Testimony on Federal Financial Support for Fuels and Energy Technologies

Testimony by Terry M. Dinan, Senior Advisor, before the Subcommittee on Energy, Committee on Science, Space, and Technology, U.S. House of Representatives

The federal government has provided various types of financial support for the development and production of fuels and energy technologies in recent decades. That support—which has taken the form of tax preferences (special provisions of tax law that reduce tax liabilities for certain activities, entities, or groups of people) and spending programs administered by the Department of Energy (DOE)—totals an estimated $19.8 billion in fiscal year 2013. (Unless otherwise indicated, all years discussed in this testimony are fiscal years, and all dollars are expressed in current terms.) That amount includes $16.4 billion in tax preferences and $3.4 billion in funding for DOE.

Tax Preferences Provide Much of the Federal Support for Fuels and Energy Technologies

Tax preferences for fuels and energy technologies were first established in 1916. For most years until 2005, the largest share of the support they provided went to domestic producers of oil and natural gas (see figure below). Beginning in 2006, the cost of energy-related tax preferences grew substantially, and an increasing share of those costs was aimed at encouraging energy efficiency and energy produced from renewable sources, such as wind and the sun, which generally cause less environmental damage than does producing and consuming fossil fuels.

Provisions aimed at increasing energy efficiency and the use of renewable sources of energy account for 74 percent of the estimated budgetary cost of federal energy-related tax preferences in fiscal year 2013 (see figure below). That mix reflects changes to the tax system made by the American Taxpayer Relief Act of 2012, which extended until December 31, 2013, four major provisions aimed at increasing energy efficiency and the use of renewable sources of energy. Those four provisions account for $6.8 billion of the cost in 2013.

Under current law, the mix of energy tax preferences will look quite different in the future. Most of the support for energy efficiency and renewable energy comes from provisions that have already expired or are scheduled to expire at the end of 2013. In contrast, most of the support for fossil fuels and nuclear power comes from provisions that are permanent.

Federal Support Is Also Provided in the Form of Direct Investments, Loans, and Loan Guarantees

The Department of Energy, which was established in 1977, also supports energy technologies by making direct investments (primarily for research and development) and by providing loans or loan guarantees. That support has varied over time, but, with the exception of the substantial funding provided in the 2009 economic stimulus legislation (the American Recovery and Reinvestment Act of 2009, or ARRA), it has generally declined—from $10.6 billion (in 2013 dollars) in 1980 to $3.4 billion in both 2012 and 2013. About half of that support is directed toward energy efficiency and renewable energy in 2013.

DOE received roughly $10 billion in funding for its subsidized credit programs in 2009 but has received only limited additional subsidy funding for those programs since then: $170 million in 2011 and no new subsidy funding in 2010, 2012, or 2013. Between 2009 and 2012, DOE provided an estimated $4 billion in subsidies for about $25 billion in loans and loan guarantees, primarily to generators of solar power, manufacturers of solar equipment, and producers of advanced vehicles.

The Government’s Involvement in Energy Markets Can Sometimes Lead to a More Efficient Use of Resources

Without government intervention, households and businesses do not have a financial incentive to take into account the environmental damage or other costs to the nation associated with their choices about energy production and consumption. The most direct and cost-effective method for addressing that problem would be to levy a tax on energy sources that reflects the environmental costs associated with their production and use. Subsidies (such as tax preferences) for favored technologies can accomplish some of the same goals but in a less cost-effective way.

Also, unless the government intervenes, the amount of research and development (R&D) that the private sector undertakes is likely to be inefficiently low from society’s perspective because firms cannot easily capture the “spillover benefits” that result from it, particularly in the early stages of developing a technology. Such research can create fundamental knowledge that can lead to significant benefits for society as a whole but not necessarily for the firms that paid for that research; thus government funding can be beneficial. By contrast, DOE’s funding of energy technology demonstration projects at later stages in the development process has been far less cost-effective. Moreover, the Government Accountability Office, among others, has criticized DOE’s management of such projects.