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Committee on the Effects of Provisions in the Internal Revenue Code on Greenhouse Gas Emissions Board on Science, Technology, and Economic Policy Policy and Global Affairs William D. Nordhaus, Editor Stephen A. Merrill, Editor Paul T. Beaton, Editor
THE NATIONAL ACADEMIES PRESS 500 Fifth Street, NW Washington, DC 20001 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Insti- tute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This study was supported by Contract/Grant No. TOS10-C-003 between the National Academy of Sciences and the U.S. Department of Treasury. Any opinions, findings, con- clusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the U.S. Department of Treasury provided support for the project. International Standard Book Number 13: 978- 0-309-28269-7 International Standard Book Number 10: 0-309-28269-1 Limited copies are available from Board on Science, Technology, and Economic Policy, National Research Council, 500 Fifth Street, N.W., W547, Washington, DC 20001; 202- 334-2200. Additional copies of this report are available for sale from the National Academies Press, 500 Fifth Street, NW, Keck 360, Washington, DC 20001; (800) 624-6242 or (202) 334- 3313; http://www.nap.edu. Copyright 2013 by the National Academy of Sciences. All rights reserved. Printed in the United States of America.
The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Ralph J. Cicerone is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Charles M. Vest is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the re- sponsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academyâs purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the Nation- al Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Ralph J. Cicerone and Dr. Charles M. Vest are chair and vice chair, respectively, of the National Research Council. www.national-academies.org
COMMITTEE ON THE EFFECTS OF PROVISIONS IN THE INTERNAL REVENUE CODE ON GREENHOUSE GAS EMISSIONS William D. Nordhaus, Chair, Sterling Professor of Economics, Yale University Maureen L. Cropper, Professor of Economics, University of Maryland, College Park Francisco de la Chesnaye, Program Manager and Senior Economist, Electric Power Research Institute Noah Diffenbaugh, Center Fellow, Woods Institute for the Environment, Assistant Professor, School of Earth Sciences, Stanford University David G. Hawkins, Director of Climate Programs, Natural Resources Defense Council Roberta F. Mann, Frank Nash Professor of Law University of Oregon School of Law Brian C. Murray, Research Professor and Director of Economic Analysis, Nicholas Institute for Environmental Policy Solutions, Duke University John M. Reilly, Co-Director of Joint Program on the Science and Policy of Global Change, Senior Lecturer, Sloan School of Management, The Massachusetts Institute of Technology Drew Shindell, Senior Scientist, NASA Goddard Institute for Space Studies Eric Toder, Institute Fellow, Urban Institute, Co-Director, Urban-Brookings Tax Policy Center Roberton C. Williams, III, Associate Professor, University of Maryland, College Park Catherine Wolfram, Flood Foundation Professor of Business Administration, Haas School of Business, University of California, Berkeley Project Staff Stephen A. Merrill, Study Director Paul T. Beaton, Program Officer Aqila Coulthurst, Program Coordinator Cynthia Getner, Financial Officer v
BOARD ON SCIENCE, TECHNOLOGY, AND ECONOMIC POLICY (STEP) For the National Research Council (NRC), this project was overseen by the Board on Science, Technology and Economic Policy (STEP), a standing board of the NRC established by the National Academies of Sciences and Engi- neering and the Institute of Medicine in 1991. The mandate of the STEP Board is to advise federal, state, and local governments and inform the public about economic and related public policies to promote the creation, diffusion, and ap- plication of new scientific and technical knowledge to enhance the productivity and competitiveness of the U.S. economy and foster economic prosperity for all Americans. The STEP Board and its committees marshal research and the exper- tise of scholars, industrial managers, investors, and former public officials in a wide range of policy areas that affect the speed and direction of scientific and technological change and their contributions to the growth of the U.S. and global economies. Results are communicated through reports, conferences, workshops, briefings, and electronic media subject to the procedures of the National Acad- emies to ensure their authoritativeness, independence, and objectivity. The members of the STEP Board and the NRC staff are listed below: Paul Joskow (Chair), President, Alfred P. Sloan Foundation Ernst Berndt, Louis E. Seley Professor in Applied Economics, Massachusetts Institute of Technology Jeff Bingaman, Former U.S. Senator, New Mexico Ralph J. Cicerone (ex-officio), President, National Academy of Sciences John Donovan, Senior Executive Vice President, AT&T Technology and Network Operations, AT&T Inc. Ellen Dulberger, Managing Partner, Ellen Dulberger Enterprises LLC Harvey V. Fineberg (ex-officio), President, Institute of Medicine Alan Garber, Provost, Harvard University Ralph Gomory, Research Professor, Stern School of Business, New York University John Hennessy, President, Stanford University William H. Janeway, Managing Director and Senior Advisor, Warburg Pincus, LLC Richard Lester, Japan Steel Industry Professor, Head, Nuclear Science and Engineering, Founding Director, Industrial Performance Center Massachusetts Institute of Technology David Morgenthaler, Founding Partner, Morgenthaler Ventures Luis M. Proenza, President and Chief Executive Officer, University of Akron William J. Raduchel, Independent Director and Investor Kathryn L. Shaw, Ernest C. Arbuckle Professor of Economics, Graduate School of Business, Stanford University vi
Laura DâAndrea Tyson, S. K. and Angela Chan Professor of Global Management, Haas School of Business, University of California at Berkeley Hal Varian, Chief Economist, Google, Inc. Charles M. Vest (ex-officio), President, National Academy of Engineering Alan Wm. Wolff, Senior Counsel, McKenna, Long & Aldridge LLP Staff Stephen A. Merrill, Executive Director Charles W. Wessner, Program Director Paul T. Beaton, Program Officer McAlister Clabaugh, Program Officer Aqila Coulthurst, Program Coordinator David Dawson, Senior Program Assistant Sujai Shivakumar, Senior Program Officer David Dierksheide, Program Officer Cynthia Getner, Financial Officer vii
Preface The U.S. Congress directed the U.S. Department of the Treasury to re- quest that the National Academy of Sciences undertake âa comprehensive re- view of the Internal Revenue Code of 1986 to identify the types of and specific tax provisions that have the largest effects on carbon and other greenhouse gas emissions and to estimate the magnitude of those effectsâ (P.L. 110-343, Divi- sion B, Title I, Sec. 117). Congress appropriated funds for this study in its 2010 appropriations (P.L. 111-117; Division C, Title I, Sec. 126). After the National Academies accepted this assignment, the National Re- search Council established the ad hoc Committee on the Effects of Provisions in the Internal Revenue Code on Greenhouse Gas Emissions, which prepared this report. Appendix B contains biographical information on the committee mem- bers. The committee met five times as it worked to prepare this report. At its first meeting in April 2011, the committee held an open session for interested members of the public to make presentations to the committee. The following individuals responded to notice of that open session and made oral presentations to the committee: Elizabeth Paranhos (on behalf of Environmental Defense Fund); Jay Pendergrass (Environmental Law Institute); and Eric Pica (Friends of the Earth). Two individuals could not attend in person but submitted written statements: Janet Milne (Environmental Tax Policy Institute at Vermont Law School); and Douglas Koplow (Earth Track). Additionally, the following indi- viduals made presentations at the invitation of the committee: Mun Ho (Re- sources for the Future); Gilbert Metcalf (Tufts University); and Ian Parry (Inter- national Monetary Fund). During later meetings, the committee also requested presentations from the following individuals: Alan Krupnik (Resources for the Future); Stephen P. A. Brown (University of Nevada, Las Vegas); and Lessly Goudarzi and Frances Wood (OnLocation, Inc.). We are grateful for the thoughtful presentations that these individuals made. The committee also made use of peer-reviewed scientific literature, work- ing papers, government agency reports, and think tank reports as it deliberated and in producing this report. The committee extends its thanks to Danny Cullenward (Stanford University), Kathleen Foreman (University of California, ix
x Preface Berkeley), and Ritadhi Chakravarti (formerly of the Urban Institute) for help with reviews of relevant literature. These literature reviews were crucial for un- derstanding and framing the need to undertake original economic modeling in order to respond to Congressâs request. At the core of this study is the committeeâs analysis of original economic modeling of tax policies performed by independent consultants. This report would not have been possible without their expertise and willingness to work with the committee through an iterative and often challenging process to understand each modelâs capabilities and, thus, which tax policies it could realistically model. All of the consultants produced excellent reports explaining results for the committee and did so in a timely manner and responsive to the specifications outlined by the committee. Readers can download those reports at the National Academies Press website, http://www.nap.edu/catalog.php?record_id=18299. The committee and the nation are indebted to the following: Lessly Goudarzi (OnLocation, Inc.), Frances Wood (OnLocation, Inc.), Dale W. Jorgenson (Dale Jorgenson Associ- ates), Richard Goettle (Dale Jorgenson Associates), Wyatt Thompson (The Food and Agriculture Policy Research Institute, University of Missouri), Stephen P. A. Brown (Center for Business and Economic Research, Lee Business School, Uni- versity of Nevada, Las Vegas), and Ryan Kennelly (Center for Business and Eco- nomic Research, Lee Business School, University of Nevada, Las Vegas). Before committing funds, staff time, and other resources to the modeling exercises, the committee asked for independent experts to consider the choices of models to use and underlying methodology and offer critiques and sugges- tions. The committee is grateful to Richard Newell (Nicholas School of the En- vironment, Duke University) and William Pizer (Sanford School of Public Poli- cy, Duke University) for carefully evaluating its plan for modeling selected tax policies and the committeeâs deliberative process for choosing those policies. Their comments and suggestions proved helpful in shaping the committeeâs final requests to the independent modeling consultants. We are highly indebted for their assistance. Despite this assistance, the committee remains solely responsi- ble for all modeling decisions. This report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures ap- proved by the National Academiesâ Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making its published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the process. We wish to thank the following individuals for their review of this report: Amos Avidan, Bechtel Corporation; John Birge, University of Chicago; Steven Davis, University of California, Irvine; Austen Goolsbee, University of Chicago; Lawrence Goulder, Stanford University; Russell Lee, Oak Ridge National Labora- tory; Bruce McCarl, Texas A&M University; Dave McCurdy, American Gas As- sociation; Gilbert Metcalf, Tufts University; Peter Merrill, Pricewater-
Preface xi houseCoopers LLP; Janet Milne, University of Vermont; William Pizer, Duke University; Mark Schwartz, PIRA University; Philip Tabas, The Nature Con- servancy; Susan Tierney, Analysis Group Inc.; David Weisbach, University of Chicago; and John Weyant, Stanford University. Although the reviewers listed above have provided many constructive comments and suggestions, they were not asked to endorse the conclusions or recommendations, nor did they see the final draft of the report before its release. The review of this report was overseen by T.J. Glauthier, TJG Energy Associ- ates, LLC and Charles Manski, Northwestern University. Appointed by the Na- tional Academies, they were responsible for making certain that an independent examination of this report was carried out in accordance with institutional pro- cedures and that all review comments were carefully considered. Responsibility for the final content of this report rests entirely with the authoring committee and the institution. The committee could not have completed its work without the assistance of the talented and dedicated staff of the National Research Councilâs Board on Science, Technology, and Economic Policy (STEP). Stephen Merrill (director of STEP) served as study director, assisted by Paul Beaton (STEP) and Aqila Coulthurst (STEP). The committee is also indebted to Lint Barrage (Yale Uni- versity), who served as an independent consultant to the committee, providing assistance with literature reviews, technical advice, and regularly briefing the committee on the details of relevant topics when requested. Several participants of the National Academiesâ Christine Mirzayan Science and Technology Policy Fellowship program provided additional scientific and technical assistance: Christopher Avery, Carrie Chen, Adnan Aslam, Marilyn Waite, and Vincent Huang. Karin Matchett served as an editor of the final report. William D. Nordhaus, Chair Committee on Effects of Provisions in the Internal Revenue Code on Greenhouse Gas Emissions
Contents SUMMARY ...............................................................................................................1 1 OVERVIEW AND SCOPE OF THE STUDY ............................................11 2 METHODS FOR EVALUATING TAX POLICY EFFECTS ON GREENHOUSE GAS EMISSIONS......................................................23 3 ENERGY-RELATED TAX EXPENDITURES ..........................................53 4 ENERGY-RELATED EXCISE TAXES .....................................................81 5 BIOFUELS SUBSIDIES ...............................................................................91 6 GREENHOUSE GAS EMISSIONS AND BROAD-BASED TAX EXPENDITURES ..............................................................................113 7 SUMMARY OF FINDINGS AND RECOMMENDATIONS AND USE OF TAX POLICY TO ADDRESS CLIMATE CHANGE POLICY .....................................................................................135 REFERENCES ......................................................................................................157 APPENDIXES A MODELING APPROACHES TO THE EFFECTS OF TAX POLICY ON GHG EMISSIONS ...............................................................165 B BIOGRAPHICAL INFORMATION OF COMMITTEE AND STAFF ................................................................................................175 TABLES AND FIGURES TABLES 2-1 The 10 Largest Excise Tax Collections for Fiscal Year 2010, 28 xiii
xiv Contents 2-2 The 10 Largest Energy Tax Policies (by dollars of foregone revenue), 30 2-3 The 10 Largest Broad-based Tax Expenditures, 31 2-4 Provisions Modeled for This Study and Where Discussed in This Report, 49 3-1 Assumptions Underlying NEMS Scenarios, 56 3-2a Summary of CO2 Emissions Impacts, 59 3-2b Summary of CO2 Emissions Impacts, 60 4-1 Summary Impacts of Removing Federal Highway Fuels Taxes Across Four Models, 83 4-2 Summary Appraisal of Studies of Impact of Removing Highway Fuels Taxes, 88 5-1 Key Modeling Assumptions, 97 5-2 Removal of Biofuel Provisions â Key Modeling Results, 100 5-3 Effect of the RFS2 Mandate on Model Projections for the âRemoving All Biofuel Provisionsâ Scenario: Key Modeling Results, 105 5-4 Alternative Emission Coefficients for Gasoline and Biofuels Based on Study, 107 5-5 Sensitivity of GHG Impacts from Variations in Biofuel GHG Emission Coefficients: Removing all Provisions Scenario, 107 6-1 Energy Intensities of Different Sectors, 116 6-2 Effects of Different Revenue Recycling Options, 118 6-3 Estimated Effects Relative to Base Case of Eliminating Accelerated Depreciation Preference on Key Economic Variables, 2010-2035, 118 6-4 Estimated Effects of Eliminating the Home Mortgage Interest Deduction Relative to Base Case, 2010-2035, 127 6-5 Estimated Effects Relative to Base Case of Eliminating the Exclusion for Employer-supplied Health Insurance, 2010-2035, 132 7-1 Summary of Modeling Results, 150 FIGURES 1-1 Schematic representation of how taxes affect GHG emissions through the market, 18 3-1 Total U. S. Electricity Generation, in Terawatt hours (TWh) â Reference Scenario and No-PTC/ITC Scenario, 64 3-2 Changes in Electricity Generation Caused, in Terawatt hours (TWh), by Removing the PTC/ITC Compared to the Reference Scenario, 65 3-3 Changes in Electricity Generating Capacity Caused by Removing the PTC/ITC Compared to the Reference Scenario, 65 3-4 Changes in Non-Hydro Renewable Generation Caused by Removing the PTC/ITC Compared to the Reference Scenario, 66 3-5 U.S. Average Retail Electricity Prices under the Reference Scenario and the No-PTC/ITC Scenario, 66 3-6 PTC/ITC Tax Expenditures â Various Scenarios, 68 3-7 Power Sector CO2 Emissions â Four Scenarios, 69 3-8 Natural Gas Consumption Under Three Scenarios, 72
Contents xv 3-9 Natural Gas Prices Under Several Scenarios, 73 3-10 Changes in CO2 Emissions under the Cost Depletion Scenario, 75 5-1 Effects of biofuel provisions removal on biofuel production levels, 108 5-2 Effects of removing the biofuel provisions on total energy expenditures, 109 5-3 Effects of biofuel provisions removal on federal revenue, 109 5-4 Effects of biofuel provisions removal on U.S. CO2 emissions, 109