The Federal government supports energy investment and production through the tax code and spending programs administered by the Department of Energy (DOE). In 2016, energy-related tax preferences cost an estimated $18.4 billion, while relevant DOE spending programs cost $5.9 billion.
DOE programs advance knowledge benefits, which the private sector underproduces because companies cannot capture all the benefits for themselves. Early-stage research and development (R&D) has the largest “knowledge spillovers,” yet DOE direct investments in applied (late stage) energy research is more than double those in basic (early stage) research. Tax preferences may encourage knowledge benefits for nascent technologies but deter investment in R&D in new technologies that find it harder to compete with incumbents receiving preferential tax treatment.
The Congressional Research Service estimates that, between 2015 and 2019, the cost of energy tax incentives will be $21.5 billion for fossil fuels, $46.5 billion for renewables and $3.1 billion for energy efficiency. The production tax credit (PTC), investment tax credit (ITC) and Section 1603 grants comprise the vast majority of energy tax incentive costs for renewables. One of the primary arguments for these incentives is that they reduce pollution, which are external costs markets alone do not fully account for. However, the National Academy of Sciences found that the PTC and ITC reduce carbon dioxide emissions at an average cost of $250 per ton, well above prevailing estimates on the harm caused by such emissions.
Energy tax policy has attracted the attention of Congress as it contemplates tax reform. On March 29th, the House Subcommittee on Energy held a hearing entitled “Federal Energy-Related Tax Policy and its Effects on Markets, Prices, and Consumers.” Participants offered contrasting perspectives on the effect and value of various energy tax preferences. Arguments in support of clean energy tax preferences focused on pollution reduction benefits, the need for parity with current and historical fossil fuel tax preferences and “green” jobs and investment growth. Pro-market proponents argued that tax preferences are expensive, distortionary and address market failures inefficiently.
Devin Hartman’s witness statement to Energy Subcommittee