card swipes showed Thursday." The nationwide average price of a gallon of regular gas "retreated nearly a penny to $4.105, down from a record $4.114" on Thursday, according to AAA. The drop in gas prices follows a drop in the price of oil. The Los Angeles Times notes, "Oil prices tumbled for the third straight day Thursday, taking the cost of crude below $130 a barrel for the first time in six weeks and signaling a possible end to a bull run that seemed intent on hitting $150 this summer." The Times adds, "Although no one would rule out an abrupt reversal like those that followed other dips in recent months, several oil analysts suggested that oil prices could continue to slide." Some analysts believe a drop in consumer demand is behind the decreasing price, while others caution "that oil's slide was at least partly triggered by a wave of selling on the last day of trading for the August futures contract," meaning the drop is unlikely to last. "They also noted that a hurricane or new bellicose talk between the U.S. and Iran could shove economic worries to the back burner and reignite oil's climb." The Toronto Star notes, "Opinions are divided over whether the drop is merely temporary relief…or the beginning of a long-term slide." Some analysts see decreasing U.S. demand, and an end to government subsidies in other countries, initiating a lasting drop in oil prices. Others, "Including Morgan Stanley, Goldman Sachs, and CIBC World Markets, hold the view that the global supply-demand outlook will drive oil to $200 a barrel over the next few years. They argue chronic underinvestment in exploration can't be solved overnight, and it will take many years to bring on new supplies -- and great expense." The Star cautions, "What all observers seem to agree on is that oil prices will be much more volatile in the years ahead." The International Herald Tribune adds one concern: "While demand is falling in the United States and Western Europe, oil consumption is still expected to rise this year, because of growth in China, India, and the Middle East. That growth," the IHT writes, "which should reach about a million barrels a day this year, provides a floor for oil prices." Even if Americans all buy 40 mpg Ford Fiestas and 45 mpg Chevy Cruzes in coming years, some believe, growing demand for oil in other parts of the world will continue to push up the price we pay at the pump.
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