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Friday, January 29, 2010

Climate Change and the EU Emissions Trading Scheme (ETS): Looking to 2020

Larry Parker
Specialist in Energy and Environmental Policy

The European Union's (EU) Emissions Trading Scheme (ETS) is a cornerstone of the EU's efforts to meet its obligation under the Kyoto Protocol. It covers more than 10,000 energy intensive facilities across the 27 EU Member countries; covered entities emit about 45% of the EU's carbon dioxide emissions. A "Phase 1" trading period began January 1, 2005. A second, Phase 2, trading period began in 2008, covering the period of the Kyoto Protocol. A Phase 3 will begin in 2013 designed to reduce emissions by 21% from 2005 levels. Several positive results from the Phase 1 "learning by doing" exercise assisted the ETS in making the Phase 2 process run more smoothly, including: (1) greatly improving emissions data, (2) encouraging development of the Kyoto Protocol's project-based mechanisms—Clean Development Mechanism (CDM) and Joint Implementation (JI), and (3) influencing corporate behavior to begin pricing in the value of allowances in decision-making, particularly in the electric utility sector. 

However, several issues that arose during the first phase were not resolved as the ETS moved into Phase 2, including allocation schemes and new entrant reserves, and others. A more comprehensive and coordinated response by the EU has been made for Phase 3 with harmonized and coordinated rules being developed by the European Commission. The United States is not a party to the Kyoto Protocol. However, five years of carbon emissions trading has given the EU valuable experience in designing and operating a greenhouse gas trading system. This experience may provide some insight into cap-and-trade design issues currently being debated in the United States. 

• The U.S. requires only electric utilities to monitor CO2. The EU-ETS experience suggests that expanding similar requirements to all facilities covered under a capand- trade scheme would be pivotal for developing allocation systems, reduction targets, and enforcement provisions. 

• In the U.S. debate continues on comprehensive versus sector-specific reduction programs; the EU-ETS experience suggests that adding sectors to a trading scheme once established may be a slow, contentious process. 

• As with most EU industries, most U.S. industry groups either oppose auctions outright or want them to be supplemental to a base free allocation. The EU-ETS experience suggests Congress may want to consider specifying any auction requirement if it wishes to incorporate market economics more fully into compliance decisions. 

• EU-ETS analysis suggests the most important variables in determining Phase 1 allowance price changes were oil and natural gas price changes; this apparent linkage raises possible market manipulation issues, particularly with the inclusion of financial instruments such as options and futures contracts. The EU will examine the matter in preparation for Phase 3. Congress may consider whether the government needs enhanced regulatory and oversight authority over such instruments. 
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Date of Report: January 26, 2010
Number of Pages: 22
Order Number: R41049
Price: $29.95

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CRS Issue Statement on Oil and Natural Gas Markets

Carl E. Behrens, Coordinator
Specialist in Energy Policy

The sudden plunge of crude oil and gasoline prices in the second half of 2008 eased the urgency of legislative efforts to deal with high prices. In the 111th Congress, the energy focus shifted toward alternative energy sources and related policies regarding global climate change, but a number of oil and gas issues and questions remained to be resolved. Primary among them was the issue of increasing domestic production of conventional oil and gas resources, particularly the long-standing moratorium on oil and gas leasing on much of the Outer Continental Shelf, which the 110th Congress allowed to expire. 

Another issue of legislative interest was the role of unregulated speculation in oil markets and the consequential affect on gasoline prices. During the dramatic run-up of crude oil prices in the first half of 2008 many Members complained that there was little government oversight and practically no effective regulation of the commodities market that could detect or prevent excesses. This sentiment continues to stimulate legislative proposals, even though the speculative bubble has burst.


Date of Report: January 19, 2010
Number of Pages: 3
Order Number: IS40357
Price: $7.95

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Tuesday, January 26, 2010

Emission Allowance Allocation to Electricity Local Distribution Companies (LDCs):Considerations for Policymakers

Jonathan L. Ramseur
Specialist in Environmental Policy

Stan Mark Kaplan
Specialist in Energy and Environmental Policy


This report examines a major component of the emission allowance distribution strategy proposed in two major legislative vehicles under consideration in the 111th Congress: H.R. 2454 (Waxman- Markey), which passed the House on June 26, 2009; and S. 1733 (Kerry-Boxer), which was ordered reported by the Senate Committee on Environment and Public Works on November 5, 2009. Both bills (among other provisions) would establish a cap-and-trade program that would distribute—in the program's early years—a substantial portion of allowance value to electricity local distribution companies (LDCs) for the benefit of electricity consumers. Considering the magnitude of allowance value directed to LDCs, the potential consequences and challenges associated with this approach raise fundamental policy issues. 

Although an LDC allocation approach would be effective in mitigating cap-related electricity price increases at the household level, a closer examination of this strategy reveals potential concerns. Recent economic studies indicate that an electricity LDC allowance distribution strategy would alter the carbon price signal. The overall cost of the cap-and-trade program would increase if the price signal is channeled away from economic sectors with abundant low-cost abatement opportunities to economic sectors that have fewer such opportunities. In addition, if the price signal is dampened in one sector of the economy or for a particular subgroup of society, the signal may shift to other sectors or other groups, yielding unintended impacts. Several studies have estimated the efficiency loss. The range of estimates indicates that the magnitude of the efficiency loss due to LDC allocation would be uncertain. This uncertainty may pose a challenge for policymakers, when evaluating trade-offs between various allowance distribution strategies. 

Regions that get electricity from more carbon-intensive sources are generally expected to face disproportionate impacts, and many have argued that an electricity LDC allocation approach could be designed to address these impacts. However, recent economic studies suggest that the differences across regions (for the average household) may be relatively modest. A question for policymakers is whether this disparity is worth addressing with an LDC allocation strategy, especially considering the implementation challenges involved. Robust data exist for the carbon intensity of electricity at the point of generation, but analogous data for the carbon intensity of electricity distributed for consumption are substantially less precise. This information gap would likely pose a significant challenge in terms of distributing emission allowances to LDCs, if policymakers seek to account for different carbon intensities of electricity. In addition, a range of stakeholders has expressed concern that the state Public Utility Commissions, which oversee LDCs, would implement the LDC allowance distribution requirements in different ways. Allowing different applications of allowance value (for the benefit of the electricity consumer) could lead to varied impacts across state lines. Some state agencies may allow LDCs to use allowance value to support efforts (unrelated to electricity bill rebates) that may not be allowed in other states. 

Recent economic models indicate that most households would fare better with a lump-sum distribution. This is likely partly due to the expected efficiency loss associated with the LDC allotment. Another factor is that households in different regions use energy in different ways and consume fuels with different levels of carbon-intensity. The lump-sum distribution approach would likely provide households with more flexibility to offset the cost increases specific to their situation, whereas an LDC allocation would favor those impacted the most by electricity price increases.


Date of Report: January 25, 2010
Number of Pages: 28
Order Number: R41041
Price: $29.95

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CRS Issue Statement on Transportation, Energy, and Environment

Brent D. Yacobucci, Coordinator
Specialist in Energy and Environmental Policy


Concerns over energy supply and prices and growing concerns over the environmental effects of transportation have led to increased interest in technologies and strategies to limit energy consumption or to move toward more sustainable mobility. Further, the role of the transportation sector—a source of roughly one-third of U.S. greenhouse gas emissions— will be at the forefront as Congress considers legislation to regulate greenhouse gas emissions. 

The potential for improved air quality, lower greenhouse gas emissions, improved energy security, and other benefits of energy conservation, biofuels, new technologies, or new transport modes are viewed by proponents as warranting greater government support and mandates. But opponents argue that such measures could distort markets and cause economic harm, and they contend that supply and demand should determine the nation's transportation choices. Further, in some cases, the energy efficiency, total cost, and overall environmental cost/benefit of some transportation strategies have been questioned.


Date of Report: January 8, 2010
Number of Pages: 3
Order Number: IS40402
Price: $7.95

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Sunday, January 24, 2010

Displacing Coal with Generation from Existing Natural Gas-Fired Power Plants

Stan Mark Kaplan
Specialist in Energy and Environmental Policy


Reducing carbon dioxide emissions from coal plants is a focus of many proposals for cutting greenhouse gas emissions. One option is to replace some coal power with natural gas generation, a relatively low carbon source of electricity, by increasing the power output from currently underutilized natural gas plants. 

This report provides an overview of the issues involved in displacing coal-fired generation with electricity from existing natural gas plants. This is a complex subject and the report does not seek to provide definitive answers. The report aims to highlight the key issues that Congress may want to consider in deciding whether to rely on, and encourage, displacement of coal-fired electricity with power from existing natural gas plants. 

The report finds that the potential for displacing coal by making greater use of existing gas-fired power plants depends on numerous factors. These include: 

• The amount of excess natural gas-fired generating capacity available. 

• The current operating patterns of coal and gas plants, and the amount of flexibility power system operators have for changing those patterns. 

• Whether or not the transmission grid can deliver power from existing gas power plants to loads currently served by coal plants. 

• Whether there is sufficient natural gas supply, and pipeline and gas storage capacity, to deliver large amounts of additional fuel to gas-fired power plants. 

There is also the question of the cost of a coal displacement by gas policy, and the impacts of such a policy on the economy, regions, and states. 

All of these factors have a time dimension. For example, while existing natural gas power plants may have sufficient excess capacity today to displace a material amount of coal generation, this could change in the future as load grows. Therefore a full analysis of the potential for gas displacement of coal must take into account future conditions, not just a snapshot of the current situation. 

As a step toward addressing these questions, Congress may consider chartering a rigorous study of the potential for displacing coal with power from existing gas-fired power plants. Such a study would require sophisticated computer modeling to simulate the operation of the power system to determine whether there is sufficient excess gas fired capacity, and the supporting transmission and other infrastructure, to displace a material volume of coal over the near term. Such a study could help Congress judge whether there is sufficient potential to further explore a policy of replacing coal generation with increased output from existing gas-fired plants.


Date of Report: January 19, 2010
Number of Pages: 34
Order Number: R41027
Price: $29.95

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CRS Issue Statement on Electric Power Sector

Stan Mark Kaplan, Coordinator
Specialist in Energy and Environmental Policy

Larry Parker
Specialist in Energy and Environmental Policy

Adam Vann
Legislative Attorney

Paul W. Parfomak
Specialist in Energy and Infrastructure Policy

Beth A. Roberts
Information Research Specialist


The electric power industry is in the process of transformation. Since 1978, technology improvements, changes in the economics for generating electricity, and new federal laws and regulations (such as the Public Utility Regulatory Policies Act of 1978, the Energy Policy Acts of 1992 and 2005, the Energy Independence and Security Act of 2007, and Federal Energy Regulatory Commission (FERC) orders, have created a new competitive landscape for electricity. Competition is occurring on the wholesale level, and some states have moved toward retail competition. Other states have retreated from open markets due to concerns over impacts on power prices. Congress continues to face the issue of how much to intervene to ensure a reliable and affordable supply of electricity throughout the United States. 

The electric utility system is vulnerable to outages due to system operator errors, weather-related damage, terrorist attacks, and shortages of transmission and generating capacity. The blackout of 2003 in the Northeast, Midwest, and Canada highlighted the need for operations improvements and greater standardization of operating rules. Pursuant to the Energy Policy Act of 2005, FERC named the North American Electric Reliability Corp. (NERC) as the electric reliability organization (ERO) required by the act. The ERO is developing mandatory and enforceable standards for the sector to ensure bulk power reliability


Date of Report: January 15, 2010
Number of Pages: 3
Order Number: IS40272
Price: $7.95

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U.S. and South Korean Cooperation in the World Nuclear Energy Market: Major Policy Considerations

Mark Holt
Specialist in Energy Policy


A South Korean consortium recently signed a contract to provide four commercial nuclear reactors to the United Arab Emirates (UAE), signaling a new role for South Korea in the world nuclear energy market. The $20 billion deal indicates that South Korea has completed the transition from passive purchaser of turn-key nuclear plants in the 1970s to major nuclear technology supplier, capable of competing with the largest and most experienced nuclear technology companies in the world. The South Korean government reportedly has established a goal for South Korea to capture 20% of the world nuclear power plant market during the next 20 years, and the importance placed by Seoul on the UAE contract was underscored by South Korean President Lee Myung-bak's presence at the signing ceremony in the UAE. 

In the 1970s, South Korea launched its nuclear power program through the government-owned Korea Electric Company (now Korea Electric Power Corporation, KEPCO), which purchased the country's first nuclear power units from Westinghouse. In the early years of the Korean nuclear program, Westinghouse and other foreign suppliers delivered completed plants with minimal Korean industry input. After the first three units, Korean firms took over the construction work on subsequent plants, although the reactor systems, turbine-generators, and architect/engineering services continued to be provided primarily by non-Korean companies. In 1987, KEPCO embarked on an effort to establish a standard Korean design, selecting the System 80 design from the U.S. firm Combustion Engineering as the basis. Combustion Engineering won the competition for the Korean standard design contract by agreeing to full technology transfer, according to KEPCO. The technology transfer program resulted in the development of the APR- 1400 power plant, which is the design purchased by the UAE. 

In the UAE deal, the South Korean consortium is headed by KEPCO and includes other major Korean industrial companies that are involved in Korea's rapidly growing domestic nuclear power plant construction program. The consortium also includes Pittsburgh-based Westinghouse Electric Company, which currently owns the U.S. design on which the Korean design is based, and the Japanese industrial conglomerate Toshiba, which now owns most of Westinghouse. 

Because the AP-1400 is based on a U.S. design, U.S. export controls will continue to apply. Westinghouse plans to seek the necessary authorization from the U.S. Department of Energy (DOE) to transfer the technology to the UAE. The UAE recently reached a nuclear cooperation agreement with the United States in which the country agreed not to develop fuel cycle facilities to support its planned nuclear power program, which could ease weapons proliferation concerns. The UAE program may establish a precedent for U.S. policy on future Korean exports to nonnuclear power nations, which is likely to be of continuing congressional interest. 

The Korea-UAE nuclear plant sale also has been cited by the Korean news media as an important consideration in upcoming negotiations on the renewal of the U.S.-Korea nuclear cooperation agreement, a prerequisite under Section 123 of the Atomic Energy Act for nuclear trade. The current agreement expires in 2014, and the first discussions on renewal are likely within the next year. Congress will have an opportunity to review any new agreement before it takes effect.


Date of Report: January 21, 2010
Number of Pages: 14
Order Number: R41032
Price: $29.95

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Friday, January 22, 2010

CRS Issue Statement on Renewable Energy and Energy Efficiency

Fred Sissine, Coordinator
Specialist in Energy Policy


The energy crises of the 1970s spurred the federal government, and some state governments, to mount a variety of energy efficiency and renewable energy policies to address concerns about oil import dependence, high energy prices, and overall energy security. Since then, additional economic and environmental concerns—especially international competitiveness, air pollution, and climate change—have also driven policy proposals to support efficiency and renewables. As the nation seeks to reduce imported energy and to increase production from "clean" domestic sources, there may continue to be interest in additional federal spending, tax incentives, and regulatory measures to further expand renewable energy use and help overcome market barriers to efficiency measures. Also, any future efforts to create a capand- trade program for greenhouse gas emissions could include auctions of emission credits to generate revenue that could, in part, be used to fund renewable energy and energy efficiency initiatives. 

Renewable energy is derived from resources that are generally not depleted by human use, such as the sun, wind, and water movement. These primary sources of energy can be converted into heat, electricity, and mechanical energy in several ways. There are some mature technologies for conversion of renewable energy such as hydropower, biomass, and waste combustion. Other conversion technologies, such as wind turbines and photovoltaics, are already well developed, but they have not achieved the technological efficiency and market penetration that many expect they will ultimately reach. Although geothermal energy is produced from geological rather than solar sources, it is often included as a renewable energy resource. Marine/hydrokinetic (river currents and wave, tidal, and ocean thermal) energy has recently emerged as a potential renewable energy resource. Renewable energy sources provide nearly 7% of the nation's energy use. About 36% of renewable energy production is supplied by conventional hydropower and about 47% is supplied by biomass (mainly wood use for heating).


Date of Report: January 12, 2010
Number of Pages: 5
Order Number: IS40382
Price: $7.95

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Thursday, January 21, 2010

Energy and Water Development: FY2010 Appropriations

Carl E. Behrens, Coordinator
Specialist in Energy Policy


The Energy and Water Development appropriations bill provides funding for civil works projects of the Army Corps of Engineers (Corps), the Department of the Interior's Bureau of Reclamation, the Department of Energy (DOE), and a number of independent agencies. 

Key budgetary issues for FY2010 involving these programs may include: 

• the distribution of Corps appropriations across the agency's authorized planning, construction, and maintenance activities (Title I); 

• support of major ecosystem restoration initiatives, such as Florida Everglades (Title I) and California "Bay-Delta" (CALFED) and San Joaquin River (Title II); 

• funding for the proposed national nuclear waste repository at Yucca Mountain, Nevada (Title III: Nuclear Waste Disposal); 

• several new initiatives proposed for Energy Efficiency and Renewable Energy (EERE) programs (Title III); and 

• funding decisions in DOE's Office of Environmental Management. 

Energy and Water Development funding for FY2009 was included in the Omnibus Appropriations Act, 2009 (P.L. 111-8). In addition, the American Recovery and Reinvestment Act (ARRA, the "Stimulus" Act, P.L. 111-5) included funding for numerous programs in the Corps of Engineers, the Bureau of Reclamation, and the Department of Energy, to be expended in FY2009 and FY2010. 

Funding for FY2010 Energy and Water Development programs is contained in H.R. 3183, which the House passed July 17, 2009. The Senate passed its version of H.R. 3183 July 29. The Conference Committee issued its report (H.Rept. 111-278) September 30, and the House passed the conference bill October 1, and the Senate October 15. The President signed the bill October 28 (P.L. 111-85). 


Date of Report: January 5, 2010
Number of Pages: 55
Order Number: R40669
Price: $29.95

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Sunday, January 17, 2010

CRS Issue Statement on Energy Sector Transformation

Gene Whitney, Coordinator
Section Research Manager

Anthony Andrews
Specialist in Energy and Energy Infrastructure Policy

Richard J. Campbell
Specialist in Energy Policy

Robert Bamberger
Specialist in Energy Policy

Stan Mark Kaplan
Specialist in Energy and Environmental Policy


The U.S. energy portfolio may be transformed in response to economic signals and global competition for fossil fuel resources, as well as concerns about national security and climate change. This energy sector transformation will be driven or advanced by existing and emerging policies, and will require development of new technologies for the extraction and use of energy, the diversification of energy sources, and more efficient ways of gathering, transporting, and using energy. 

A partial framework for this transformation has been established through the Energy Policy Act of 2005 (P.L. 109-58), the Energy Independence and Security Act of 2007 (P.L. 110-140), and the American Recovery and Reinvestment Act of 2009 (P.L. 111-5). New legislation that has been introduced during the first session of the 111th Congress would advance several aspects of energy transformation while focusing more on reducing carbon emissions and providing new jobs in the energy sector. 

Diversification of U.S. energy supply is already supported through policies that encourage expanded development and use of renewable energy sources, biofuels and biomass, and other reduced-carbon fuels. Currently, 40% of U.S. energy consumption is oil, and the U.S. transportation system is 96% reliant on oil. Reducing oil consumption would help satisfy both economic and national security concerns arising from the import of almost 60% of the oil used by the U.S. Policies are being considered that would expand the production of oil and natural gas within the United States while minimizing the impact of such development on the environment. Growing concerns about the impact of fossil fuel combustion on the Earth's climate via accumulations of CO2 in the atmosphere will serve as an additional driver for further development of low-carbon energy technologies. 

The U.S. seeks economical ways to generate electricity while reducing carbon emissions. Transformation of the nation's electrical generating capacity from high-carbon fuels like coal, which currently provides approximately 50% of U.S. electricity, may involve further changes in the policies related to renewable energy technologies, nuclear energy, and natural gas production and use. Carbon capture and storage provisions have been included in recent legislation, and Congress will face additional decisions regarding this set of technologies as demonstration plants test the practicality and effectiveness of the capture and sequestration processes. 

Energy efficiency and conservation continue to be targeted as a cost-effective way to make significant gains in energy savings. The efficiency of buildings, industry, agriculture, and transportation may be improved substantially through the adoption of modern methods, materials, and technologies to reduce the amount of energy required to perform a task or to maintain a facility. Developing new policies or expanding existing policies to encourage the adoption of energy efficient practices will likely continue to be fruitful. 

Improvements in energy efficiency and the diversification of energy sources rely on a foundation of new technologies developed in a climate that rewards innovation. In addition, these new technologies must be viable at large scales, so the inclusion of demonstration and deployment provisions for certain technologies is essential. Incentives for developing and deploying new energy technologies may be provided through a variety of policy tools. 

Date of Report: January 12, 2010
Number of Pages: 3
Order Number: IS41014
Price: $29.95

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Wednesday, January 6, 2010

The Strategic Petroleum Reserve: History, Perspectives, and Issues

Robert Bamberger
Specialist in Energy Policy

Congress authorized the Strategic Petroleum Reserve (SPR) in the Energy Policy and Conservation Act (EPCA, P.L. 94-163) to help prevent a repetition of the economic dislocation caused by the 1973-1974 Arab oil embargo. The program is managed by the Department of Energy (DOE). The capacity of the SPR is 727 million barrels, and by the end of 2009, was virtually filled to its capacity at 726 million barrels of crude oil. In addition, a Northeast Heating Oil Reserve (NHOR) holds 2 million barrels of heating oil in above-ground storage. The SPR comprises five underground storage facilities, hollowed out from naturally occurring salt domes in Texas and Louisiana. EPCA authorized drawdown of the Reserve upon a finding by the President that there is a “severe energy supply interruption.” Congress enacted additional authority in 1990 (Energy Policy and Conservation Act Amendments of 1990, P.L. 101-383), to permit use of the SPR for short periods to resolve supply interruptions stemming from situations internal to the United States. The meaning of a “severe energy supply interruption” has been controversial. EPCA intended use of the SPR only to ameliorate discernible physical shortages of crude oil. However, the American Clean Energy Leadership Act of 2009 (S. 1462), reported in the Senate, would require that the SPR include 30 million barrels of refined product; would transfer authority for a drawdown from the President to the Secretary of Energy; and would amend the drawdown authority to permit drawdown and sale in the event of a “severe energy market supply interruption” that has caused, or is expected to cause, “a severe increase” in prices. This language is a significant departure from existing authorities which predicate drawdown disruptions in supply, and discourages use of the SPR to address high prices, per se.

Beginning in 2000, additions to the SPR were made with royalty-in-kind (RIK) oil acquired by the Department of Energy in lieu of cash royalties paid on production from federal offshore leases. In May 2008, Congress passed legislation (P.L. 110-232) ordering DOE to suspend RIK fill for the balance of the calendar year unless the price of crude oil dropped below $75/barrel. However, the sharp decline in crude oil prices since spiking to $147/barrel in the summer of 2008 brought about a resumption of fill of the SPR. On January 2, 2009, the Bush Administration announced plans that included the purchase of nearly 10.7 million barrels for the SPR to replace oil that was sold after Hurricanes Katrina and Rita in 2005. In May 2009, RIK fill was resumed at an average volume of 26,000 barrels per day, totaling over 6.1 million barrels to be delivered by January 2010. These activities have brought the SPR essentially to capacity. The government has not purchased oil for the SPR since 1994.

The Energy Policy Act of 2005 (EPACT) required expansion of the SPR to its authorized maximum of 1 billion barrels. Congress approved $205 million for FY2009, including $31.5 million to continue expansion activities. A site in Richton, MS, has been evaluated as a possible location for an additional 160 million barrels of capacity. Although expansion activity appears to have been set aside, the FY2010 budget enacted in the FY2010 Energy and Water Appropriations Act (P.L. 111-85), which provides $243.8 million for the entire SPR program, includes $25 million for expansion activities and $43.5 million for purchase of a cavern at Bayou Choctaw to replace a cavern posing environmental risks. An amendment agreed to in the Senate, and included in the final bill, prohibits SPR appropriations expended to anyone engaged in providing refined product to Iran, or assisting Iran in developing additional internal capacity to refine oil.

Date of Report: December 28, 2009 
Number of Pages: 16 
Order Number: RL33341 
Price: $29.95  

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Energy Tax Policy: Issues in the 111th Congress

Donald J. Marples
Specialist in Public Finance

Molly F. Sherlock
Analyst in Economics

Energy tax policy involves the use of one of the government’s main fiscal instruments, taxes (both as an incentive and as a disincentive) to alter the allocation or configuration of energy resources and their use. In theory, energy taxes and subsidies, like tax policy instruments in general, are intended either to correct a problem or distortion in the energy markets or to achieve some economic (efficiency, equity, or even macroeconomic) objective. In practice, however, energy tax policy in the United States is made in a political setting, being determined by the views and interests of the key players in this setting: politicians, special interest groups, bureaucrats, academic scholars, and fiscal dictates. As a result, enacted tax policy embodies compromises between economic and political goals, which could either mitigate or compound existing distortions.

The economic rationale for government intervention in energy markets is commonly based on the governments perceived ability to correct for market failures. Market failures, such as externalities, principal-agent problems, and informational asymmetries, result in an economically inefficient allocation of resources—in which society does not maximize well-being. To correct for these market failures governments can utilize several policy options, including taxes and regulation, in an effort to achieve policy goals.

Date of Report: December 30, 2009
Number of Pages: 29
Order Number: R40999
Price: $29.95
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