Issue Date: July 4, 2011
Clash Over Natural Gas
A battle is brewing in the House of Representatives over a tax credit bill that aims to greatly expand the use of natural gas in the transportation sector and reduce the nation’s growing reliance on imported oil. That expansion would be a huge boon for domestic energy producers.
But chemical manufacturers and other industries that consume vast quantities of natural gas in their operations have launched an aggressive lobbying campaign to block the proposal. They fear it will artificially boost demand for the key raw material and cause prices to spike.
Natural gas prices in the U.S. have declined steeply since the financial crisis hit in the latter half of 2008, giving America’s chemical industry a large cost advantage over European rivals, many of which produce chemicals from crude oil.
“Natural gas has many economic and environmental advantages that should lead to market success without generous federal preferences, and American manufacturing relies on natural gas to remain competitive,” says Calvin M. Dooley, president and chief executive officer of the American Chemistry Council, a trade group that represents more than 140 U.S. chemical companies.
Chemical makers depend heavily on natural gas as both a feedstock and an energy source, and much of U.S. manufacturing relies on gas for power as well.
The New Alternative Transportation to Give Americans Solutions Act (NAT GAS Act) would provide an estimated $5 billion in tax incentives for the production, purchase, and use of natural-gas-fueled vehicles, and for the expansion of related infrastructure, such as natural gas fueling stations. The U.S. has approximately 170,000 gasoline stations but only 1,000 natural gas stations.
The bill (H.R. 1380) was introduced in April by Reps. John Sullivan (R-Okla.), Dan Boren (D-Okla.), John B. Larson (D-Conn.), and Kevin P. Brady (R-Texas). More than 180 House members from both sides of the political aisle have signed on as cosponsors, and both President Barack Obama and House Speaker John A. Boehner (R-Ohio) have expressed support for legislation promoting natural gas vehicles (NGVs).
The legislation would offer a tax credit of up to 80% of the incremental cost of buying an NGV, with a maximum value ranging from $7,500 for a light-duty passenger vehicle to $64,000 for the heaviest trucks. It would also provide a $100,000 tax credit for every fueling station that converts to natural gas. Each of these incentives would be in place for five years.
“We want Americans to know that there is an alternative—namely accelerating the use of domestic natural gas in vehicles instead of gasoline and diesel,” says Richard Kolodziej, president of Natural Gas Vehicles for America (NGVAmerica), an industry coalition.
Kolodziej says the five-year time horizon is critical in encouraging fleets to switch to natural gas because it creates stability in the market and reassures fleet owners as they consider their purchasing decisions.
“This is particularly important in the market for heavy-duty vehicles,” he remarks. Heavy-duty fleets, which include 18-wheelers, buses, garbage trucks, and dump trucks, account for about one-quarter of all the on-road fuel consumed in the U.S.
According to NGVAmerica, there are more than 12 million NGVs in operation around the world. However, the U.S. has only about 112,000 NGVs on the road, which used an estimated 43 billion cu ft of natural gas last year.
“That’s the equivalent of 320 million gal of gasoline we did not have to import,” Kolodziej says. But with government support, he contends that that number could grow to 1.25 trillion cu ft, or the equivalent of about 10 billion gal of gasoline within 15 years.
Many options are available to displace gasoline in light-duty vehicles, Kolodziej notes, but there are few substitutes for diesel in trucks, buses, and other heavier vehicles. Of those options, natural gas can make the biggest impact the fastest, the industry official says.
The legislation is the centerpiece of the so-called Pickens Plan, a blueprint developed in 2008 by Texas energy magnate T. Boone Pickens for ending the nation’s dependence on foreign oil. In May 2011, federal statistics showed that the U.S. imported 62% of its oil, or 362 million barrels, sending approximately $41.7 billion to foreign countries.
“The oil import numbers continue to be astronomical and our country continues to suffer as a result,” Pickens says. “In a time of great economic turmoil, our crippling dependence on OPEC [Organization of the Petroleum Exporting Countries] oil represents the height of fiscal irresponsibility, particularly when we have the ability to use our own vast domestic natural gas resources.”
Tax credits are needed, Pickens says, because the U.S. has almost no manufacturing capability for NGVs. “Rather than supporting manufacturers in China and India, this credit would help jump-start that industry here, adding jobs up and down the supply chain,” he remarks.
Critics of his plan, Pickens contends, are “for the status quo, which is to continue sending billions of dollars to OPEC nations, many of whom, in return, are helping to fund terrorism.”
For its part, natural gas production in the U.S. is booming as advances in technology have enabled drillers to extract the fuel from enormous shale rock formations that previously were considered impenetrable. Studies have indicated that the amount of gas now available for economically viable recovery from shale deposits could supply the U.S. for more than a century. But gas producers and industrial consumers disagree over how best to use the resource.
The NAT GAS Act is “highly inappropriate,” particularly at a time when Congress is being challenged to get the nation’s fiscal house in order, Dooley asserts. “Taxpayers cannot afford another massive subsidy program, especially one that favors one industry over another and bolsters a market that’s functioning well on its own,” he remarks.
American manufacturers need affordable natural gas to compete successfully in global markets, Dooley notes. “Federal incentives for NGVs could divert much-needed supplies from manufacturers, threatening competitiveness and jobs,” he says.
Congress also needs to recognize how the legislation favors one U.S. sector over others and how it distorts markets, says Dooley, who was a Democratic member of the House in 1991–2005, representing California’s Central Valley. “Congress should not subsidize some natural gas uses at the expense of others,” he declares.
The conflict over the bill's proposed tax credits comes at a time when many lawmakers are pushing for an overhaul of the U.S. corporate tax code to eliminate myriad special breaks and loopholes in favor of lower overall rates. Moreover, Republicans are focused on cutting the federal budget deficit, and the bill’s tax credits would mean $1 billion less per year in government revenue.
As a result, the legislation is also receiving stiff opposition from free-market conservative organizations, such as the Club for Growth and Americans for Tax Reform, which argue that using the tax code to pick winners and losers in the energy industry is bad economic policy.
“Americans sent a strong message to members of Congress in the 2010 midterm elections: It’s time to stop wasteful government subsidies and end the destructive nature of special interest politics,” 17 conservative groups said in a recent letter to the bill’s supporters. “Cosponsoring this misguided legislation is a sign that you have not heard the message and are not serious about eliminating expensive, counterproductive energy subsidies.”
The fiscal hawks have persuaded more than a dozen House Republicans to withdraw their names from the legislation. Rep. Mike Coffman (R-Colo.) says he supports using natural gas as a transportation fuel. “But having the taxpayers spend up to $64,000 per truck and up to $100,000 to install a single natural gas pump is a lot more than I thought it would cost when I initially cosponsored the bill,” he remarks.
Similarly, Rep. Tim Griffin (R-Ark.) says he changed his mind about the legislation, even though it is a “well-intentioned” proposal that seeks to promote natural gas as a clean-burning, abundant, and American energy source.
“However, I am concerned that H.R. 1380 might be inconsistent with my goal of simplifying the tax code by lowering the overall tax rate and simultaneously ending industry-specific incentives,” he explains.
Sullivan dismisses the criticism and predicts that his measure will not only retain strong bipartisan support but will also attract more cosponsors in the coming weeks.
“What we offer are incentives in the form of limited tax credits to give American businesses and families fueling options in light of high gas prices,” he remarks. “This legislation is the perfect opportunity to jump-start the NGV marketplace while at the same time decreasing our $1.5 billion- to $2 billion-per-day wealth transfer to foreign countries for most of our oil.”
Sullivan also asserts that the NAT GAS Act is “the only energy bill in Congress that can pass the House and the Senate and be signed by the President.”
However, the legislation faces a steep uphill climb to becoming law. The House bill has been referred to three different committees—Ways & Means, Energy & Commerce, and Science, Space & Technology—which could slow its movement. No companion legislation has been introduced yet in the Senate. But Sens. Richard Burr (R-N.C.) and Robert Menendez (D-N.J.) are drafting a bill that closely resembles the House measure.
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