Use New Oil & Gas Production Revenues to Invest in Energy Innovation

“With pencils being sharpened on a debt deal,” Politico reports (subscription article), “all eyes are on the gas tax as a possible savior for transportation spending. But another option that may cause lawmakers less heartburn is being obscured by the gas tax dust: linking energy production with infrastructure spending…includ[ing] instituting a fee on oil production, or expanding oil and natural gas drilling availability.” Without a doubt, leveraging expanded energy production for revenue is a welcome idea. But linking this revenue to transportation infrastructure spending is misguided because it breaks a very useful policy connection: consumption and infrastructure use.

The thinking goes that new fees on oil and natural gas extraction are more politically feasible than a gas tax, as the cost to consumers would be relatively hidden. While industry would ultimately try to pass costs on to consumers, as the Politico article put it, “the pain of a new fee “upstream” has the advantage of not being immediately obvious to an electorate jittery about the economy — certainly nothing as in your face as a tax increase at the pump.” The problem is that tying energy production to transportation infrastructure-spending reduces the link between consumption and infrastructure use. Transportation infrastructure already has a dedicated revenue stream in the form of federal gas taxes, which go to the Highway Trust Fund. Thus as consumers drive more (and use infrastructure), more revenue goes towards maintaining that infrastructure and vice versa.

The problem with tying transportation infrastructure to oil and gas extraction is that it muddies the feedback loop.  Extracting oil and gas is connected to many other uses in addition to transportation, including industrial energy, residential heating, chemical production, and so on. So taxing drilling impacts many other industries (and their competitiveness), but the direct benefit of increased revenue goes to transportation infrastructure, assuming no other policy changes. It’s simply a less efficient and economically beneficial way of funding infrastructure.

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By extension, a more efficient and direct way use of increased revenue from oil and gas fees is to use it to develop the energy sector. For example, ITIF proposes in Lemons to Lemonade: Funding Clean Energy Innovation with Offshore Drilling Revenues that expanded drilling revenue should be linked to clean energy innovation:

The more socially desirable goal—the transition to clean energy—could directly benefit from the less desirable goal of drilling. The most pressing need for clean energy innovation is public investment, but this has been hard to come by in a time of fiscal austerity. Fortunately, the economic value of the nation’s offshore resources could offer a substantial revenue stream for exactly that investment we need, so long as policymakers are willing and able to harness it, as they occasionally have in a bipartisan fashion in the past. In other words, if we have to drill, we should leverage it to make it work for clean energy.

And arguably even more so than transportation infrastructure, clean energy innovation programs have long been hampered by inconsistent and insufficient funding. According to ITIF’s Energy Innovation Tracker, clean energy innovation investments have only totaled roughly $4 to $5 billion per year for decades, or only 20 percent what leading experts agree full funding should reach.

Ultimately, there are a variety of other options when considering establishing a dedicated revenue stream for clean energy innovation, including a carbon tax and ending fossil fuel subsidies and redirecting those funds. But if policymakers are serious about new fees on oil and natural gas extraction, directing the new revenue to energy innovation instead of transportation infrastructure is a more direct and desirable option.

By. Clifton Yin