Effects of U.S. Tax Policy on Greenhouse Gas Emissions

This report is the response of a committee appointed by the National Academies to a charge by the U.S. Congress to conduct “a comprehensive review of the Internal Revenue Code to identify the types of and specific tax provisions that have the largest effects on carbon and other greenhouse gas emissions and to estimate the magnitude of those effects.” The committee is composed of experts in tax policy, energy and environmental modeling, economics, environmental law, and related areas. The general findings of the study are shown below. The full report can be accessed by clicking on the link(s) at the bottom of this page.


Our report does not estimate an aggregate impact of tax provisions on greenhouse gas emissions due to the complexity of the tax code as well as the difficulty of determining the impact of several important provisions. The summary table of impacts of different studies and provisions is contained in Table 7-1. The following provides a summary of the results from different sectors.

First, the combined effect of current energy-sector tax expenditures on GHG emissions is very small and could be negative or positive. The most comprehensive study available suggests that their combined impact is less than 1 percent of total U.S. emissions. If we consider the estimates of the effects of the provisions we analyzed using more robust models, they are in the same range. We cannot say with confidence whether the overall effect of energy-sector tax expenditures is to reduce or increase GHG emissions.

Second, individual energy-sector tax expenditures in some cases contribute to, and in other cases subtract from, U.S. and global GHG emissions. The subsidies on ethanol that expired in 2012 clearly added to global GHG emissions. By contrast, the balance of the evidence is that the production and investment tax credits for renewable electricity slightly reduce U.S. GHG emissions. The depletion allowance has virtually zero impact on emissions.

Third, the best existing analytical tools are unable to determine in a reliable ashion the impact of some important subsidies. Important tax expenditures that have resisted analysis include ones subsidizing residential energy efficiency. The difficulties in this case involve such factors as the discount rate consumers apply to future fuel savings, the strength of any rebound effect, and the extent to which consumers understand and respond to tax law changes.

Fourth, the revenues foregone by energy-sector tax subsidies are substantial in relation to the effects on GHG emissions. The Treasury estimates that the revenue loss from energy-sector tax expenditures in fiscal years 2011 and 2012 totaled $48 billion. Few of these were enacted to reduce GHG emissions. As policies to reduce GHG emissions, however, they are inefficient. Very little if any GHG reductions are achieved at substantial cost with these provisions.

Fifth, the emissions impacts of the broad-based tax expenditures are 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. We investigated a subset of provisions representing about one -third of the revenue losses from tax expenditures-subsidies to equipment investment through accelerated depreciation, to health care, and to owner-occupied housing. Except for accelerated depreciation, we were unable to reach a definite conclusion on whether they increase or decrease GHG emissions per unit of output. Rather, the principal effect of these provisions is on national output. If removing broad-based subsidies were offset by reducing distortionary taxes, the resulting increase in national output would be accompanied by increased GHG emissions. If the subsidies were replaced with lump-sum tax cuts that do not reduce distortions, there would likely be little effect on national output or emissions.

Sixth, it is difficult to estimate the impact of the broad-based tax expenditures on GHG emissions intensity. The committee examined the existing literature and commissioned modeling studies to estimate the effects of changes in the broad-based provisions on the overall GHG intensity of the economy. The results were not judged to be sufficiently reliable to draw firm conclusions.

Seventh, the effects of many tax provisions are complicated by their interaction with regulations. Very few tax provisions take place in a regulatory vacuum. Particularly in the energy sector, energy and environmental  regulations overlay and interact with tax provisions. Prime examples are the interaction of highway motor fuels excise tax provisions with the CAFE standards for light-duty vehicles, the air pollution standards for the mix of electricity generation, the Renewable Portfolio Standards (RPS) for electricity generation, and the Renewable Fuel Standards for motor fuels blended from petroleum and ethanol. There are cases where regulations or mandates reinforce the effects of tax provisions and others where they offset their impacts. Analyses of the impacts of taxes on GHG emissions must take special care to include consideration of the regulatory environment.

Eighth, energy excise taxes reduce GHG emissions, but the impact is limited because of special features of the tax and because of regulatory constraints. The committee's estimates show unambiguously that highway fuel excise taxes reduce fuel consumption and GHG emissions. The analysis for this report finds that the current highway fuels taxes have a relatively small impact on GHG emissions because of the volumetric bias of the taxes as well as the constraints imposed by the renewable fuels standards.

Tax Policyand Ghg Emissions

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JUL 1 2013
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