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Thursday, August 25, 2011

The Role of Federal Gasoline Excise Taxes in Public Policy

Robert Pirog
Specialist in Energy Economics

American drivers, compared to those in industrialized nations in Europe, pay relatively low federal, state, and local gasoline and diesel excise taxes. The federal taxes are used specifically to fund annual highway construction, maintenance, and mass transit. Over the years, proposals have come forth to raise the federal tax as a way to address long-standing national policy concerns, including U.S. dependence on imported oil and various environmental problems related to large volumes of gasoline consumption. The current federal gasoline tax legislation is set to expire on September 30, 2011, and renewal of the tax could be controversial.

Policy attention on the role of the gasoline tax has also increased recently due to two major developments. First, the 2008 and 2011 oil and gasoline price run-ups and continuing effects of the economic downturn have periodically led to a decline in gasoline tax revenues available for needed highway construction and maintenance. Second, the volatility of gasoline prices has affected investment planning (e.g., for alternative fuels and vehicles) and arguably contributed to the troubles facing domestic automobile manufacturers. In the above context, this report outlines some of the macroeconomic and microeconomic pros and cons of using the federal gasoline excise tax for policy purposes in addition to the funding of highway infrastructure.

Whether an increase in the gasoline tax is fixed or variable, advocates argue that increasing the relative price of gasoline would promote beneficial short- and long-term changes in how we use this form of energy. A higher relative price would encourage consumers and manufacturers to move toward more fuel-efficient vehicles, or to switch to alternative fuels, thus reducing oil consumption and imports, reducing air pollution, and possibly encouraging greater use of mass transit. Advocates further argue that such taxes could be recycled back into the economy through changes in the tax structure and/or increased investment in renewable or alternative fuels, among other options.

Opponents of gasoline tax increases point to the effects on consumer and business spending, which affect the short- and long-term performance of the overall U.S. economy, especially in a time of needed economic recovery. Additionally, opponents point out that the gasoline tax has a regressive impact and affects rural areas disproportionately. Opponents also argue that such tax revenues could be better spent if left in the private sector.

Gasoline price increases due to market forces, or earlier tax increases, of course, have been part of the economic environment for almost four decades. Since the mid-1970s, there have been significant spikes in gasoline prices due to world oil market turmoil attributed to political conflict and war in the Middle East and to financial market speculation. Depending on the specified purpose of a new gasoline tax increase, it could be modest, or more significant. Because the demand for gasoline is quite price insensitive (inelastic), significant revenues could be generated with little change in real consumption, even with a relatively low tax increase. A more substantial tax increase would likely be needed to change consumer preferences and business investment decisions. Any debate on modifying the gasoline excise tax will likely revolve around these tensions.

Date of Report: August 1
6, 2011
Number of Pages:
Order Number: R40
Price: $29.95

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Wednesday, August 24, 2011

Federal Agency Authority to Contract for Electric Power and Renewable Energy Supply

Anthony Andrews
Specialist in Energy and Defense Policy

The federal government purchases roughly 57 million megawatt hours of electricity annually (based on FY2007 data, the latest information available), making it the single largest U.S. energy consumer. The Department of Defense (DOD) alone consumes over 29 million megawatt-hours. The federal Power Marketing Administrations (PMAs) sell electricity at more than twice the volume of federal power purchases, over 127 million megawatt-hours of hydropower annually and are projected to produce wind-generated energy far in excess of the 2005 Energy Policy Act (EPAct) mandates for increasing federal use of renewable energy.

Various statutes and regulations authorize federal agencies to enter into contracts for their utility services and designate the General Services Administration (GSA) as the lead federal contracting agency. Utility services include electricity, natural gas, water, sewerage, thermal energy, chilled water, hot water, and steam. GSA may enter into “area-wide contracts” for up to 10 years with electric utility service suppliers to cover the needs of federal agencies within the supplier’s franchise territory. GSA has delegated certain authority to DOD to enter into utility service contracts on behalf of the military departments, and delegated similar authority to other federal agencies. DOD can also enter into contracts for up to 30 years for services to operate energy generating facilities on military installations. To meet the EPAct renewable energy goals, multiyear “power purchase agreements” (upwards of 10 to 20 years) are proposed with small and merchant renewable power generators. The agreements would fully commit funds up front, contrary to the pay-as-you-go rules of the 1990 Budget Enforcement Act.

In addition to utility service contracts, federal agencies can also take advantage of utility sponsored incentive programs for reducing energy demand. Demand response and load management programs provide rate incentives and/or cash payments to utility customers in exchange for curtailing their energy demand during peak usage periods. Utility energy service contracts (UESCs) enable federal agencies to enter into contracts with utilities to implement energy and water related improvements at their facilities. Agencies may also fund energy-savings improvement projects with appropriations, or the utility may arrange to finance the project’s capital cost up front and recover the investment through its rate charge. Energy saving performance contracts (ESPCs) enable federal agencies to install energy efficiency improvements with no upfront capital costs. The 2007 Energy Independence and Security Act (EISA) authorized federal agencies to combine appropriated funds and energy service companies’ (ESCO) private financing for ESPCs. The authority expands agencies’ opportunities to install solar energy generation.

The 1978 Public Utilities Regulation Policies Act (PURPA) defined a new class of small renewable energy generators that produce less than 80 megawatts and required electric utilities to purchase the electricity generated at the utility’s “avoided cost” of power production via a stateauthorized “power purchase” contract (also referred to as a power purchase agreement). However, state laws and regulations vary on the use of the contracts. States are more likely to permit the contracts when the purchaser is a utility, because the utility is responsible for providing firm uninterrupted power to the customer. Four PMAs market and distribute hydropower in 34 states to public utility districts and cooperatives at cost-based rates. EPAct directed the PMAs to study the economic and engineering feasibility of combining wind-generated energy with hydropower and to conduct a demonstration project that uses wind energy generated by Indian tribes. Short of amending federal contract authority, federal agencies may have recourse to meet EPAct mandates by purchasing power through the PMAs.

Date of Report: August 15, 2011
Number of Pages: 24
Order Number: R41960
Price: $29.95

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Tuesday, August 23, 2011

Nuclear Energy Cooperation with Foreign Countries: Issues for Congress

Paul K. Kerr
Analyst in Nonproliferation

Mark Holt
Specialist in Energy Policy

Mary Beth Nikitin
Specialist in Nonproliferation

U.S. civil nuclear cooperation agreements (“123” agreements), which are bilateral agreements with other governments or multilateral organizations, have several important goals, including promoting the U.S. nuclear industry, which is increasingly dependent on foreign customers and suppliers, and preventing nuclear proliferation. Increased international interest in nuclear power has generated concern that additional countries may obtain fuel-making technology that could also be used to produce fissile material for nuclear weapons. Ensuring the peaceful use of transferred nuclear technology has long been a major U.S. objective, and Congress has played a key role. For example, the Nuclear Nonproliferation Act of 1978, which amended the Atomic Energy Act (AEA) of 1954, added new requirements for nuclear cooperation with the United States. Moreover, the United States has been a longtime proponent of restrictive international nuclear export policies.

In recent years, some observers and Members of Congress have advocated that the United States adopt new conditions for civil nuclear cooperation. These would include requiring potential recipients of U.S. civil nuclear technology to forgo fuel-making enrichment and reprocessing technologies and to bring into force an Additional Protocol to their International Atomic Energy Agency (IAEA) safeguards agreements. Such protocols augment the IAEA’s legal authority to inspect nuclear facilities.

Civil nuclear commerce, particularly reactor transfers, may not be a near-term proliferation threat: all but three states (India, Israel, and Pakistan, all of which have nuclear weapons) are parties to the nuclear Nonproliferation Treaty (NPT); all legitimate transfers of nuclear technology to NPT non-nuclear-weapon states are subject to IAEA safeguards; and no country with comprehensive safeguards in place and a record in good standing with the IAEA has used declared nuclear facilities to produce fissile material for weapons. Further, the international community has multiple mechanisms to dissuade countries from developing domestic enrichment or reprocessing facilities. States such as India, Iran, Israel, North Korea, and Pakistan did acquire enrichment or reprocessing technology, but did so either clandestinely or prior to the establishment of the Nuclear Suppliers Group (NSG) in the mid-1970s.

Key factors and issues for Congress: 

  • The United States concludes nuclear cooperation agreements for a variety of reasons, including promoting nonproliferation, supporting the U.S. nuclear industry, and improving or sustaining overall bilateral and strategic relations. (See “Policy Goals of U.S. Nuclear Cooperation Agreements.”) 
  • The U.S. nuclear industry’s market share has declined in recent years; foreign customers and suppliers are important to the industry’s viability. Some argue that the absence of U.S. government liability protections for the U.S. nuclear industry puts that industry at a disadvantage relative to foreign competitors who enjoy such protections. (See “U.S. Nuclear Industry” and “Liability.”) 
  • Fears of additional states obtaining enrichment or reprocessing technologies may not materialize. Neither the United States nor any other states possessing enrichment or reprocessing technology have plans to transfer any such technologies. Moreover, the market for nuclear fuel currently functions well and the international community has begun to implement mechanisms to support the market. Although countries have the right under the NPT to develop their own nuclear fuel production capabilities, a functioning nuclear fuel market should reduce the need for them do so. Nevertheless, as noted, states have previously managed to acquire these technologies. (See “Enrichment and Reprocessing Worldwide.”) 
  • The number of NPT states-parties that have signed Additional Protocols has been steadily increasing; most states with significant nuclear activities have signed such protocols, giving the IAEA greater inspection authority over civil nuclear programs. (See “The NPT and IAEA Safeguards.”) 
  • Some argue that the United States should use its influence to persuade other countries to adopt additional constraints on nuclear transfers. However, the relative decline of the U.S. nuclear industry, as well as some key states’ demonstrated lack of willingness to accept such constraints, suggests that U.S. influence in this area is limited. (See “Additional Issues for Consideration.”) 
This report discusses broad themes related to U.S. nuclear cooperation with other countries. More details of specific legislative proposals from the 112th Congress are found in CRS Report RS22937, Nuclear Cooperation with Other Countries: A Primer, by Paul K. Kerr and Mary Beth Nikitin.

Date of Report: August 10, 2011
Number of Pages: 36
Order Number: R41910
Price: $29.95

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Thursday, August 18, 2011

Automobile and Light Truck Fuel Economy: The CAFE Standards

Brent D. Yacobucci
Specialist in Energy and Environmental Policy

Interest in the fuel economy of automobiles and light trucks has waxed and waned over more than three decades as oil and gasoline prices have risen and fallen. However, in recent years, as oil prices have spiked to historic levels, and concerns over greenhouse gas emissions and climate change have grown, there has been a resurgence in interest in the fuel economy of motor vehicles in the United States. Proponents of higher fuel economy standards argue that they will create incentives for the development of new technologies that will help reduce dependence on imported oil and better enable us to use scarce resources and limit our greenhouse gas emissions— technologies that would not be developed in the absence of that “technology push.” Critics argue that fuel economy standards distort the market for new vehicles, compromising consumer choice, and that other policy mechanisms would be more effective at reducing petroleum consumption and emissions (e.g., higher fuel taxes).

On July 29, 2011, the Obama Administration announced plans to tighten passenger vehicle fuel economy and greenhouse gas standards for model years (MY) 2017-2025. Although the National Highway Traffic Safety Administration (NHTSA) and the Environmental Protection Agency (EPA) do not plan to issue proposed rules until September 2011, they expect that Corporate Average Fuel Economy (CAFE) standards combined for new passenger cars and light trucks will rise to 40.9 miles per gallon (mpg) in MY2021 and 49.6 mpg in MY2025, up from 34.1 mpg in MY2016. To the extent possible, new CAFE standards will be harmonized with federal and state greenhouse gas standards for automobiles. A key impetus for the agreement is California’s regulation of vehicle greenhouse gas (GHG) emissions under the Clean Air Act.

Although necessary cost-benefit analyses have not been completed, the Administration expects that consumers’ fuel savings from the new standards will more than offset the additional cost of equipment embodying the new technology for these vehicles, which could be thousands of dollars. The Administration expects that the new standards will save roughly 4 billion barrels of oil and 2 billion metric tons of greenhouse gases over the life of the vehicles covered under the proposal.

In a similar process to the landmark agreement that led to new fuel economy and greenhouse gas standards for MY2012-MY2016, the Administration has secured commitment letters from the state of California and from 13 automakers. Many stakeholders were concerned about a potential “patchwork” of different federal and state standards if EPA, NHTSA, and California were to establish different standards at the intersection of fuel economy and GHG emissions. Two key parts of the agreement are that California will treat any vehicle meeting the new federal GHG standards as meeting California standards, and that the automakers agree to not challenge the new standards in court.

At the same time that EPA and NHTSA have proposed new standards for passenger vehicles, the agencies finalized a joint rulemaking on fuel economy and greenhouse gas emission standards for medium- and heavy-duty trucks and engines. On November 30, 2010, the agencies issued a proposed joint rulemaking for MY2014-2018. On August 9, 2011, the agencies announced final rules. EPA and NHTSA estimate that the rules will raise the average cost of a MY2018 combination tractor (i.e., the tractor portion of a tractor-trailer) by about $6,200, although the increased costs would be made up within a few years in fuel savings resulting from the rules.

Date of Report: August 11, 2011
Number of Pages: 19
Order Number: R40166
Price: $29.95

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Monday, August 15, 2011

U.S. Energy: Overview and Key Statistics

Carl E. Behrens
Specialist in Energy Policy

Carol Glover
Information Research Specialist

Energy supplies and prices are major economic factors in the United States, and energy markets are volatile and unpredictable. Thus, energy policy has been a recurring issue for Congress since the first major crisis in the 1970s. As an aid in policy making, this report presents a current and historical view of the supply and consumption of various forms of energy.

The historical trends show petroleum as the major source of energy, rising from about 38% in 1950 to 45% in 1975, then declining to about 40% in response to the energy crisis of the 1970s. Significantly, the transportation sector has been and continues to be almost completely dependent on petroleum, mostly gasoline. The importance of this dependence on the volatile world oil market was revealed over the past five years as perceptions of impending inability of the industry to meet increasing world demand led to relentless increases in the prices of oil and gasoline. With the downturn in the world economy and a consequent decline in consumption, prices collapsed, but then recovered to a much higher level than in the 1990s. As the world economy showed signs of recovery upward pressure on oil prices began to appear again. With the crisis in Libya and other Arab nations in the Spring of 2011, oil and gasoline prices began again to approach their former peak levels.

Natural gas followed a long-term pattern of consumption similar to that of oil, at a lower level. Its share of total energy increased from about 17% in 1950 to more than 30% in 1970, then declined to about 20%. Recent development of large deposits of shale gas have increased the outlook for natural gas consumption in the near future. Consumption of coal in 1950 was 35% of the total, almost equal to oil, but it declined to about 20% a decade later and has remained at about that proportion since then. Coal currently is used almost exclusively for electric power generation, and its contribution to increased production of carbon dioxide has made its use controversial in light of concerns about global climate change.

Nuclear power started coming online in significant amounts in the late 1960s. By 1975, in the midst of the oil crisis, it was supplying 9% of total electricity generation. However, increases in capital costs, construction delays, and public opposition to nuclear power following the Three Mile Island accident in 1979 curtailed expansion of the technology, and many construction projects were cancelled. Continuation of some construction increased the nuclear share of generation to 20% in 1990, where it remains currently. Licenses for a number of new nuclear units have been in the works for several years, and preliminary construction for a few units has begun, but the economic downturn has discouraged action on new construction. The accident at Japan’s Fukushima station following the March 2011 earthquake and tsunami raised further questions about future construction of nuclear powerplants.

Construction of major hydroelectric projects has also essentially ceased, and hydropower’s share of electricity generation has gradually declined, from 30% in 1950 to 15% in 1975 and less than 10% in 2000. However, hydropower remains highly important on a regional basis.

Renewable energy sources (except hydropower) continue to offer more potential than actual energy production, although fuel ethanol has become a significant factor in transportation fuel, and wind power has recently grown rapidly. Conservation and energy efficiency have shown significant gains over the past three decades and offer encouraging potential to relieve some of the dependence on oil imports.

Date of Report: July 29, 2011
Number of Pages: 40
Order Number: R40187
Price: $29.95

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