Arguments For and Against Energy-Related Tax Incentives

Many economists argue that energy-related tax expenditures are an inefficient way to achieve energy policy goals. One argument is that the subsidies for energy efficiency essentially make energy cheaper and therefore may cause consumers to use more energy than they otherwise would have, thereby negating the emission-reducing effects of those subsidies. Some also say that the tax provisions are costly for the government, as they subsidize energy conservation and clean energy activities that would have happened even in the absence of those tax credits. Finally, the government must choose winners and losers by deciding what activities and technologies they want to subsidize, and many experts have criticized the current mix of tax credits for the lack of neutrality across technologies that reduce emission.

Critics of energy-related tax expenditures generally agree that rather than subsidizing desirable activities, policies that discourage undesired energy activities would be more efficient tools. A larger tax on energy, for example, would not only promote investments in energy efficiency but would also decrease the use of energy by increasing its price. In fact, countries with higher energy taxes tend to have more energy-efficient economies — that is, they use less energy to produce a given level of economic output. Such taxes could also generate additional revenues that could help reduce rising federal deficits.

In addition, policymakers have proposed the implementation of a clean energy standard to regulate the production and use of electricity. A report by the Resources for the Future found that emissions reductions in the electricity sector would cost $11 per ton under a carbon tax and $15 per ton under the clean electricity standard proposal, while reductions would cost more than $35 per ton under clean energy tax credits.

Nevertheless, advocates argue that energy-related tax credits are an important part of the overall federal strategy to reduce carbon emissions. Many supporters contend that those tax incentives should be extended over a long period to provide greater certainty to producers and investors. According to a study by the Rhodium Group, an energy research and consulting firm, a 10-year extension of the existing clean energy tax credits at their full values may lower emissions by 54–117 million metric tons compared to current policies by 2031. The study also indicates that other enhancements to the tax credits will further their effectiveness in reducing emissions. For example, allowing more clean energy resources to qualify for the tax credits could yield 195–278 million metric tons of additional emission reductions by the end of the decade. Christy Goldfuss from the Center for American Progress also noted that tax expenditures provided over a sufficiently long period of time can make other energy policies, such as clean-energy or energy efficiency standards, more effective by reducing the cost of creating new green energy facilities.

Proposed Reforms to Energy Taxation

Recently, lawmakers have proposed various reforms to energy-related tax policies that could increase federal investments in clean energy initiatives. Most notably, the Senate’s latest budget resolution included proposals for extending some existing tax provisions, including tax credits for buyers of electric vehicles and for clean energy developers. The package also introduced several new programs, such as a program of payments and penalties for electric utilities, as well as taxes on methane emissions and imports from polluting countries. Legislators claim that some of those polluter fees will also partially offset the cost of the reconciliation bill.

Conclusion

Overall, revenues and expenditures on energy-related tax provisions comprise a small part of the federal budget. While the United States does not impose substantial taxes on energy, it offers various tax incentives primarily to promote the production and use of clean energy. Those policies may have a mitigating effect on climate change, which in turn may help generate budgetary savings in the future. However, the effectiveness of the current tax code in influencing energy activities continues to be debated among economists and environmental advocates. Policymakers should carefully consider the implications of various tax provisions and other policies aimed at combatting climate change in a fiscally sound way.

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