Current federal tax provisions have minimal net effect on greenhouse gas emissions, according to a National Research Council report published today.
The report found that several existing tax subsidies have unexpected effects, and others yield little reduction in greenhouse gas emissions per dollar of revenue loss.
At the request of Congress, a Research Council committee was formed to evaluate the most important tax provisions that affect CO2 and other GHGs and to estimate the magnitude of the effects. The report considers both energy-related provisions — such as transportation fuel taxes, oil and gas depletion allowances, subsidies for ethanol, and tax credits for renewable energy — as well as broad-based provisions that may have indirect effects on emissions, such as those for employer-provided health insurance, owner-occupied housing, and incentives for investment in machinery.
Using energy economic models based on the 2011 US tax code, the committee found that the combined effect of energy-related tax subsidies on GHGs is minimal and could be negative or positive. It noted that estimating the precise impact of the provisions is difficult because of the complexities of the tax code and regulatory environment. However, it found that these provisions achieve very little GHG reductions at substantial cost; the US Department of the Treasury estimates that the combined federal revenue losses from energy-sector tax subsidies in 2011 and 2012 totaled $48 billion. While few of these provisions were created solely to reduce GHGs, they are a poor tool for doing so, the report says.
The models indicate that the provisions subsidizing renewable electricity reduce GHGs, while those for ethanol and other biofuels may have slightly increased GHGs. They also suggest that broad-based provisions such as tax incentives to increase investment in machinery affect emissions primarily through their effect on national economic output. In other words, when a broad-based tax provision is removed, the percent change in emissions is likely to be close to the percent change in national output.
In addition, the committee examined the broader implications of tax provisions and climate change policy and concluded that tax policies can make a substantial contribution to meeting the nation’s climate change objectives, but the current approaches will not accomplish that. While the report does not make any recommendations about specific changes to the tax code, it says that policies that target emissions directly, such as carbon taxes or tradable emissions allowances, would be the most effective and efficient ways of reducing GHGs.
The US ranks No. 1 among 21 countries most actively using the tax code to influence sustainable corporate activity, reflecting the country’s federal tax incentives for energy efficiency, renewable energy and green buildings, according to KPMG’s first Green Tax Index, published in April. Japan, the UK, France, South Korea and China are also among the leading countries using tax as a tool to drive corporate sustainability, according to the index. Key policy areas explored in the index include energy efficiency, water efficiency, carbon emissions, green innovations and green building.
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