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 policy 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
What’s needed is to move away from energy tax preferences and toward taxing emissions. That would shift energy policy from a drain on revenue to a source of revenue and… Read more »
Thank you Daniel. I certainly agree in principle that we’re better pricing externalities like pollution than picking winners in the tax code. What are the best incremental reforms to get… Read more »
A few comments: One point of clarification is that to say that DOE spends double on applied programs what it spends on basic science depends partially on how one defines ‘basic… Read more »
Thanks Brent. Great point on the limitations of framing DOE spending as binary (applied vs. basic research). I agree that it’s on a spectrum. Seems like a nice infographic weighted… Read more »
It’s not clear to me why the CBO report would not include the categories I listed (advanced computing, fusion energy, high energy physics, nuclear physics) as basic science research…there’s an argument… Read more »
There is no logical reason to separate out tax preference subsidies from others, so these questions are too narrow. The problem of getting subsidies right does end with some thorny… Read more »
Thank you Carl. I agree we should stop subsidizing environmentally destructive behavior. R Street is part of the Green Scissors coalition on that front. I also think there’s an important… Read more »
Thanks Devin, I’m not going to be able to do the Nelson piece justice right now, so will pass on the issues he raises on coal leasing. I can see… Read more »
Thanks Carl. I think it’s possible to have a (more) level tax playing field, but it’d likely take broad reform in the energy tax space (or more comprehensive tax reform).… Read more »
Devin: While we can certainly mitigate most carbon emissions for $250/ton, that does not mean that the external costs of CO2 emissions are less than $250/ton. Yes, most social cost… Read more »
Thanks Dan. I agree that prevailing approaches to valuing the damages of climate change have shortcomings. I’m not going to get into this much in a post on energy tax… Read more »
Devin: While you are correct that the future costs (i.e., death and destruction) of climate change are poorly modeled. But this means we must assume the worse. Uncertainty is this… Read more »
In the absence of a carbon and pollution tax, I believe that government should fund mid-TRL (Technology Readiness Level) projects in photovoltaics. I would argue that there is a market… Read more »
Thanks Henry. To your point on artificially low electricity prices, is the problem existing government interventions or market failure(s) other than not accounting for pollution? You raise a common concern… Read more »
Over 40 years of subsidies, tax preferences, loan guarantees and the like should be abundant evidence that government directed industrial policy to achieve energy independence and promote alternatives to fossil… Read more »
Thanks Bill, I think you raise a number of discrete points. I’d underscore your historical view on government’s ability to pick energy winners – it’s not pretty. The poor performance… Read more »
I think that the best opportunity for leveling the playing field is through tax reform legislation. The Congressional Budget Office and EIA could be asked to conduct analyses of subsidies… Read more »
Bill: You are not including all the ways that we subside fossil fuels. One of the biggest is that we let fossil fuel companies pollute the atmosphere for free. You… Read more »
It is just wrong to claim that fossil fuel companies get to pollute the atmosphere for free. Do you believe that clean air regulations are free or that air quality… Read more »
Bill: 1. While “air quality” has improved due to clean air regulations, I am referring to polluting the atmosphere with CO2 and fossil fuel companies do not pay for that,… Read more »
Bill: A little bit of climate science: Each doubling of CO2 in the atmosphere causes about a +3ºC increase in warming (and more in the long run). Therefore, the CO2… Read more »
Devin has raised a number of important points in this discussion and in his testimony as well. I’ve been hearing about the idea of expensing capital, mostly from conservative groups,… Read more »
One area that always seems to get overlooked in these discussion are energy efficiency subsidies. Most studies show that the cost of reducing demand is less than adding capacity (including… Read more »