ENVIRONMENTAL AND ENERGY TAX CREDITS AND DEDUCTIONS

Many of the current environmental and energy provisions within the US tax code are not environmental or energy taxes, but rather tax credits, exemptions, and deductions. Rather than taxing pollution, energy use, or similar activities that government wants to discourage, these tax expenditures are implicit subsidies. This section briefly reviews two of the larger energy/environmental tax expenditures, discusses their effects, and considers whether they could be removed or replaced with more efficient alternatives.

Tax Credits for Renewable Electricity Generation

The renewable energy production tax credit (PTC) provides a tax credit of 2 cents/ kWh ofelectricity generated from qualifying renewable sources (primarily solar, wind, and biomass). Alternatively, firms can take an investment tax credit (ITC) of 30% of the cost of investing in qualifying generating equipment. These credits substantially lower the cost of generating power from renewable sources, and thus encourage use of renewable energy.

This policy can be viewed as correcting a pollution externality, to the extent that renewable power substitutes for other more polluting sources of electricity (and that those pollution externalities are not already corrected by other policies). One might also argue that the policy addresses externalities in technology development (such as research and development spillovers), though that justification is more tenuous, given that these are not brand-new technologies and that the United States represents a relatively small share of world demand.

Nordhaus et al. (2013) looked at the effects of the PTC and ITC on carbon emissions and found relatively small effects: eliminating these provisions would increase carbon emissions by roughly 360 million metric tons, less than 0.3% of US energy-sector emissions. Moreover, this is a relatively expensive way to reduce carbon emissions: the government gives up more than $250 in tax revenue per ton of CO2

reductions.[1]

Thus, if the goal of the PTC and ITC is to reduce carbon emissions, these credits are a relatively expensive way to achieve that goal. A carbon tax—even one with a very low rate—would do much more to reduce emissions and at a lower cost.

  • [1] Note that revenue cost is not the same thing as the economic cost of the policy, and unfortunatelythe model used could not provide estimates of social cost. Nonetheless, this suggests that the policyis quite costly relative to its modest effects, which is consistent with theoretical results that such subsidies are inefficient relative to emissions pricing policies.
 
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