Energy, Climate & Environment - Rising Gas Prices: Kick-Starting the Debate on Fuels Policies

04/19/2011

In recent weeks, Congress has begun to examine the current patchwork of tax credits, mandates and programs that can increase the domestically-produced renewable and alternative fuels in our country. Legislation to increase supplies of domestic oil and natural gas will also be offered as part of the energy policy debate surrounding prices at the pump. Given the bipartisan focus by the Executive and Legislative Branches on fiscal discipline, there is a renewed effort to examine the extent to which the U.S. should provide incentives for fuels that would not be cost competitive with traditional petroleum without federal support.

Rising gas prices have again set the stage for a debate in Congress for ways to lessen our dependency on imported foreign oil. Legislation being crafted by members of Congress over the next few weeks and months will address a range of policy goals, including increasing domestic exploration and production of oils and gas, but also a renewed focus on alternatives in the transportation sector like ethanol, biodiesel, algae, natural gas-powered and electric vehicles.

Under the Microscope

In May, the House of Representatives will take its first step toward consideration of policies that increase access to oil and gas energy resources. Three pieces of legislation — H.R. 1229, H.R. 1230 and H.R. 1231 — all make strides toward offshore oil and gas exploration and are likely to see action under the leadership of Chairman Doc Hastings (R-WA) of the House Natural Resources Committee. House Democrats are likely to offer legislation that pertains to price-gouging as well as bills that would mandate timelines for beginning resource production on leases related to oil and gas operations. Democrats are likely to consider offering proposals that will decrease the tax benefits that domestic oil and gas operations have under current law.

In the Senate, senior Democrats have indicated the need to provide a specific response as increasing prices of gasoline receive increasing attention across the country. The Senate Energy and Natural Resources Committee, as well as the Senate Finance Committee, have already begun discussing proposals that could become part of the debate, from the Clean Energy Standard framework to tax incentives for new clean energy fuels technologies.

The use of biofuels, including ethanol and biodiesel, has increased significantly in the last decade, yet both can only remain competitive with significant federal subsidies and volume mandates. For example, the renewable fuels standard (RFS) stands as a crucial market signal for continued growth in this sector. The RFS was greatly expanded in a large energy policy package in 2007, but while corn ethanol production is at its highest level ever, advanced biofuels, e.g., cellulosic ethanol and fuel made from algae, are almost non-existent. Some in Congress have called for a review of the law to ensure it is designed in a way that best invigorates the private sector. In addition, the future of related tax incentives is also unclear as several key provisions are set to expire at the end of this calendar year. Both the U.S. Senate and House of Representatives have held hearings on corn ethanol. There is concern that our country can no longer afford $6 billion in costs associated with the tax subsidies for blenders of ethanol. The Senate Energy and Natural Resources Committee has begun its review of the potential to expand biofuels-related infrastructure for ethanol as opposed to a continuation of "per-gallon" incentives. This panel has also examined the promise of "drop-in" fuels such as algae-based biofuels or biobutanol which do not require billions of dollars of infrastructure improvements. Similarly, the Senate Environment & Public Works Committee has begun holding hearings about the future of biofuels policy, and the House of Representatives will also soon begin its separate oversight and examination of these public policies.

A number of important federal tax incentives for farmers, biofuel producers and petroleum suppliers have become law in the last decade to assist in making biofuels more cost competitive. The challenge facing policymakers is how to choose which incentives to extend, to expand or let expire. In addition, the President recently shared his policy goals for energy security as it relates to fuels, expressing his support for accelerating commercialization of biofuels as well as expanding biofuels markets. Earlier this month, the U.S. Department of Agriculture Secretary Tom Vilsack announced a plan that would accelerate the financing opportunities for fuel blends that contain higher amounts of ethanol, such as E85 as well as grants to fund the installation of more ethanol blender pumps. The Department is hopeful that automakers will follow these efforts by producing more flex-fuel vehicles.

Action on existing fuels policy is clearly on the Washington, D.C. horizon. Below is a table that displays just a few of the important incentive programs that are scheduled to terminate by the end of 2011 without Congressional intervention.

Incentive or Program

Description

Alternative Fuel Station Credit

Up to $50,000 for alternative fuel pumps

Biodiesel Tax Credit

Producer tax credit of $1/gallon

Bioenergy Program- Advanced Biofuels

Payments for production of advanced biofuels

Biorefinery Assistance

Grants; loan guarantees for biorefineries to produce advanced biofuels

Import Duty for Ethanol

54 cents/gallon added duty on imported fuel ethanol

Renewable Diesel Tax Credit

Producer tax credit of $1/gallon

Rural Energy for America

Grants; loan guarantees for rural energy projects including biofuels

Small Agri-biodiesel Producer Credit

Small capacity producers get tax credit of 10 cents/gallon on first 15 million gallons

Small Ethanol Producer Credit

Small capacity producers get tax credit of 10 cents/gallon on first 15 million gallons

Volumetric Ethanol Excise Tax Credit

Blenders of gasoline and ethanol can obtain tax credit of 45 cents/gallon of ethanol

The Path Ahead

Pressures will come from across the political spectrum to either extend these programs in an effort to diversify our domestic fuels resources, or let programs end as a means to save taxpayer dollars. Legislation to open new lands and waters for oil and gas exploration will also be part of the debate, where ongoing disagreements over permits for offshore exploration or the natural gas exploration method called "fracking" have gained increased attention by lawmakers. We are likely to see a number of legislative proposals come forward from Democrats and Republicans, in preparation for Senate or House action before the summer driving season begins. The policies could move either as part of a larger package of energy or tax policies, or could instead be debated as part of a larger effort to simplify the federal tax code.

The House of Representatives is already hoping to finish its legislative response to very high gas prices by Memorial Day. Successfully navigating a divided Congress and the Executive Branch is key to increasing the likelihood that a federal affairs objective is realized in Washington.

B&D; Consulting understands the range of strategies for meeting federal affairs objectives in an era that could affect investors and private, public and nonprofit entities across the country. Whether developing a business or advancing a mission, B&D; Consulting has the many skills and disciplines to help clients adapt to and shape policy changes, as well as take advantage of new policy opportunities.

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