Lemons to Lemonade: Funding Clean Energy Innovation with Offshore Drilling Revenues

Matt Hourihan July 15, 2011
July 15, 2011
Policymakers should increase the royalty rate on offshore drilling to produce a steady, dedicated stream for clean energy innovation.

With the Administration’s recent easing of drilling opposition and continuing support from Congress, the nation appears to be heading again towards expanded offshore drilling. The limitations of drilling are well-documented, from the prolonged reliance on fossil fuels, to the increased environmental risks, to the limited impacts on gasoline prices. Perversely, the expansion of drilling comes at a time when policymakers see investments in clean energy innovation as an expendable sacrifice in the name of deficit reduction. Drilling on the outer continental shelf (OCS) is inadvisable on its own. Compounding it with starving energy innovation is worse. Only one of these sectors offers long-term economic upside, massive social returns to investment, and export potential, and it’s not oil.

Nevertheless, 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.

There are many ways to tap the OCS for revenue and put it to good use. One logical step, of course, would be to roll back tax subsidies benefiting oil and gas extractors. But this step has foundered of late. Other smart steps would include increased drilling fees or higher minimum bonus bids, with increased revenues dedicated to clean energy innovation programs. But one step that should receive greater attention is increases to the royalty rate itself, an idea that has received favorable attention from the Obama Administration. Just a five percentage point increase in the offshore royalty rate could produce an additional $2 billion in revenues—and potentially much more—in the coming years. Current rates are below those in many other industrialized countries, and increasing royalty rates would enable the United States to harness the economic value of fossil fuel reserves for direct clean energy investment. But if we are to raise royalty rates, any increased revenues should be dedicated by Congress specifically towards clean energy innovation, perhaps by establishing a trust fund similar to the other public funds that currently receive drilling revenues.

To be clear, raising royalties on new drilling activity is not a short-term revenue solution, but if it were coupled with more short-term revenue streams from drilling activities, over time it could nevertheless provide a long-run, steady funding stream for clean energy investment.