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Energy policy: A state of disunion in the US

President Obama's plans to green the US economy face political and financial obstacles

IN HIS State of the Union speech, President Barack Obama called for federal spending on research and development at a level unseen since the height of the Space Race. "Half a century ago, when the Soviets beat us into space with the launch of a satellite called Sputnik, we had no idea how we'd beat them to the moon," he said. "The science wasn't there yet. Nasa didn't even exist.

"But after investing in better research and education, we didn't just surpass the Soviets; we unleashed a wave of innovation that created new industries and millions of new jobs."

Many members of the audience were not even born in October 1957, when the Soviet Union surprised the world by putting the first artificial satellite into orbit. The event, in the midst of the Cold War, triggered an intense competition between the US and USSR to lead the world in space technology. Within a year, Congress had approved a programme to invest billions of dollars on the country's educational system. By 1969, when Neil Armstrong became the first person to walk on the Moon, the US had the upper hand.

"This is our generation's Sputnik moment," Obama told Congress, referring to the quest to develop alternative energy.

Ironically, the comparison comes at a time when Nasa faces huge budget cuts as House Republicans seek to fulfil their promise from last year's midterm election campaign to slash funding for government agencies by $100bn.

Sputnik moments don't come cheap. So while the US must spend heavily on research and development to regain global economic pre-eminence and enter a greener, more prosperous future, President Barack Obama has landed on an easy target to fund it all: Big Oil.

His State of the Union address on 25 January laid out an ambitious plan to generate new jobs and boost the US' global competitiveness – rhetoric tailored to tap anxieties in a country where unemployment has more than doubled in the past half-decade, while economic dynamism has shifted to Asia.

But it was not a speech that will win friends in the oil industry. The President's verbal pummelling of the sector added to the battering it has suffered since the Deepwater Horizon oil spill last year. On top of the drilling moratorium in the Gulf of Mexico and a beefing up of regulation on the industry's activities, Obama wants industry tax breaks eliminated and new levies imposed.

For oil companies, this was as predictable as it is dismaying. Obama pushed for ending the tax cuts in last year's State of the Union speech, too, and his proposed budget for 2011 includes $36.5bn in additional taxes on oil and natural gas production over the next decade.

The reaction hasn't been a surprise, either. Weary of being depicted as the economy's bad guy, industry representatives quickly lashed out at the President. Jack Gerard, head of the American Petroleum Institute, says that if the White House wants to create jobs, it ought to encourage new drilling, not clobber the industry. Domestic oil development would create hundreds of thousands of new jobs, he argues. "Even better, the government wouldn't have to invest a single taxpayer dollar – just give [the oil] industry a green light to invest its own money."

Oil and gas companies already support more than 9.2 million jobs – 2.1 million directly – and account for 7.5% of the country's economy, he claims, and pay effective income taxes that are higher than most other industries. And, says Gerard, the tax relief it receives is similar to that enjoyed by other industries.

Clean-energy spending

But it's other energy industries that Obama wishes to encourage. As he hammered the oil companies, the president also gave a hearty endorsement to alternatives. Wind and solar power, biofuels and – appealing to centrists in the energy debate – natural gas, nuclear and clean coal should provide up to 80% of the country's electricity in the next 25 years, he said, as Americans double electricity consumption from greener sources. Lawmakers should approve an annual $2bn spending increase on clean-energy technology – on top of the $8bn Obama has already proposed for the coming fiscal year. And he restated another goal, to see 1m electric vehicles on the nation's highways by 2015. Only 4,000 of them travel the road today, says Plug In America, a not-for-profit organisation.

But mandating such goals, and targeting the oil companies to fund them, is easier done in a speech than on the ground. And it ignores one irony, that the companies exploring for, producing and refining oil are often also the pioneers in clean energy. Total industry investment in these forms of energy – more than $58bn between 2000 and 2008 – were "more than the federal government and more than all other industries combined", points out Gerard, referring to statistics from T2 & Associates, a firm of consultants.

And then there's the politics. Even when Obama's party controlled Congress, proposals to eliminate tax breaks for the oil industry failed. The task is more difficult now. Last November's midterm elections put Republicans in control of the House of Representatives and increased their ranks in the Senate, sharply narrowing the odds that these incentives will be cut or that more oil company taxes will be put on the books.

Yet the fate of clean-burning or renewable fuel sources, such as wind and solar, also depends on the country's legislative bodies reaching bipartisan agreement on energy. But this is already coming unstuck. Just days before Obama's speech, a House Republican Study Committee recommended cutting funding for applied research at the Department of Energy (DOE) by $1.27bn a year. In contrast, the Obama administration's proposed budget calls for doubling funding for the DOE's Advanced Research Projects Agency, which promotes development of next-generation energy technologies.

As the American Wind Energy Association points out, renewable energy suffers because the industry can't know if incentives on which it depends one year will be extended the next. "It's time to reorient the tax code to predictable policies that allow energy sources that will never run out, to thrive – instead of keeping renewable energy on a constant one-year footing," the association says.

Meanwhile, although Obama endorsed the use of clean coal, it's unlikely that this form of fuel will play a significant role in the country's energy mix in the near future. Integrated-gasification combined-cycle (IGCC) technology holds the most promise for reducing greenhouse-gas emissions from coal-fired power plants, but it has yet to be applied on a commercial scale. Because IGCC facilities would cost billions of dollars to build, substantial government subsidies would be needed to move this technology into the mainstream.

Nuclear power also got the President's nod. But no new commercial nuclear plant has been commissioned in the US in more than 35 years. The nuclear renaissance expected since the turn of the century has yet to materialise, in part because of concerns about radioactive waste disposal and competition from lower-priced natural gas.

Of the clean energy sources cited by Obama, gas could contribute the most to the US energy mix. But Bruce Vincent, chairman of the Independent Petroleum Association of America, finds it difficult to reconcile Obama's backing for the fuel with his decision to cut oil company incentives. About 85% of the nation's wells are drilled by independents, Vincent points out. "By and large, the US' independent natural gas producers are also its oil producers."

What about electric cars?

The Recovery Act of February 2009 provides a $7,500 federal tax credit toward the purchase of some "green" vehicles, but establishes a limit of 200,000 units per manufacturer. The day after Obama's speech, two Michigan Congressmen proposed a bill that would boost that number to 0.5m. With the high cost of such vehicles – the Nissan Leaf, for example, comes with a sticker price of more than $32,700 – that kind of subsidy and more would be needed to make these models affordable in the mass market.

The burden of payment

Clearly, increasing clean energy consumption on the scale called for in the State of the Union address would require substantial federal investment. If Congress refuses to put the burden of payment on the backs of the oil companies, the President will be hard-pressed to find a way to finance his proposals.

"Instead of subsidising yesterday's energy, let's invest in tomorrow's," the President suggested in his speech. But the reality is that the fuel of choice for Americans tomorrow – and the foreseeable future – will probably be fossil-based.

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