President Obama’s remarks at Georgetown make certain tax reforms essential for achievement of his goals. In his remarks, Mr. Obama highlighted the role that technology plays in our energy future. New technology has yielded the drilling advances and extraction capability linked with America’s growing supply of natural gas and oil. Additional new energy technology will come not only through federal research grants but also from R&D done in the private sector. New taxes on the energy industry, in both the traditional oil & gas segment, as well as the renewable sector, will only take away money from areas that support R&D. Historically, the energy industry has sought out new and innovated technologies that increase energy capability and development which benefit everyone.
The President noted the benefits that the U.S. is receiving from the technological advances that have led to growth in the supply of natural gas. Observing that there are criticisms of natural gas extraction, the President stated, “We should strengthen our position as the top natural gas producer because, in the medium term at least, it not only can provide safe, cheap power, but it can also help reduce our carbon emissions.” The lower carbon intensity of natural gas is one of its considerable advantages (See Penley on Education and Energy – EPA Study Provides Favorable Findings for Natural Gas).
In addition to the role that new technology has played in unlocking the enormous U.S. supply of natural gas, technology is also making a considerable difference in other energy areas, e.g., efficiency of photovoltaic cells for the production of solar energy, oil sands technology and high efficiency carbon capture. The latter area of technology development becomes especially important to mitigating climate change from atmospheric carbon in that fossil fuels, as Mr. Obama observed, will be around for many years to come.
Accomplishing the President’s goals, however, makes policy change essential. Among the most valuable policy changes for incenting new energy technology is tax reform associated with R&D tax credits for U.S. companies. This type of reform was called for in a bipartisan report from the American Energy Innovation Council (AEIC): Catalyzing American Ingenuity: The Role of Government in Energy Innovation. Without broadly drawn R&D tax credits that are generally applicable to the energy industry that do not have limitations to just the renewable energy sector, it is unlikely we will achieve the President’s goals.
The AEIC has linked a viable U.S. energy policy directly to the economic health of the country. AEIC pointedly notes that underinvestment by the private sector in new R&D in energy limits U.S. economic health. As the report detailed, U.S. underinvestment in energy R&D occurs as a result of the capital-intensive nature of the energy industry, the need for large up-front investments with slow turnover in capital assets, and the imperfect energy market leading to slow adoption of new technology.
R&D tax credits have historically been subject to repeated expiration with uncertainty about their renewal or the timetable for renewal. That uncertainty limits the development of new technology in capital-intensive sectors like energy. Moreover, R&D tax credits have been targeted at specific segments of the energy industry like wind and solar. This practice of targeting specific segments of the industry limits the development of widespread new energy technology. The consequence is that the historic underinvestment by the U.S. energy industry hampers the development of a broad range of new technology — from innovative sources of renewable energy to innovative technology for capture and sequestration of carbon to cheaper and more widely available sources of cleaner fossil fuels like natural gas.
The President’s remarks at Georgetown were about more than climate change; they addressed the need for policy that will advance the development of innovative energy technology. They make the case for the President to address tax reform with specific attention to the issue of R&D tax credits that will encourage an industry that is critical to our economic health.