Memo: Simple Pro-Growth Energy Policy Recommendations for the Next Congress

Below is a memo from the R Street Institute highlighting opportunities for the 119th Congress to utilize free-market policy to improve the U.S. economic growth outlook.

Introduction

Republican leadership that will be responsible for addressing energy priorities next Congress has indicated that energy policy will be a priority. The next Congress will enjoy an unusually permissive legislative environment, as many of their key priorities fit squarely within the limitations of budget reconciliation provisions. This memo aims to offer brief information on key issues, as well as simple, broad-stroke policy recommendations (both related and unrelated to budget reconciliation) that would yield economic benefits as part of a pro-growth strategy for the nation.

Energy Subsidy Reform

The primary purpose of energy subsidies is to ensure long-term energy security; a secondary objective is to attain environmental objectives. However, energy subsidies from tax credits are ballooning. They rose from $20.9 billion in 2022 to $60.2 billion in 2023 and are a symptom of the federal government’s continued subsidy of major energy sources. Energy technologies that are low-cost, such as wind, solar, oil, gas, and coal, do not need any subsidy to ensure energy access for the American public. Additionally, the environmental benefits of most energy subsidies are debatable because we expect most of the subsidy dollars to go to projects that would have been built even without the subsidy.

The Treasury Department’s projected cost for tax credits for 2024-2033 is $424.6 billion for clean electricity, $112.1 billion for clean vehicles, and $36.2 billion for carbon sequestration. Total energy- and natural resource–related subsidies over the next decade are projected at $819.5 billion, which may even be an underestimate, as third-party assessments have calculated a figure closer to $1.2 trillion. Before the Inflation Reduction Act (IRA), the projected 10-year cost of clean energy tax credits was $187.5 billion, meaning the IRA more than quadrupled energy subsidy tax credits. These subsidies represent high-cost policies that are divorced from their overarching policy objectives of energy innovation and environmental improvement.

Recommendations:

• Clean electricity subsidies should be reduced overall, and remaining subsidies should be reformed into a technology-neutral, pro-innovation policy that no longer subsidizes mature, commercialized energy sources. As an example, the Energy Sector Innovation Credit Act of 2019 would have established a subsidy level that was based on the market uptake of energy types. Mature technologies like wind, solar, and fossil fuels would have their subsidies sunset, whereas emerging technologies would be eligible for the tax credit. This type of policy design would cut most federal spending on energy subsidies, while ensuring that a technology-neutral, pro-innovation energy policy agenda is preserved.
• Subsidies that are focused on innovation should be modified into programs that are better suited to their purposes. For example, the IRA modified the 45Q tax credit to subsidize carbon dioxide removal (CDR) that was performed via direct air capture (DAC). However, DAC is only one form of CDR, and the presence of the tax credit distorts innovation incentives by giving DAC an advantage over other CDR methods. Such subsidies should be modified into lower-cost, competitive programs.
• The restoration of full expensing for research and development (R&D) should be a priority. Expensing is not a subsidy, but it carries a budgetary cost because it shifts tax deductibility from beyond the 10-year budget projection into the budget window. Full expensing doesn’t cost the government any money in the long run, and it incentivizes investment in R&D. For energy and environment R&D, the Tax Cuts and Jobs Act (TCJA) modifications were likely responsible for an 11.8 percent increase in investment—much higher than the annual change of 2 percent before the TCJA. This is especially significant because private-sector R&D for energy and environment is roughly seven times as large as public-sector R&D.

Regulatory Reform

The Biden administration has so far adopted $1.47 trillion worth of regulations. A partial reason the administration has been able to expand its regulatory agenda is that it rewrote the rules governing how regulators weigh the costs and benefits of regulations. Congress should use the rare opportunity of an administration more critical of regulatory expansion to implement permanent reform that ensures future regulations carry more benefit than cost.

Recommendations:

• Codify the earlier version of the Office of Management and Budget’s Circular A-4, which required the consideration of discount rates between 3 and 7 percent for benefits.
• Regulators should consider the economy-wide costs and benefits of their proposed regulations. The current requirements focus on direct costs and benefits, which yields incomplete information and creates a distorted impression as to the cost-effectiveness of regulations that may have broader downstream economic impacts. Increased oversight of regulators should push for the consistent use of discount rates across costs and benefits, as well as the utilization of econometric analysis to produce estimates that show the economy-wide effects of new regulation.
• Congress should establish a congressional organization that acts as a counterpart to the executive branch’s Office of Information and Regulatory Affairs. Such a body could then be tasked with providing unbiased, nonpartisan estimates of the costs of new regulation.

Permitting Reform

Across all industries in the United States, a consistent theme has been the difficulty in securing federal permits for large projects. Major projects requiring a federal permit can expect an average of 4.5 years before receiving a decision. Thankfully, this is an issue on which Congress has been making bipartisan progress in recent years. However, some outstanding issues remain that are important to address, especially as most delays are related to litigation risks that mostly come from public interest groups.

Recommendations:

• Shorten the statute of limitations for National Environmental Policy Act (NEPA) decisions from six years to the common 30-180 days. Although most decisions that are challenged are done so immediately, the possibility of a project dealing with litigation years after approval should be put to rest.
• Plaintiffs challenging NEPA decisions should be required to have provided sufficient recommendation to put agencies on notice prior to a decision being issued. The current system allows for NEPA decisions to be litigated for reasons that agencies may be unaware of when they prepare documents, which incentivizes agencies to produce ever more complicated and lengthy permitting documents. Major projects eligible for special provisions (called FAST-41) can only have their decisions challenged by plaintiffs that raised relevant issues during the public comment period; this treatment should be the norm rather than the exception.
• Congress should clarify that NEPA environmental reviews should be isolated to the direct effects of projects. The Biden administration, and the Obama administration before it, have sought to expand NEPA requirements to include indirect climate assessments. Single projects have miniscule effects on such broad, global environmental issues, but these requirements create real costs and delays.

Electric Power Reliability

Electricity demand is growing in the United States. This growth is driven by broad electrification, reshoring manufacturing, data centers, and an interest in setting America apart in the artificial intelligence race. Competitive electricity markets meet needs in the most efficient manner, providing transparent price signals for supply and demand and allocating risks directly to market participants rather than socializing costs broadly. However, in some areas of the country, it takes years for generation or load to get permission to connect to the grid, forcing customers to come up with innovative ways to get supply. State and federal roadblocks exacerbate this challenge by making it more difficult to build or site generation and transmission. Regardless, the dependability of today’s electric generators to meet current demand could benefit from additional congressional action and oversight.

Recommendations:

• Congress should help coordinate and safeguard ever-interconnected gas and electric systems. This may include ensuring that winterization and fuel-assurance policies exist for electric generators and the infrastructure necessary to fuel those generators. Generator outages, especially those caused by natural gas supply and delivery concerns, are the biggest near-term risk to bulk electric reliability.
• Congress should facilitate resolutions to perhaps the biggest long-term risk to reliability: the unintended consequences of policies outside the electric industry’s control. This requires refining reliability authorities and instilling a framework for institutional coordination at federal and state levels.
• Lawmakers should direct the Federal Energy Regulatory Commission (FERC) to further reduce barriers to connecting generation to the grid more quickly. The interconnection process now takes an unacceptable five years in many regions. Generation should have a faster path to connecting to the grid, thereby reducing the risk of blackouts and decreasing customers’ bills. As part of this rulemaking, grid operators should employ technology and standardization to accelerate the connection of new generation.
• Congress should explore avenues to address self-interested state infrastructure siting decisions that undermine the reliability of regional grids and increase costs. Some states block cost-effective transmission that would reduce bills for consumers in other states, and policies hindering pipeline expansion threaten electric reliability.
• Congress should direct FERC to resolve insufficient and inefficient power transfers between regions. Reliability authorities, with Congress’s direction, are examining how such constraints imperil grid reliability. Solutions like seams optimization, reducing barriers to voluntary transmission expansion, and ensuring adequate interregional transfer have the potential to save consumers billions of dollars in costs.