Fossil Fuel Politics: How the New Congress Might Change the Mix
petroleum) as a primary energy source. 2 Ultimately, the FUA was amended to allow for more fuel choices. 3 Specifically, the amendments repealed the prohibitions against using natural gas and petroleum as a primary energy source in new and existing electric power plants, while requiring any plant constructed as a base load supplier also to have coal or other alternate fuel capabilities.
In contrast, the alternative fuels production tax credit (i.e., the Section 29 credit) exemplifies a highly effective, targeted intervention into the fuel markets. This credit has contributed mightily to the supply of natural gas from coalbed methane. From 1989 to 2000, coalbed methane recovery increased by a factor of more than 10, from 91 billion cubic feet to 1.4 trillion cubic feet. 4 By 2000, coalbed methane accounted for 7.2 percent of domestic natural gas production. 5
Overall, federal intervention in the fuels market, when measured in terms of tax expenditures and direct transfers, is relatively insignificant. Federal incentives/subsidies to the energy markets in 1999 accounted for just 1 percent of the total 1995 retail expenditures on energy. 6 Another measure of the relative lack of federal intervention in fuels markets is to compare federal tax expenditures for fuels with tax expenditures directed to other sectors of the economy. According to the Energy Information Administration (EIA), incentives/subsidies in the form of tax expenditures directed to the energy market account for just 0.3 percent of all government tax expenditures. 7
Given the increasingly significant role of natural gas as a fuel for electric generation, electric generators are affected indirectly by the various federal policies that affect the marginal economics of producing natural gas. Federal tax law that permits the expensing of exploration and development costs creates incentives for petroleum and natural gas exploration and production. 8 The alternative fuels production tax credit likewise provides a tax credit to qualified fuels drilled from certain wells. 9
Another current federal incentive affecting electric generation is the renewable energy production tax credit (i.e., the Section 45 credit) provided to generators that produce electricity using wind or closed-loop biomass processes. 10 The nuclear generating sector also benefits from federal support in the form of the Price-Anderson Act , which limits the liability of nuclear plant operators in the event of an accident involving commercial nuclear power plants. For the 110 nuclear units operating in 1991, the total subsidy would have been $3.6 billion in 1999 dollars. 11
Most federal incentives are targeted at particular fuels and technologies. Therefore, such incentives, while relatively small when their dollar value is compared with the overall size of the fuels market, still can have a significant effect on the economic viability of the targeted fuel or technology. For instance, the Section 29 tax credit provides a benefit upward of $1 billion annually to natural gas producers who produce eligible fuels, such as coalbed methane. 12 Another example of a targeted incentive is the $0.7 billion that ethanol producers receive annually in the form of an excise tax exemption. 13
Of course, federal interventions affecting fuel choice for electric generation