Author: Jack Thorlin

The D.C. Circuit ruled this past Friday that the EPA issued biofuel mandates with the explicit goal of helping its favored biofuel industry.  In so doing, EPA violated the Clean Air Act’s requirement that the agency make its mandates in an objective, scientific manner.

In 2007, Congress created a renewable fuel standard (RFS) program mandating a certain level of production for biofuels to be used as transportation fuel.  The EPA was tasked with establishing the year-to-year level of production mandated.  To make sure the EPA did not set outrageous mandates for renewable fuel, Congress required that the EPA predict, based on Energy Information Administration estimates, how much biofuel would be required.

Earlier this month, we noted that the EPA had utterly failed to match its predictions to actual production over the past three years.  Here’s the graph we made from government data on biofuel production:

It turns out that the EPA forecasting incompetence resulted from bias in its predictions process.  In responding to comments on its forecasts, EPA stated that its “intention is to balance [] uncertainty with the objective of promoting growth in the industry.”  The EPA went on to say that setting the biofuel mandate at a high level would “provide the appropriate economic conditions for the cellulosic biofuel industry to grow.”  It is estimated that EPA levied nearly $7 million in fines on U.S. refiners for failing to use non-existent biofuel in 2011.

In the words of the D.C. Circuit, EPA’s actions were a case of “let[ting] its aspirations for a self-fulfilling prophecy divert it from a neutral methodology.”  The result was that fuel companies were hurt by the inevitable failure of biofuel producers to meet impossible projections.  The Court noted that the EPA essentially said, “Do a good job, cellulosic fuel producers.  If you fail, we’ll fine your customers.”

The D.C. Circuit did a good job of policing EPA excess in this case, but only the most diehard optimist would expect that the EPA will refrain from playing favorites again in the future.  The only way to permanently deprive the EPA of the power to choose winners and losers is to take away its power to mandate levels of renewable fuel production.

The wind industry received a belated Christmas present this year when Congress passed the American Taxpayer Relief Act of 2012 (née fiscal cliff deal). The fiscal cliff deal not only extended the wind Production Tax Credit (PTC) for another year, but expanded the credit to apply to more facilities. But that’s not all. The wind industry now wants the IRS to torture the plain language of the Act to allow even more projects to qualify.

For the past 20 years, the wind PTC required projects to be placed “in service,” by the end of the year to receive the credit. But the fiscal cliff deal expanded that language to apply to any wind facility “the construction of which begins before January 1, 2014.” Because of this expansion, the Joint Tax Committee estimates that the wind PTC will cost the Treasury $12.1 billion dollars.

Not content with this victory, the wind industry lobby now wants the IRS to interpret the term “construction of which begins” to have no reference to a physical act of construction, but rather merely mean that construction begins when five percent of the cost of the wind project has been committed.  As the attached white paper will demonstrate, this would be an aberration from the many tax laws that have specified or assumed construction as actual construction work having taken place.

The Five Percent Rule Tortures the Plain Meaning of the Word “Construction” and Means Delayed Economic Benefit

If the “five percent” interpretation is implemented, many companies might make that token investment and then wait several years for technology to mature or the economy to improve.  Needless to say, that outcome would be distortionary and wasteful.

If instead construction “begins” with the physical act of construction, companies that otherwise might have sat on their investments will be incentivized to commence building sooner.  Earlier construction would mean that the economic benefits of construction would be realized more quickly.  While more money might be paid out under the five percent interpretation, more short-term economic stimulus would come from the physical act requirement.

Senator Mark Udall, a strong supporter of the PTC extension, noted that the extension is meant to “provid[e] a strong incentive for developers to begin projects as soon as possible.” But Udall also understands that the word “construction” should have something to do with physical wok.  As he stated, “So if you put a shovel in the ground on Dec. 31, at the end of this year, the tax credit will apply…”

That being the case, the policy behind the PTC extension suggests that we should interpret “begins construction” to mean, well, starting physical construction.

Ample Precedent for the Physical Work Requirement

The legal precedent is also on the side of the physical work interpretation.  As shown in the attached IER white paper, there is a long history of Congress and administrative agencies interpreting similar phrases (variations on “construction begins”) to require physical work on the project.  To name just a few examples, the common-sense interpretation of beginning construction prevailed in the Tax Reform Act of 1969, the Revenue Act of 1971, the Tax Reform Act of 1976, the Revenue Act of 1978, the Tax Reform Act of 1986, and the American Jobs Creation Act of 2004.  The IRS itself ruled that way many times, including in 2011, 2008, and 2006.

The Five Percent Alternative

Against all that precedent, the wind lobby can only offer the American Recovery and Reinvestment Act of 2009, when the Treasury Department interpreted “construction began” as including the five percent rule as a safe-harbor provision. A safe-harbor provision is intended to protect good faith, but unsuccessful, efforts to adhere to a given law.  Similar safe-harbors have appeared in other IRS guidance, but normally as a less-lenient 10% investment rule.

Bottom Line

The legal and policy arguments both weigh heavily in favor of the physical work requirement.  Wind industry lobbyists would do well to accept the already-generous PTC subsidy without pushing a dubious interpretation to siphon off even more taxpayer money.

 IER’s White Paper on the definition of when “construction begins” is available here.

President Obama recently submitted his chief of staff Jack Lew’s name to fill the post of Treasury Secretary after Tim Geithner vacates later this month.  Mr. Lew’s long history as an advocate for green energy interests and the Treasury Department’s role in doling out green energy grants mean that he has some important questions to answer.

10.  The Internal Revenue Service, which is part of the Treasury Department, administers the recently-extended Wind Production Tax Credit (PTC).  The PTC, which will cost taxpayers $12.1 billion or $300,000 for each active wind energy job in the industry over the next year, has led to absurd market distortions.  For example, wind producers produce most of their electricity at the times it is least needed, simply so they can collect the PTC subsidy to make profits.  Given the high cost and terrible effects on the energy market, will Mr. Lew advocate for ending the PTC once and for all after the current extension?

9.  In order to receive the PTC subsidy, wind companies must begin construction on their project by the end of 2013, a massive expansion of the existing law, which said the units had to be completed in order to be eligible.  While most ordinary people would say that “begin construction” means that physical construction must begin, wind-industry lobbyists want the phrase to be interpreted as meaning that the companies have invested some token amount of money upfront.  Given that the Treasury Department may end up issuing guidance on this question, will Mr. Lew advocate for the plain English meaning of the phrase or the meaning favored by industry lobbyists?

8.  Lew played an important role in creating the Electric Drive Transportation Association, a lobbying organization promoting electric vehicles.  The Chevy Volt, GM’s highly-publicized (and highly-subsidized) electric vehicle, has repeatedly failed to meet GM’s sales goals. Given that the Treasury Department still owns 500 million shares of GM stock, will Mr. Lew promise American taxpayers that he will not use the Treasury Department’s leverage over GM to promote unpopular and uneconomic electric vehicles?

7.  During his time at the White House Office of Management and Budget, Lew worked to increase funding for ARPA-E, the Department of Energy’s research program.  Explicitly modeled on the defense technology program DARPA, ARPA-E’s mission is to fund high-risk, high-reward energy research.  However, DARPA funds research for important military applications which the market would otherwise have no inherent reason to support.  Does Mr. Lew believe that there is no incentive for private companies to invest in energy technology?  If so, why has the Obama Administration been playing investment banker in an unprofitable field?

6.  According to the environmentalist group Alliance to Save Energy, Jack Lew was instrumental in protecting the Department of Energy Building Technologies program from budget cuts.  The program, largely concerned with weatherizing buildings, is justified on the grounds that it will help reduce greenhouse gas emissions.  According to the Department of Energy’s own report on the program’s effects written in April 2012, the specific, confirmed cuts achieved by the Building Technologies program total a paltry 7,046 tons, about a thousandth of a percent of national annual emissions.  What are Lew’s economic standards for success for energy subsidy programs aimed at carbon emission reductions?

5.  Jack Lew was similarly instrumental in directing funding toward the Department of Energy Industrial Technologies program.  The most recent publicly available report on the results of the program, published in 2010, claimed 206 million tons of carbon emission reductions over the past eighteen years, or about 11,444 tons per year, which amounts to about two-thousandths of a percent of national annual emissions.  If DOE is correct , will Lew advocate for still more funds for this effort?

4.In its last four budgets, the Obama Administration has advocated increasing taxes on natural gas, oil and coal produced in the United States.  The Treasury justification for increasing taxes is that “to the extent the lower tax rate encourages the overproduction of oil and gas, it is detrimental to long-term energy security and is also inconsistent with the Administration’s policy of reducing carbon emissions and encouraging the use of renewable energy resources.”  Does Jack Lew think we are “overproducing” oil and gas in the U.S. and, if so, why does President Obama continue to herald increased production of oil and gas on non-government lands that has changed the energy outlook in the U.S. and around the world?   

3.  Recently, the EPA suffered public embarrassment when Administrator Lisa Jackson was found to have conducted EPA business on an EPA email account under the alias “Richard Windsor”.   Mr. Lew was Chief of Staff at the White House at that time.  Given Mr. Lew’s past association with lobbying groups, how can he assure us that such non-transparent practices will not continue on his watch?

2.  During his stint at Citigroup, Mr. Lew made money betting against the housing market.  Given the scandals surrounding the financial crisis of 2008 and the subsequent bailouts, can American taxpayers trust Mr. Lew to represent their interests in his role at the Treasury Department, and didn’t he, given his long government service, have an obligation to alert the public to the coming disastrous housing collapse?

1.  In November 2012, Senator David Vitter probed the Treasury Department’s withholding of thousands of pages of emails concerning a potential carbon tax bill in response to a Freedom of Information Act request.   In keeping with President Obama’s vow to create the most transparent administration in history, will Jack Lew ensure that the Treasury Department carbon tax emails are released?

Jack Thorlin (JD, Harvard ’12) is a 2012-13 legal fellow with the Institute for Energy Research. Thorlin’s first novel, Stand of Knights, tells story of a group of American soldiers fighting to protect Taiwan and preserve a last bastion of freedom in the 21st century.