Effects of U.S. Tax Policy on Greenhouse Gas Emissions (2013) / Chapter Skim
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7 Summary of Findings and Recommendations and Use of Tax Policy to Address Climate Change Policy
7 Summary of Findings and Recommendations and Use of Tax Policy to Address Climate Change Policy
Pages 135-156
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From page 135... ...
Because the country's energy sector, dependent as it is on fossil fuels, is the largest source of greenhouse gas emissions, tax provisions specifically targeted toward energy are a log ical place to start the assessment. Given time and budget constraints, the committee was unable to consider all of the energy-related provi sions, but it did examine major ones such as the renewable electricity production tax credit and allowance for percentage depletion of petro leum and natural gas.
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From page 136... ...
CHOICE OF TAX PROVISIONS As described in Chapter 1, we chose for close examination provisions of the tax code that were closely related to energy-intensive activities because the energy sector is the largest source of domestic GHG emissions. The tax code provisions most clearly relevant to the committee's charge are excise taxes on energy consumption and energy-intensive activities, including taxes on motor fuels and taxes on air travel.
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From page 137... ...
The broad-based tax expenditures selected by the committee for analysis account for about one-third of the cost of all tax expenditures that year. REVIEW OF EXISTING RESEARCH The next step was to review existing research on the impact of the tax code on greenhouse gas emissions.
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From page 138... ...
However, because of the limited existing research in the area of the committee's focus and the need to use a unified set of baseline assumptions to compare the effects of different tax provisions, the committee concluded that it would be necessary to commission new studies. The committee determined that the most useful approach to analyzing tax provisions is the use of computable energy-economy models.
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From page 139... ...
The fourth model we employed (CBER) was a simplified PE energy supply and demand analysis that was specifically designed to estimate the GHG impacts of tax expenditures, but did so with a highly stylized modeling structure.
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From page 140... ...
The Renewable Fuel Standards under the Energy Independence and Security Act are included, although these are modified to allow for a plausible potential waiver scenario. To estimate the impacts of each of the specific tax provisions of interest, the selected models were run with a baseline assumption that all of the 2011 tax code provisions remained in place indefinitely, and then the models were rerun by removing each tax provision one at a time.
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From page 141... ...
Energy-related Tax Expenditures The committee identified 10 major energy tax expenditure provisions as candidates for analysis. Of these, the committee evaluated 5, which account for 71 percent of the revenue loss from the 10 provisions.
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From page 142... ...
However, given the magnitude of the tax expenditure and the evidence of unexploited savings in this sector, we believe that understanding the impacts of tax incentives on household energy consumption should be a high priority for future research. Nuclear Decommissioning Tax Preference Another provision that was analyzed qualitatively was the special tax rate on reserves set up to decommission nuclear power plants at the end of their lifetime.
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From page 143... ...
However, most of the federal excise taxes are energy related, while only a small fraction of tax expenditures are energy related. Chapter 4 considers two such excise taxes -- highway motor fuel taxes and taxes on air travel.
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From page 144... ...
Biofuels Provisions One particularly important set of tax provisions involves the use of ethanol and other biofuels, particularly as substitutes for petroleum products. These provisions involve a complex combination of taxes, tax expenditures, import tariffs, and regulatory mandates that interact to change the composition of fuels.
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From page 145... ...
Broad-based Tax Expenditures The committee examined a limited set of broad-based tax expenditures in addition to energy-sector provisions. The broad-based provisions are important primarily because of their impact on the size and composition of the overall economy.
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From page 146... ...
Because the model has large incentive effects of changes in the tax structure, IGEM suggested that some of the largest estimated impacts of changes in the tax provisions on GHG emissions come through changes in overall economic activity. Accelerated Depreciation Accelerated depreciation is one of the largest business tax expenditures in the federal income tax code.
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From page 147... ...
According to the estimates prepared for the committee, eliminating the tax subsidies for owner-occupied housing and using the revenue to lower marginal tax rates would improve the efficiency of allocation of the capital stock and increase national output. GHG emissions would increase at about the same rate as GDP increases.
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From page 148... ...
Recycling new revenues through reductions in individual and company tax rates is likely to raise national output and therefore will also increase GHG emissions. Estimates from the IGEM model indicate that removing the broad-based tax expenditures might increase national output and related GHG emissions in the order of 1 to 2 percent of baseline emissions.
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From page 149... ...
The study also includes some non-tax direct expenditures, such as spending on low-cost residential weatherization. It studies the energy tax expenditures in effect for the period 2005–2009, which is different from the other models.
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From page 150... ...
150 TABLE 7-1 Summary of Modeling Results Model Parameters NEMS CBER FAPRI IGEM Baseline Parameters AEO 20111 AEO 2012 2 AEO 2012 AEO 2011 for GDP and and Assumptions emissions baseline Other variables as specified in Chapter 6 Gases Included in Model Only CO2 Only CO2 CO2, CH4, N2O, LUC/ILUC CO2, CH4, N2O, HGWPs Policies Modeled and Indicative Results Model Policy NEMS CBER FAPRI IGEM Tax Credits for Production of Decrease Decrease Not Modeled Not Modeled Renewable Electricity Excess of Percentage Over Increase Increase Not Modeled Not Modeled Cost Depletion Credits for Energy Efficiency Not Modeled Decrease Not Modeled Not Modeled Improvements to Existing Homes Special Tax Rate on Nuclear Not Modeled Decrease Not Modeled Not Modeled Decommissioning Reserve Funds 1 AEO 2011 Assumptions: GDP 2.7%; GDP components of final demand – Consumption 2.4%; Investment 4.6%; Government 0.7%; Exports 6.3%; Imports 4.6%. 2 AEO 2012 Assumptions: GDP 2.6%; GDP components of final demand – Consumption 2.3%; Investment 4.2%; Government 0.4%; Exports 6.0%; Imports 4.1%.
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From page 151... ...
Highway Motor Fuels Decrease Decrease Decrease Decrease Excise Tax Volumetric Ethanol Very small impact Increase Increase Not Modeled Excise Tax Credit Ethanol-specific Tariff Very small impact Not Modeled Increase Not Modeled Biodiesel Excise Tax Credit Very small impact Decrease Increase Not Modeled Tax Incentives for Home Not Modeled Not Modeled Not Modeled Uncertain Ownership Tax Incentives for Health Not Modeled Not Modeled Not Modeled Uncertain Insurance and Health Care Accelerated Depreciation Decrease Not Modeled Not Modeled Increase 151
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From page 152... ...
Fifth, the impacts of the broad-based tax expenditures on GHG emissions come primarily through their impact on the level of national output. Broad-based tax expenditures entail roughly 50 times more revenues foregone than the energy-sector subsidies.
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From page 153... ...
Prime examples are the interaction of tax provisions with the CAFE standards for light-duty vehicles, the air pollution standards for the mix of electricity generation, the Renewable Portfolio Standards for electricity generation, and the Renewable Fuel Standards for motor fuels blended from petroleum and ethanol. An important finding of our studies is that regulatory and environmental constraints generally reduce the size of the impacts of tax provisions on GHG emissions.
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From page 154... ...
The committee finds that attempting to institute scoring is premature. Estimating the impacts of tax provisions on greenhouse gas emissions is difficult because the mechanisms are so complex; there are so many interacting forces; the regulatory and market environments change quickly and unpredictably; and regulatory and tax arbitrage across national boundaries tends to reduce or increase the impact measured from a global vantage point.
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From page 155... ...
First, current tax expenditures and subsidies are a poor tool for reducing greenhouse gases and achieving climate-change objectives. The committee has found that several existing provisions have perverse effects, while others yield little reduction in GHG emissions per dollar of revenue loss.
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From page 156... ...
This is not an argument against removing inefficient tax expenditures, however. Effective tax reform will increase the nation's productivity and living standards, thereby providing more than sufficient resources to pay for reducing the additional GHG emissions.
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