The Energy Policy Act Of 2005

The Energy Policy Act of 2005: A Failed Bipartisan Compromise

Carlos Rymer Introduction to Environmental Policy MPA-ESP Program August 6th, 2008

Executive Summary The Energy Policy Act of 2005 provides a few positive steps to address the energy challenge facing the U.S., but it fails to prescribe a long-term, realistic plan to diversify energy production, eliminate fossil fuel dependence, and secure long-term economic growth. With special interests dominating the political scene, the Act is riddled with provisions that largely satisfy special interests. Some of these provisions are having significant negative economic effects and prolonging inaction on key issues. Nevertheless, we have an incredible opportunity to meet the grave challenges we face and create lasting prosperity by focusing on renewable energy, energy efficiency, and improved public transportation. The key requirement is be bold policy that prioritizes solving the various challenges we face over the interests of powerful groups. Introduction The Energy Policy Act of 2005 (the Act) intended to change the United States’ (U.S.) energy policy to “ensure jobs for [the nation’s] future with secure, affordable, and reliable energy” (109th Congress, 2005). With increasing concerns about the U.S.’s heavy dependence on foreign oil (now around 60%) and increasing oil prices (Gold, Lichtblau, and Goldstein, 2005), the Act was signed into law with bipartisan Congressional support to increase domestic energy supply and strengthen energy security through tax incentives, research and development, and direct fiscal spending (Pew Center on Global Climate Change, 2005). The Act’s implementation will require $3.8 billion in direct spending and will create tax revenue losses of approximately $12.3 billion over the ten years after enactment (Congressional Budget Office, 2005). With oil prices over $100 per barrel (as of writing of this document), the federal fiscal costs associated with the goals of implementing the Act to increase domestic energy supply and alleviate energy prices are justified. The Act provides direct funding, tax incentives, and mandates for energy efficiency, fossil fuels, nuclear energy, renewable energy, advanced vehicle technologies, and the national electricity grid (109th Congress, 2005). While the Act intends to ensure energy security in the U.S. through these various provisions, it in fact fails to adequately address the challenges the

nation faces in order to secure reliable and affordable energy supply (Cooke, 2005). By largely focusing on energy sources such as fossil fuels and biofuels, not only does the Act fail to address short-term issues, but it also fails to tie energy supply to climate change and food security, issues that are now adding pressure to the world’s economic problems (Associated Press, 2007; Hanson, 2008). In effect, the Act failed to provide a focused strategy that would lead the U.S. towards energy security and a strong, low-carbon economy. Important Provisions of the Act In order to achieve energy security and create jobs in the U.S., the Act sets forth a long list of provisions in the areas of energy efficiency, fossil fuels, nuclear energy, renewable energy, vehicle technologies, and electricity markets. While several agencies, ranging from the Environmental Protection Agency to the Bureau of Land Management, are responsible for implementing specific provisions of the Act, most of the responsibility lies with the Department of Energy, as is explicitly mentioned in the Act (109th Congress, 2005). Nearly all provisions not pertaining to the Department of Energy are not specifically related to the goal of this bill. Instead, they focus on issues like Indian energy programs, demonstration projects, land leases, and other provisions for special interests. The table below summarizes the key provisions for each area that pertain directly to the Department of Energy (Library of Congress, 2005). Table 1. Key Provisions of The Energy Policy Act of 2005 Energy Efficiency

Improve energy efficiency and conservation across the nation through federal and state programs, energy assistance, research and development, energy efficient products, and public housing programs.

Fossil Fuels

Provide subsidies, tax breaks, and research and development, and project funding for unconventional and conventional fossil fuels, as well as clean coal projects.

Nuclear Energy

Approve, supervise, and provide loans for new nuclear power projects, as well as funding for research and development.

Renewable

Help deploy renewable energy technologies through tax credits and

Energy

research and development funding. It includes a mandate to produce 7.5 billion gallons of biofuels by 2012.

Vehicle Technologies

Conduct demonstration projects with advanced vehicles, fuel cells, clean school buses, and hydrogen technology.

Electricity Markets

Improve reliability standards and begin modernizing transmission infrastructure, rates structure, and market transparency.

The table above of the key provisions of the Act that pertain to the Department of Energy shows a strong focus on tax incentives (such as subsidies, tax credits, and tax breaks) and direct funding (such as loan guarantees for nuclear energy and special projects, and research and development for new technologies and exploration). In terms of subsidies, tax credits, and tax breaks, $1.6 billion were allocated to the oil and gas industry (Axtman, 2005); 1.9 cents/kWh were allocated to the renewable energy industry through 2007; $253 million were allocated to solar power and fuel cells; nearly $900 million were allocated to energy efficiency; $874 million were allocated for alternative fuel vehicles; up to $200 million per year and $1.6 billion in tax credits were allocated to clean coal projects; 1.8 cents/kWh were allocated to nuclear electricity for the first eight years of operation; and loan guarantees for up to 80% of project costs and up to $2 billion in costs overruns were allocated to new nuclear power plants (Pew Center on Global Climate Change, 2005). With these tax incentives and funding programs, the Act provided the only opportunity since 1992, aside from market influences, for the energy industry and energy security in the U.S. to improve. Despite these important provisions, which together do make up a good step forward (especially for energy efficiency and research and development), the Act insufficiently addresses the scale of the energy challenge the U.S. currently faces and will continue to face in the coming years. The bill’s strong focus on new technologies and special interests leave little room for a long-term strategy that both boosts domestic energy production and addresses climate change

and food security, current issues affecting the country and the rest of the world. As a result, the Act does not provide an appropriate framework to address the challenges the U.S. will face well into the future. A Misguided Energy Strategy The Act’s strong focus on new technologies and commitments to special interests renders it insufficient to meet the energy challenges the U.S. faces today. These challenges include increasing international oil prices, foreign oil dependence (Gold, Lichtblau, and Goldstein, 2005), climate change (Associated Press, 2007), and food security (Hanson, 2008), all of which directly affect the economy. The Act insufficiently addresses these key challenges by continuing the status-quo of satisfying special interests in a policy framework where political security is compromised over the real needs of society (Bluhdorn and Welsh, 2007). In effect, the Act’s positive steps are offset by a push for nuclear power production, a mandate for biofuels production from important food crops, and incentives for increased fossil fuel dependence. The Act’s strong focus on nuclear energy, biofuels, and fossil fuels makes it clear that strong special interests had much to do with the outcome of the legislation (Grunwald and Eilperin, 2005). With increased certainty about climate change (IPCC, 2007), the impacts of increasing food prices (Hanson, 2008), and the economic inefficiency of nuclear energy (Schneider and Froggatt, 2007; Mariotte, 2008; Lusk, 2008), the Act’s strong emphasis on these sources of energy is misguided and unreasonable. Bringing Back the Nuclear Energy Industry The Act’s emphasis on nuclear energy provided an opportunity for revival of this declining industry. Increased interests in nuclear energy to improve energy security and reduce greenhouse gas emissions have been justified by the supposedly beneficial economics of nuclear

energy. According to the nuclear industry and political supporters in government, the costs of producing electricity from nuclear energy only involve the cost of the fuel, operation and maintenance, and the investor-backed capital costs. In all, these amount to around $1 million per MW of installed capacity and 2-5 cents per kWh of electricity produced (Bertel and Morrison, 2001; World Nuclear Association, 2005). However, these cost allocations leave out the low-interest loan guarantees provided by government, the substantial cost of safely disposing of the radioactive wastes, and the cost of decommissioning the plants. When all of these additional costs are included, nuclear energy is uneconomical, costing 3-10 times more for installed capacity and up to 19 cents per kWh (Lusk, 2008). This is why, without loan and disposal costs guarantees in the last 30 years, the nuclear energy industry has stalled in the U.S. In the end, taxpayers end up paying the high costs of installing more nuclear power plants for the benefit of private interests. Satisfying Special Interests in the Agriculture Sector The Act’s mandate for dramatically higher domestic biofuel production is yet another result of special interests influencing the policy process (Bluhdorn and Welsh, 2007). Currently, the mandate to increase biofuels production is putting pressure on key grain prices all around the world. Making matters worse is a direct subsidy of $0.51 per gallon of ethanol, which on top of the mandate to have a certain amount of ethanol produced makes no economic sense (De Gorter and Just, 2008). This mandate has dramatically caused an increase in food prices that is having a global effect and adding to the pressure that increasing oil prices are adding. As a result, the world’s poor and low-income people in the U.S. are suffering the consequences of satisfying special interests (Hanson, 2008).

The Act’s key incentives add to an initiative by the current Bush administration to boost ethanol production. This has meant an increased shift in corn production for food to corn production for ethanol fuel. This has led for a sharp rise in the demand for corn, making food companies shift wheat and soy fields to corn in order to take advantage of the higher price corn is commanding. Consequently, this has pushed the price of wheat, soy, and other key crops up. Around the world, the push for biofuels is having similar effects, creating a world food crisis and hurting millions of poor people (Hanson, 2008). Sustaining the Fossil Fuel Industry Finally, the Act continues the traditional focus of U.S. energy policy on coal, gas, and oil. The fossil fuel industry has traditionally had a strong influence on the public policy process, making it a powerful player in the energy sector in the U.S. The Act’s provisions for increased oil and gas production, as well as new demonstration projects for clean coal technology, make it clear that the government intends fossil fuels to continue to dominate the energy mix in the U.S. While the U.S. counts on a large supply of coal, it is becoming clearer that oil and gas are not as plentiful and will reach production peaks in the near future, with oil thought to already have peaked (Koppelaar, 2005). A continuation of strong support for these sectors is a recipe for future energy problems and increased greenhouse gas emissions. Energy prices and climate change today are major issues affecting public policy globally. Markets determine energy prices through supply and demand. Decreasing future supplies of oil and gas will translate into higher prices. This alone makes the Act’s strong focus on fossil fuels and lack of support for alternatives with strong potential unreasonable. In addition, climate change is already threatening to cost the world substantially if action is not taken (Stern, 2006), another reason why the Act failed to focus on carbon-free, economic, and potentially better

alternatives. While the Act’s misguided strategy is failing to address the energy challenges the U.S. faces, the current global situation provides a new opportunity for a strategic framework that can address climate change, energy and food security, and job creation for the future. Moving Forward: Bold Steps for the Future Despite the shortcomings of the Act in effectively reaching its intended goal, we now have an opportunity to realize its own goals and take the U.S. out of the current crises that plague it through bold legislation. A policy framework that equally weighs different interests and prioritizes the real needs of society is necessary. Such a framework should have the broad understanding that policy needs to focus on drastically expanding renewable energy production over the long-term; increasing the corporate average fuel economy standard; providing funding and incentives for improved public transportation; and providing substantially more research and development funding, as well as standards, for energy efficiency, renewable energy, and transportation. Only through such a bold framework of understanding can the U.S. achieve long-term energy security with stable prices, address climate change along with scientific recommendations, and create jobs that will spur economic growth and ensure food security. The world’s current crises not only serve as a challenge, but also as an opportunity to move in a new direction. We now have the technical, institutional, and human capacity to create a revolution never seen before and create lasting prosperity in the U.S. and the rest of the world. The only requirement is bold policy that will ensure this future is achieved. Conclusion The Energy Policy Act of 2005 moves the U.S. forward in some ways, but it largely continues the same policies of the past and fails to address key challenges. In order to meet the

energy challenge the U.S. faces, bold policy that radically shifts from satisfying traditional interests will be necessary. Such policy will have to focus on expanding renewable energy supply, dramatically improving energy efficiency across the board, and for the first time prioritizing public transportation over private transportation. The policy framework to achieve such a goal will have to be based on the understanding that special interests cannot be weighed more heavily than the crises the U.S. currently faces and the impacts they are having on the economy and the rest of the world. References Associated Press. “Global Warming To Hit World’s Poor: Report.” CBS News. 6 April 2007. http://www.cbsnews.com/stories/2007/04/06/tech/printable2655270.shtml. Axtman, Kris. “How much new US oil? Not a lot.” The Christian Science Monitor. 8 August 2005. 1 August 2008. http://www.csmonitor.com/2005/0808/p01s01-uspo.htm. Bluhdorn, Ingolfur, and Welsh, Ian. “Eco-politics beyond the Paradigm of Sustainability: A Conceptual Framework and Research Agenda.” Environmental Politics 16.2: 185-205. Cooke, Ronald R. “The Energy Policy Act of 2005: Legislative Achievement or Management Fiasco?” Global Public Media. 29 August 2005. 1 August 2008 http://globalpublicmedia.com/articles/478. De Gorter, Harry and Just, David. “Why new U.S. biofuel legislation is on track to waste billions of tax dollars, while subsidizing oil consumption.” Cornell Chronicle. 9 May 2008. http://www.news.cornell.edu/stories/May08/Perspective.deGorter.html. Gold, Ron; Lichtblau, John; and Goldstein, Larry. “Energy Policy Act of 2005 leaves US open with issues.” Oil & Gas Journal 103.32 (2005): 20-26. Grunwald, Michael, and Juliet Eilperin. “Energy Bill Raises Fear About Pollution, Fraud: Critics Point To Perks For Industry.” Washington Post. 30 July 2005: A01. Accessible Online: http://www.washingtonpost.com/wp-dyn/content/article/2005/07/29/AR2005072901128.html. Hanson, Victor D. “Harvesting Money in a Hungry World.” New York Times. 1 August 2008. Accessible Online: http://www.nytimes.com/2008/08/01/opinion/01hanson.html?_r=1&scp=1&sq=food%20prices% 20and%20climate%20change&st=cse&oref=slogin.

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