4 in the 107th. Is theproblem one of excessive demand for, and consumption of, energy? Should federal taxsubsidies for oil and gas and other fossil fuels be increased to stimulate exploration and supply toaddress our energy problems or would budgetary resources be better used to reduce energy demandby providing tax incentives for energy efficiency and renewable energy? Purpose of the Report

This report provides background on the theory and application of tax policy as it relates tothe energy sector, particularly with respect to the theory of market failure in the energy sector andthe possible policy remedies. Such an income tax would be neutral; i.e., it would not distort resourceallocation, the optimal allocation that would otherwise result in a competitivemarket. The presence of externalities does not alter the economicargument that competitive mineral producers should be taxed under the same incometax rules as the competitive non-mineral producers, but it does suggest either aseparate energy tax (in the case of a negative production externality, whereproduction and use of energy generates costs) or an energy tax subsidy (in the caseof a positive production externality, where the firm's competitive free market outputgenerates benefits to third parties). (18) 
One economically efficient policy to correct for these distortions wouldimpose a tax (or tariff) on imported petroleum based on the per-barrel estimate ofthese costs (the so-called oil import "premium"). The problem of vulnerability to embargoes and price shocks, which relatesto dependence on imported oil from the Organization of Petroleum ExportingCountries (OPEC) and other unstable foreign countries, is distinct from the problemof import dependence, and might be better addressed in a policy of stockpiling oil asis being done with the Strategic Petroleum Reserve. The Economic Justification for Tax Subsidies asan Industrial Policy. There is no purely economic justification,either on efficiency or stabilization grounds, for using tax subsidies as an industrialor employment policy to help a distressed industry -- including the conventionalfossil fuels industry and the alternative fuels industry. In general, economic theory and empirical evidence refute the proposition thatcompetitive markets lead to excessive exploitation of mineral resources. These market failures may lead to Under investment in conservation measuresin rental housing and provide the economic rationale for Internal Revenue Code(IRC) Â§136, which allows the value of any energy conservation subsidy provided byelectric utilities to households to be excluded from gross income. There are other types of market failures in energy use that may suggest eitherminimum efficiency standards or government-provided information such as energyefficiency labels. Finally, although capital markets are generally competitive and efficient, low-income consumers may have difficulty acquiring loans for conservation investments,even when such investments are profitable (the present value of the energyexpenditure savings is greater than the capital costs). Over the longer term, thesupply of these alternatives would tend to increase as depletion of conventionalenergy raises its real price. Several energy taxes wereproposed at that time: 
an increase in the excise taxes on gasoline, diesel, and othermotor fuels; 
a sizeable tax on imported oil (in addition to the customs dutiesthat are already imposed on imported petroleum); 
a tax on both imported and domestically produced crude oil;and
a broadly-based or general energy tax on all or most types ofenergy consumption, either based on the heat content of the fuel (Btu tax), the carboncontent of the fuel (the carbon tax), or on the sales price (the ad valorem energy tax). Thus, they can be a very powerful energy and economic policy instrument.
This report provides background on the theory and application of tax policy as it relates tothe energy sector, particularly with respect to the theory of market failure in the energy sector andsuggested policy remedies.
Economic theory suggests that producers of energy-related minerals be taxed no differentlythan non-mineral producers: Exploration and development costs and other investments in a deposit(including geological and geophysical costs and delay rentals) should be capitalized. In general,competitive mineral producers subject to a pure income tax would not exploit resources as fast(compared with the rate of exploitation under the present system of subsidies). Over the longer term,depletion of fossil fuels and mineral resources leads to higher real energy prices, which wouldeventually promote the optimal amount of investment in energy efficiency and alternative fuelssupply.
Under principles of neutrality of tax policy, there is no purely economic rationale for energytaxes or tax subsidies to (1) raise revenues; (2) conserve energy (with one exception); (3) promotealternative fuels; (4) compensate for any extra market risk; or (5) promote, as an industrial policy,specific industries such as the fossil fuels industry. However, even under a pure income tax,economic efficiency suggests a system of energy taxes (in addition to the income taxes) to correctfor any environmental externalities caused by the production, importation, and use of each fuel, andenergy taxes in the form of user charges for benefits received, such as the highway trust fund. In thecase of energy conservation, market failures in the use of energy in rental housing provide anefficiency rationale for the current gross income exclusion for conservation subsidies provided byelectric utilities. There are other market failures in energy use that suggest efficiency standards,energy labeling, or government-provided information, but not necessarily tax subsidies.
Tax subsidies for domestic oil production tend to stimulate domestic supply of petroleum andreduce demand for petroleum imports. This may enhance national and economic security in the shortrun, but it might damage national and economic security in the long run as domestic energy resourcesare depleted faster than they otherwise would be. The economically efficient policy to reduce importdependence would impose a tax (or tariff) on imported petroleum based on the per-barrel estimateof these costs (the so-called oil import "premium"). The problem of vulnerability to embargoes andprice shocks, which relates to dependence on imported oil from the Organization of PetroleumExporting Countries (OPEC) and other potentially unstable or unfriendly foreign countries, is moreeffectively addressed in a policy of stockpiling oil, as is being done with the Strategic PetroleumReserve.
In terms of environmental protection and management, energy taxes can be a cost-effectiveand efficient market-based instrument, and they are economically superior to the command andcontrol approach. In sum, energy taxes are generally distortional (except to correct for externalities,or when imposed as user fees for benefits received) and regressive, and may have adversemacroeconomic consequences, particularly sizeable taxes on energy production or oil imports.