Are Energy Tax Expenditures Effective at Reducing Emissions?
In 2010 and 2011, the federal government "spent" nearly $50 billion in revenue on energy tax expenditures. But are these provisions actually achieving their stated goals? A new government report says no.
Recently, the National Academy of Sciences completed a Congressional-sponsored evaluation of some of the most important tax provisions related to greenhouse gas emissions. The report included a full analysis of both policies that directly affect emissions, such as taxes on gasoline or subsidies for ethanol, and those that also indirectly do so, such as business incentives for investment in machinery. For many, the results may be surprising. The report determines that the near $50 billion spent each year on energy tax subsidies have had essentially no effect on emissions. Of course, some of these provisions, like fossil fuel subsidies, are counterproductive for reducing GHG emissions. But overall, the effect is negligible.
The combined effect of current energy-sector tax expenditures on GHG emissions is very small and could be negative or positive. The most comprehensive study available suggests that their combined impact is less than 1 percent of total U.S. emissions. If we consider the estimates of the effects of the provisions we analyzed using more robust models, they are in the same range. We cannot say with confidence whether the overall effect of energy-sector tax expenditures is to reduce or increase GHG emissions.
The report recognizes that formulating exact values can be difficult due to the complexity of the tax code and the regulatory environment, yet the conclusion is an example of tax expenditures that may not justify their costs. While some provisions subsidizing renewable electricity have reduced greenhouse gas emissions, their effect is small and too often nullified by other similar policies. Ethanol subsidies, for example, have actually increased greenhouse gas emissions. Others policies may have a more indirect effect like financial incentives for businesses to invest in machinery, which have increased emissions proportionally to the increase in economic output that they led to.
The report refrains from offering any specific recommendations on changing the tax code, but does state that reforms targeting emissions directly, such as a carbon tax or a cap-and-trade program, are much more effective in reducing emissions.
Most economists and policy analysts have concluded, however, that putting a price on CO2 emissions (that is, implementing a “carbon price”) that rises over time is the least costly path to significantly reduce emissions and the most efficient means to provide continuous incentives for innovation and for the long-term investments necessary to develop and deploy new low-carbon technologies and infrastructure. A carbon price designed to minimize costs could be imposed either as a comprehensive carbon tax with no loopholes or as a comprehensive cap-and-trade system that covers all major emissions sources.
A common issue in tax policy is that many tax provisions do not change behavior enough to justify their costs, or at least could be redesigned to be more effective and fair. In the case of energy subsidies, lawmakers did take a step in that direction by allowing the ethanol credit to expire last year. Hopefully, lawmakers will apply close scrutiny to provisions across the tax code, as the Senate Finance Committee's blank slate approach would require.