As was discussed here last Friday, President Obama has proposed using a tiny portion of federal revenues from offshore oil and gas production to build an ?Energy Security Trust? to pay for the kinds of tough or longer-term energy research projects that the private sector tends to neglect. (A White House explanatory graphic is here.)
Below you can read an excerpt from an Energy Collective post in which Obama?s funding plan is dissected by Jesse D. Jenkins, a writer at the blog and graduate student and researcher at the Massachusetts Institute of Technology. (The excerpt is posted with permission.) Jenkins, a big fan of the energy trust idea, lays out the precedents for such a fund, but also points to budgetary issues and other aspects of the White House proposal that could undermine congressional support:
?The idea of a dedicated trust fund for energy research funded by small ?user fees? on current energy production and/or consumption builds on the successful logic of the national Highway Trust Fund.
For highways, a small gas tax paid by current users of the highway system ensures we are setting aside the necessary funds today to both maintain the current system and invest in the infrastructure of tomorrow.
Likewise, dedicating a small fee on oil and gas production (or consumption) or a portion of increased royalties from energy production on public lands would ensure that as we enjoy relatively cheap and abundant energy supplies today, we are also setting aside the funds needed to make steady investments in the advanced energy technologies needed to secure cheap and abundant energy in the future.
This concept could also be extended to include a small charge on electricity usage, known as a ?wires fee? that could generate additional funds for research and development of advanced power generation, storage, transmission, and demand response technologies. Several states, including New York, have already implemented similar charges often referred to as ?system benefits? or ?public benefits charges.?
From the 1970s-90s, a similar charge on the interstate transport of natural gas was dedicated to fund the Gas Research Institute, a public-private research consortia responsible for numerous advancements, including a key role in the development of commercial shale gas extraction technologies.
In short, several strong precedents exists for the Energy Security Trust concept.
Making the Energy Security Trust a reality
So in general, it is high time we begin a serious conversation about how to generate the necessary, long-term investments in energy research and innovation necessary to address national imperatives including improved security of supply, reduced public health impacts of our energy system, and climate change mitigation. The Energy Security Trust may be a big step in the right direction.
With that in mind, the thing that worries me about President Obama?s proposed Energy Security Trust [is that] it is difficult to tell how serious he and his administration are about this concept ? or how likely this proposal is to work its way through a politically charged Congress.
If the White House is serious, they must know that the proposal as it currently stands, which does not envision opening up any new areas previously closed to oil and gas production, will not produce any new federal revenues, at least as far as the Congressional Budget Office (CBO) is concerned.
The way CBO scores budgetary impacts already assumes revenues for any federal lands currently open to oil and gas production are part of the baseline revenue picture. That means that redirecting a portion of those revenues ? say $2 billion over ten years ? from existing areas open to oil and gas production is actually going to be scored by CBO as deficit enhancing, rather than deficit neutral as the president has been portraying this.
According to the White House fact sheet on the Energy Security Trust:
?The mandatory funds [for the Trust] would be set aside from royalty revenues generated by oil and gas development in Federal waters of the Outer Continental Shelf (OCS), already included in the administration?s five year plan. These revenues are projected to increase over the next several years based on a combination of leasing, production, and price trends, with additional revenues potentially generated as a result of reforms being proposed in the FY 2014 Budget. The Trust is paid for within the context of the overall budget.? [emphasis added]
The problem with this concept is that even if oil and gas prices are likely to increase in the future, thus increasing federal revenues from oil and gas leases on public lands, any such revenue coming from areas?already open to production will be considered by CBO as already included in the baseline revenue picture.
So the only piece of this proposal that may result in new revenues that CBO would consider as ?offsets? for new spending would be the ?additional revenues potentially generated as a result of reforms being proposed in the FY 2014 Budget.?
What those reforms would constitute is unclear. In response to an inquiry for additional details, a White House staffer told me that ?those reforms will be made clear when the [FY 2014] budget is released.?
A bipartisan proposal?
The president likes to say that his Energy Security Trust ?builds on a proposal supported by a broad bipartisan coalition, including retired military leaders.? The coalition he refers to is known as ?SAFE? (for Securing America?s Future Energy), and he?s right that this idea was once embraced by the Republican side of the aisle. In fact, a 2008 energy blueprint released by House Republicans, the ?American Energy Act,? included the concept of a trust fund for advanced technology research funded by oil and gas royalties. The idea has been championed in particular by Representative Devin Nunes of California in the House and Senator Lisa Murkowksiof Alaska in the Senate.
Given these bipartisan bonafides, one might think this concept was a slam dunk.
The tricky situation though is that each of the Republican proposals envision dedicating royalty revenues from expanded domestic production of oil and gas, including opening up new areas previously closed to production in the Outer Continental Shelf (OCS) and places like the Alaska National Wildlife Refuge (ANWR).
So both the CBO budget procedures and the GOP?s position on using royalties for an energy R&D trust fund means that if President Obama wants to secure truly bipartisan support for this new Energy Security Trust proposal and ensure it doesn?t increase the deficit, he?s ultimately going to have to offer a real trade: new oil and gas production areas for new revenues dedicated to clean energy R&D.
Unfortunately, Obama already agreed to open up new areas of the OCS for offshore oil and gas production?in April 2010 ? and he did so without demanding any concessions from the GOP regarding the use of revenues for advanced energy R&D. He?s unlikely to get any credit for his previous actions in any new negotiations with Republicans, and even if he did, CBO?s scoring would now take into account revenues from these areas in the budget baseline.
In short, the president missed a big chance to put this energy trust fund into action in 2010. To get another chance now, he?ll have to find some new carrot to entice GOP cooperation.
A rock and a hard place
Presumably the president already knows all of this. So perhaps this is simply his opening bid, and he?s fully prepared in the future to make this a real deficit neutral proposal by offering new areas for oil and gas production in exchange for support from Congressional Republicans. I don?t doubt that Senator Murkowski would demand something like that, and the House GOP most certainly would. So maybe, for once, President Obama hasn?t pre-capitulated and is saving his cards for the negotiating table. But it?s not clear.
Even if he can find a proposal palatable to the GOP, the idea may be doomed on his own side of the aisle. Given the current uproar over Canada?s tar sands and the Keystone XL pipeline as well as past pitched battles over expanded oil and gas production, I have a hard time imagining Congressional Democrats or their environmentalist supporters getting behind the idea of opening ANWR to oil and gas drilling.
So can President Obama find some new area in the OCS that is still closed to drilling which greens and Democrats will find palatable and will serve to entice a combative GOP to the table? Or will this Energy Security Trust end up stuck between a rock and a hard place?
Another option: raising royalty rates
If he can?t find new lands or waters to open to oil and gas production, the only other other alternative is to propose an increase in royalties and fees on existing oil and gas producing lands.
About 594 million barrels of oil and 3,724 billion cubic feet of natural gas were produced on federal lands and waters in 2012, according to the Congressional Research Service.
Raising $2 billion over ten years ? or a modest $200 million annually ? would thus require increasing royalties by just 15.8 cents per barrel of oil and 2.7 cents per million British thermal units (MMBtus) of natural gas (assuming the necessary revenues were spread across oil and gas on an equal energy-content basis). That?s an increase of less than 0.2 percent over current?WTI crude oil prices and 0.7 percent?over current?NYMEX natural gas prices.
I also encourage you to read an appraisal of the energy trust by Mark Muro, senior fellow and policy director in the?Metropolitan Policy Program?of the Brookings Institution. Like Jenkins, he is skeptical, musing that this plan could offer ?just another illusion of plausible potential compromise, soon to evaporate.?
But he said the ?concept represents a significant bid to test the potential for advancing energy policy? ? if Obama continues to press the case and some Republican lawmakers see the merits in moving being ?drill baby drill.?
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