A Low-Watt Bill
THE HOUSE Democrats plan to pass an energy bill Thursday that combines the good, the bad and a large dose of missed opportunity. Thankfully, it faces an uncertain future in the Senate. Energy policy deserves more serious treatment.
The good part of the bill revokes tax breaks for oil and gas production in the United States that should never have been granted. In 2004, Congress reduced the tax rate on U.S. manufacturers and extended the definition of manufacturing to include oil and gas projects. This had the effect of subsidizing energy sources that contribute to global warming; Congress ought to be raising the carbon tax, not cutting it. The House bill would correct this error and use the proceeds to finance climate-friendly energy technology.
The bad part of the bill would effectively revoke lease contracts granted in 1998 and 1999 for offshore drilling. The leases mistakenly omitted a standard clause requiring energy companies to pay royalties to the Treasury if the price of oil rose above $34 per barrel. Now this omission is costing the budget an estimated $10 billion over the life of the leases. The administration, rightly, has tried to renegotiate the terms, and some leaseholders have cooperated. But Chevron and ExxonMobil, the companies with the most money at stake, feel that their responsibility to shareholders compels them to get something back if they are to give up large expected profits.
The House bill would break this deadlock by imposing heavy penalties on firms that do not renegotiate on terms imposed by the government. This heavy-handed attack on the stability of contracts would be welcomed in Russia, Bolivia and other countries that have been criticized for tearing up revenue-sharing agreements with private energy companies. Legitimizing that sort of behavior might be justified if it were the only way of fixing the leases. But Chevron, for example, says it would be willing to yield on the royalty payments if the duration of its leases could be extended.
The main problem with the House bill is that hitting up oil companies is a poor substitute for a real energy policy. The nation needs to accelerate the development of less-carbon-intensive fuels by capping or taxing carbon consumption. Members of Congress sometimes present half-measures such as the House bill as the most that can be achieved, given political constraints. But the oft-cited defeat of the BTU tax in Congress occurred more than a decade ago. The evidence on global warming has changed radically since then, and so, too, has the politics. Even ExxonMobil, traditionally the fiercest opponent of climate action, has cut funding to "research" groups that question global warming and is starting to engage in the debate about which sorts of carbon restrictions should be adopted.