Statement of Technology Network

Chairman Neal, Ranking Member English, and Members of the Subcommittee, on behalf of The Technology Network (TechNet), I am privileged to provide testimony on the important issue of energy and tax policy and specific issues related to the current framework of tax incentives encouraging the development of alternative sources of energy.

TechNet was created in 1997 to shape public policy impacting U.S. innovation and technology leadership and today is the preeminent organization representing chief executive officers of the nation’s leading high technology companies. Chaired by John Chambers of Cisco Systems and John Doerr of Kleiner Perkins Caufield & Byers, TechNet’s CEO and senior executive members are the nation’s leading innovators in the fields of information technology, Internet and e-commerce, biotechnology, venture capital and investment banking. TechNet’s top priority is to foster public policies and private sector initiatives that maintain U.S. competitiveness and economic growth through innovation.

Recognizing the nation’s energy and environmental challenges and the enormous potential of innovation as the solution to these challenges, TechNet established a Green Technologies Task Force comprising senior executives of leading innovation companies to identify key public policies and industry initiatives that will spur the development and adoption of new technologies to enhance energy efficiency, encourage use of renewable energy and protect the environment. 

The TechNet Green Technologies Initiative represents TechNet’s longstanding commitment to policies that strengthen the nation’s innovation-driven global competitiveness.

Among the key recommendations of the TechNet Green Technologies Task Force is the need to adopt fundamental reform of federal tax policy with the goal of encouraging the development, commercialization and adoption of new energy technologies. 

We appreciate the Subcommittee’s leadership in exploring how tax policy can more effectively drive innovative green technologies and alternative sources of energy.  Indeed, we believe this should be among Congress’s leading priorities because of the tremendous potential that such policy changes hold for U.S. economic competitiveness, national security and the global environment. 

Several provisions of the current tax code provide incentives for investment in anddeployment of renewable energy sources or alternative fuels. These include: 

• Production Tax Credit, providing a 1.5-cent/kWh credit for wind, solar, geothermal, and “closed-loop” bioenergy facilities (adjusted for inflation, the 1.5 cent/kWh tax credit is currently valued at 1.9 cents/kWh).
• Investment Tax Credit, providing a federal income tax credit worth 10% of initial investment cost for certain solar, geothermal, or qualifying biomass facility and a 30% credit for some solar or fuel cell investments and residential projects, with various caps applying to different applications.
• Volumetric Ethanol Excise Tax Credit (VEETC), providing ethanol blenders and retailers with $.0051 per percentage point of ethanol in the blend on a volumetric basis (E10 is eligible for $.051/gal). VEETC also provides a credit of $.01 per percentage point to blenders of two types of biomass-derived diesel fuels fatty-acid methyl esters derived from virgin oils/fat and diesel derived from biomass via a thermal depolymerization process), and $0.005 per percentage point to blenders of fatty-acid methyl esters derived from recycled oils/fats.

We applaud the leadership of this Subcommittee in advancing these incentives. They are an important first step in securing our nation’s energy future. However, more remains to be done.

Federal incentives including tax credits, loan guarantees and other programs are critical to the early success of energy technology projects which in many cases incur substantial up-front costs to generate electricity in lieu of high ongoing fuel costs. Investors or consumers face significant capital investments to develop or install such technologies, creating a need for creative financing solutions particularly for larger-scale commercial installations.

The convergence of computing, communications and data; digital technologies and broadband-enabled networking that has revolutionized industries from communications to e-commerce to manufacturing to finance is beginning to transform the energy sectors in the United States and abroad. Technologies that were unimaginable ten years ago are widely available today.

The federal tax code’s existing incentive programs, however, have not kept pace with the dramatic rate of technological advances. The current tax code is not optimally designed to spur the development of new technologies. We believe that they comprise a level of incentives that is not strong enough to drive substantial new investment or significantly change consumer behavior. As a result, their impact on cutting edge innovations has been limited by constraints including the timeframe and structure of these incentives.

As a fundamental matter the current federal tax code has historically favored conventional fossil fuels, which have received billions of dollars in federal subsidies each year. According to General Accountability Office data, the U.S. petroleum industry received between $134.9 and $149.6 billion in tax incentives between 1968 and 2000, as a result of various programs including expensing of exploration and development costs, alternative fuel production credits and other incentives. Predicted benefits to the oil and gas industries resulting from just the incentives included in the Energy Policy Act of 2005 totaled $6 billion.

Because current tax incentives are structured in a manner that continues to advantage traditional energy sources, we believe that federal tax policy will not significantly change patterns of energy production or consumption unless we commit to a fundamentally new approach.

To be truly effective in addressing our nation’s critical energy challenges, our tax system must be modernized so that it accelerates the rate of change for bringing energy technology solutions to market. Significant reform is necessary even to achieve parity in terms of the support for new technologies relative to incumbent energy sources, but we should do more.

Similar efforts by other nations have yielded substantial results. Comprehensive and strategic policies to create sustainable markets for renewable energy technologies have had far-reaching success in Germany, Spain, Japan and other nations that now benefit from robust alternative energy industries. In each case, an unwavering high-level commitment to a fundamental shift in strategy has led to sustained investment in and adoption of new energy technologies.

Achieving fundamental reform of our current tax system will be a complex undertaking that demands thoughtful and detailed policy change. We believe, however, that we can and must do more to expand markets for innovative technologies and to accelerate the development of new innovations through technology-neutral tax policies.

Piecemeal programs and incentives will not drive fundamental changes in behavior necessary to change patterns of energy supply and demand. Above all, we need a comprehensive, strategic and sustained approach to tax policy that drives supply and demand for new energy technologies so that they are developed and utilized at a scale that can make a significant impact.

We recommend the following reforms as a starting point for a new approach:

1.      Restructuring incentives to ensure market signals drive new technologies

Structural issues significantly impact the effectiveness of existing tax programs in spurring new technologies. Our current tax code includes various alternative energy incentive programs, each of which applies to certain specified energy technologies but not to others.

Some of these incentives are subject to caps and other specified limitations. For example, federal law currently provides a 30% investment tax credit for solar installations, but residential systems are capped at $2,000 under the credit. As a result, even modest residential solar installations receive relatively little incentive under the program.

Similarly, the investment tax credit includes a $1,000 per kilowatt cap for fuel cells for both commercial and residential installations. In addition, incentives for manufacture of fuel-efficient vehicles impose an annual cap on the number of eligible hybrid vehicles.

Tax incentives for alternative fuels are similarly structured to encourage specific technologies rather than technologies that meet performance goals. Tax incentives are available to companies (including oil companies, fuel distributors and others) that blend biofuels with conventional fuels for distribution. Existing credits apply to alcohols, fatty-acid methyl esters and diesel derived from biomass using a thermal depolymerization process.

Existing credits for biofuels are based on volumetric blend percentages (i.e. the percentage of biofuel in the finished fuel). Using a volumetric basis grants an advantage to relatively low energy content fuels despite the advantages of higher energy content fuels that include increased range and lower emissions. As a result, current tax incentives favor less energy dense fuels such as ethanol over fuels with higher energy content such as butanol and other high-alcohol content fuels.

In addition, novel biofuels that do not fall within the chemistries or processes specified within the tax code are not eligible for the tax credits. These include such promising technologies as biomass derived and biochemically produced hydrocarbons. Furthermore, biofuels derived from feedstocks that result in significantly lower greenhouse gas emissions are not granted any additional incentive over those derived from conventional feedstocks.

In short, current tax policy picks winners and losers. The structure and value of existing incentives is not driven by an overarching strategy to impact energy security or reduce harmful emissions but is primarily a reflection of the political clout of various industry sectors or even individual companies.

Federal tax policy can be significantly more effective in addressing national energy and environmental priorities by driving new technologies if it is restructured in a manner that encourages a range of innovative technologies and enables the market to drive the growth of these technologies.

We recommend the establishment of robust, long-term incentives that are available to promising technologies that meet specified performance-based criteria. Such criteria may include, but are not limited to, minimum efficiency standards, reduced emissions of greenhouse gases or other pollutants, low-emissions or low-fossil fuel reliance in production processes, reduction in petroleum usage and similar factors consistent with energy and environmental policy goals.

We believe that certain novel approaches to achieving market-driven incentives also merit consideration. Linking federal support for biofuels to changes in the price for oil, for example, will cause tax incentives for biofuels production to increase as oil prices decrease. This approach will enable alternative fuels to compete more effectively, while preserving federal support when it is not needed (i.e. when oil prices rise to a point at which biofuels are competitive).

2.      Long-term, consistent approach

To drive substantial private sector investment, we need stable, long-term and predictable incentives. We support a minimum 5-year timeframe for clean energy tax credits.

We believe this is the minimum amount of time necessary to enable rational investment decisions and a reasonable period of time given budget constraints that impact tax policy. This minimum timeframe will allow for economies of scale in the development, deployment and cost of renewable energy sources.

The federal regulatory environment’s support for energy technologies can be significantly improved by establishing consistency and predictability. The effectiveness of existing incentives is significantly limited in driving development of projects with long lead time, particularly given the pace of development and consumer adoption of energy technologies. In most cases, existing tax credits or incentives are short-term, piecemeal programs subject to the uncertainty of the Congressional reauthorization and/or appropriations processes. For example, the production tax credit for renewable energy, established in 1992, has been subject to three expirations and several short-term extensions (some retroactive), most recently through December 2008.

Energy policy and its urgency have fluctuated with changing energy prices. A sound national energy strategy must include long-term, stable policies that accelerate development and adoption of new technologies including next-generation technologies.

3.      Consumer incentives that change patterns of demand

The federal tax code can do more to change consumer behavior consistent with the development and commercialization of new technologies. The tax code can significantly change consumer behavior, driving demand in pace with supply, by shortening the payback period for installation or adoption of new technologies.

Incentives currently exist for manufacturers and consumers of energy efficient appliances, including refrigerators and dishwashers. Industry has partnered successfully with the federal government for many years to establish effective market-based programs and initiatives, such as the Department of Energy-Environmental Protection Agency Energy Star program, which have been effective in informing consumers about energy usage and encouraging the development of energy efficient products.

Currently, some states offer generous incentives for consumer purchase and installation of energy technologies while others have no such incentives. Federal policy should establish greater consistency in consumer demand for energy technologies.

4.      Technology neutrality and support for a balanced portfolio of technology

Solutions

The importance of technology neutrality and the need to develop a portfolio of technology solutions that is balanced cannot be overemphasized. In particular, we note that more established energy technology solutions continue to make tremendous gains in cost reduction and effectiveness. These technologies, including solar, fuel cell and wind technologies, have not yet met their full potential. In the case of some established clean technologies, a lack of widespread consumer adoption has a counterintuitive effect of fueling consumer skepticism that should be addressed.

To the greatest extent possible, federal policy should establish a level playing field through performance-based criteria that enable all promising energy technologies to compete. Ultimately, the marketplace should pick technology winners and losers.

Conclusion

There is an unprecedented degree of consensus today that our nation faces energy challenges that will impact our economic competitiveness, national security and the global environment unless we take significant steps to chart a sound energy future.

Energy tax policy – and specifically, policies that encourage novel and innovative new energy technologies – is among the most important means of driving fundamental change in our energy supply and demand.  We deeply appreciate the Subcommittee’s leadership and encourage your continued resolve to make bold changes that will enable us to surmount our nation’s critical energy and environmental challenges. TechNet is committed to supporting the Subcommittee in this important effort.

 Thank you for your consideration.