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June 20, 2013

MURPHY: Do "Green" Tax Policies Cause More Harm than Good?

June 20, 2013
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The US Treasury commissioned a report from the National Academy of Sciences to study various proposed changes to the tax code in light of the effects on greenhouse gas emissions. The committee formed for this task just released its study, edited by William Nordhaus, Stephen Merrill, and Paul Beaton. Not surprisingly, the study found that a federal tax on greenhouse gas emissions would reduce greenhouse gas emissions. Yet the study also concluded that many of the allegedly “green” provisions in the current tax code do very little to help on this front, and may even be counterproductive. In this post I’ll walk through some of the key findings.

Production Tax Credit for Renewable Electricity: “Small” Impact

According to the report:

The production and investment tax credits for renewable electricity provide a tax credit of 2.0 cents per kWh of power for the first 10 years of electricity production generated from qualifying renewable sources (primarily solar, wind, and biomass) or a credit equal to 30 percent of investment in qualifying equipment.…The committee’s analysis indicates that these provisions do lower CO2 emissions…but the impact is small, about 0.3 percent of U.S. CO2 in the reference case. [Page 3, bold added.]

We at IER have written extensively on the flaws with the PTC for wind. In the battles over renewing the measure or letting it expire, proponents often claimed that the PTC would lead to reductions in carbon dioxide emissions. We’ll see if they keep repeating that, in light of the new study’s findings.

Oil and Gas Depletion Allowances: Removing Has “No Effect” on Emissions

In a similar fashion, the study finds that the oil and gas depletion allowances do not increase emissions:

The percentage depletion allowance permits independent (nonintegrated) domestic producers of oil and gas to deduct a percentage of gross income associated with sale of the commodity…In modeling completed for this report, removing the percentage depletion allowances (and substituting cost depletion) has virtually no effect on oil production and associated GHG emissions. [Pages 3-4, bold added.]

The parenthetical phrase “and substituting cost depletion” alludes to the fact that the depletion allowance isn’t some bonanza in the tax code, but reflects the accounting and economic reality that the development of oil and gas resources leads to a reduction in the value of the asset. When a company wears down a physical machine, the tax code allows the company to deduct a “depreciation” expense, and by the same token if a company wears down an oil well the company can deduct a “depletion” expense. The newly released study shows that tweaking the tax treatment won’t significantly alter greenhouse gas emissions, so the alleged “tax loophole for oil” isn’t causing any problems on that score. (Later on the report discusses accelerated depreciation in general for businesses—not just oil and gas companies—and finds tweaking this provision could impact GHG emissions, depending on how the revenues are used.)

Those Counterintuitive Biofuel Supports

The study’s findings on biofuels should not surprise veterans of the energy policy debate, as it has been known for some time that (at least certain) biofuel programs actually increase greenhouse gas emissions:

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…

…The findings indicate that removing all tax code provisions and the import tariff would result in a decrease of emissions of 5 million metric tons (MMT) per year of CO2 equivalent globally. This is less than 0.02 percent of global emissions. The results are complicated by the mandates for renewable fuels. If the mandates are removed along with the subsidies, the estimated emissions are smaller than the estimates with the mandates…

These results show the often counterintuitive nature of the effects of tax subsidies. Although it may seem obvious that subsidizing biofuels should reduce CO2 emissions because they rely on renewable resources rather than fossil fuels, many studies we reviewed found the opposite. [Pages 5-6, bold added.]

In case it’s not clear from the text itself, let us emphasize: The study found that tax incentives alone—including the tariff on foreign ethanol, which keeps sugarcane ethanol from Brazil from stealing market share from US corn producers—actually cause global GHG emissions to be higher than they otherwise would be, though the difference was negligible.

Further, what was really ironic is that the modeled level of global GHG emissions will be an additional 2 million metric tons higher per year because of the biofuel mandates in the Renewable Fuels Standard (see Table 5-3 on page 105).

“Uh, We Need (You to Fund) Another Study”

On the one hand, it’s refreshingly honest to read the following passage discussing the analysis of treatment of employer-provided health care, but on the other hand it shows just how difficult these modeling approaches are:

The exclusion of employer-provided health insurance from the taxable income of employees is the largest single tax expenditure in the Internal Revenue Code. The committee expected that eliminating health care subsidies would raise GHG emissions per unit of output because the health care sector is less GHG intensive than the rest of the economy. The Intertemporal General Equilibrium Model (IGEM) results show the opposite effect, however, with a small decrease in GHG intensity. The committee’s inability to understand the structural features of the model that produced these results leads it to conclude that the impact of the health provisions on GHG emissions remains an open question and an important subject for future research. [Pages 6-7, bold added.]

Note in the admission above that the committee isn’t even sure qualitatively what is driving the unexpected result in the context of health care.


The recently released analysis of broad-based tax reform from the perspective of greenhouse gas emissions is just another arrow in the quiver of those pushing for a carbon tax, or some other method to reduce the use of the energy sources that power our nation and the world. However, even taken on its own terms, the study shows that many of the allegedly “green” policies in the past or current tax code do little to reduce emissions, even though this was the ostensible justification for the policies in the first place. Some measures, including the Renewable Fuel Standard, were found to increase global emissions. We’ll see which parts of the study the interventionists highlight.

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  • Thomas Stacy

    It’s too bad the study did not compare the use of subsidies for wind to subsidies for combined cycle natural gas plants on a per unit of emissions avoided basis. And of course the study ignores the fact that wind electricity by itself is too undependable to close any fossil fuel power plants. Sure, it saves some fuel, but fuel is just one of the costs of electricity from fossil fired plants. $100 per megawatt hour wind saves $20 per megawatt hour fuel while lengthening the economic recovery cycle of our dependable power plant fleet. It is hard to fathom that we have policies which channel our tax dollars into job killing increases in the cost of electricity.

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