Effects of U.S. Tax Policy on Greenhouse Gas Emissions (2013) / Chapter Skim
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2 Methods for Evaluating Tax Policy Effects on Greenhouse Gas Emissions
2 Methods for Evaluating Tax Policy Effects on Greenhouse Gas Emissions
Pages 23-51
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From page 23... ...
HOW TAX CODE PROVISIONS IMPACT GREENHOUSE GAS EMISSIONS Taxes are one of the many factors that affect the level and composition of economic activity, which in turn determines the level of anthropogenic emissions of CO2 and other greenhouse gases. The purpose of this study is to untangle the effects of different individual tax provisions from other determinants of output and to estimate how through these changes the tax code affects U.S.
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By allowing a larger deduction for depletion than the actual economic costs, the percentage depletion allowance subsidizes oil and gas production. It thereby lowers prices for petroleum products and increases petroleum use and the resulting GHG emissions.
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The effects of broader provisions in the tax code introduce yet further complications. Accelerated depreciation or provisions affecting housing directly affect decisions on investment and housing, but just how those are related to greenhouse gas emissions is far from obvious.
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From page 26... ...
While there is an extensive literature on the response of economic activity to various tax incentives, including those related to energy provisions, with only a few exceptions do existing studies carry through to the impact on greenhouse gas emissions. Thus, the committee faced a task of estimating the GHG impacts of the tax code provisions virtually from scratch.
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From page 27... ...
Ultimately, modeling capabilities allowed analysis only of the tax on motor fuels for highway use and the tax on aviation fuel, shown in bold in Table 2-1. Moreover, we found a large literature discussing the motor fuels excise taxes' impacts on fuel consumption and vehicle miles traveled along with one study that attempts to assess the tax's impact on greenhouse gas emissions.
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From page 28... ...
prepare an annual compendium of tax expenditures, the latter for the administration's budget by the Office of Management and Budget.3 The Congressional Budget Act of 1974 defines tax expenditures as "revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability." 2 Internal Revenue Service Statistics of Income Division. Federal Excise Taxes Reported to or Collected by the Internal Revenue Service, Alcohol and Tobacco Tax and Trade Bureau, and Customs Service, by Type of Excise Tax (Table 20)
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From page 29... ...
Chapters 3 and 5 analyze the impact of these energy-sector tax policies on GHG emissions. Broad-based Tax Expenditures In addition to provisions that directly affect the energy sector, the committee examined broad-based provisions that may indirectly affect emissions.
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Credit for Energy Efficiency Improvements 3.19 Chapter 3 to Existing Homes Excess of Percentage over Cost Depletion 0.98 Chapter 3 for Oil and Gas Wells Special Tax Rate on Nuclear 0.90 Chapter 3 Decommissioning Reserve Funds Temporary 50-Percent Expensing for Equipment 0.76 N/A Used in the Refining of Liquid Fuels Biodiesel Producer Tax Credit 0.51 Chapter 5 Expensing of Exploration and Development Costs 0.40 N/A for Oil and Gas Credit for Investment Renewable Energy 0.30 N/A Infrastructure Tax Credit and Deduction for Clean-burning 0.24 Chapter 3 Vehicles Preferential Tax Treatment of Certain Publicly 0.50 (JCT) N/A Traded Partnerships with Qualified Income Derived from Certain Energy-related Activities Credits for Advanced Energy-manufacturing 0.18 N/A Facilities Some policies are codified in multiple IRC provisions.
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Government. While the broad-based tax provisions do not affect the energy sector or GHG emissions directly, they may have an effect on overall emissions, because they affect output in large portions of the economy.
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The effects of changing broad-based provisions are analyzed in Chapter 6. REGULATORY INTERACTIONS Although other laws and regulations are not specifically included in the committee's charge from Congress and the Treasury, they are a critical element because they interact with tax laws to influence GHG emissions.
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From page 33... ...
AVAILABLE LITERATURE ON EFFECTS OF TAX PROVISIONS ON GREENHOUSE GAS EMISSIONS An important first step in analyzing the potential impacts of the tax code on emissions and climate change was a review of the existing literature. The committee and several commissioned consultants undertook a systematic review of studies to analyze the impact of taxes and subsidies on GHG emissions.
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We found this study to be a useful first-order analysis, and compared its results to those from the work we commissioned using models with more detailed representations of energy markets, technologies, and regulations to ensure that we captured a full picture of the impacts of tax changes. ECONOMIC EFFICIENCY AND ECONOMY-WIDE MEASURES TO REDUCE GHG EMISSIONS Another set of studies puts the economic and GHG impacts of tax policy in the broader context of climate-change objectives.
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From page 35... ...
A uniform carbon price provides appropriate incentives for consumers, producers, entrepreneurs, and innovators to adjust their activities so as to reduce emissions and encourage low-emissions technologies in the most efficient manner.12 One of the important features of uniform carbon pricing is that the policy directly targets GHG emissions rather than indirectly targeting capital goods, processes, or products that are only indirectly linked to emissions. Studies have also found that the cost per unit of emissions reductions is higher -- often much higher -- when sector-specific tax expenditures, subsidies, or regulations are used than when economy-wide measures are employed (EIA, 2011; NRC, 2010; Clarke, et al, 2009; Krupnick, 2010)
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. Moreover, the study used one of the models employed by the committee (NEMS model)
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. MODELING APPROACHES AND COMPARATIVE STRENGTHS OF MODELS CONSIDERED FOR USE IN SUPPORTING ANALYSES The committee's review of the literature determined that there is a very thin body of published work on which to base an analysis of the impacts of the tax code on greenhouse gas emissions.
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Energy Information Administration in its annual energy outlook and available for other uses; and the CBER model, developed at the University of Nevada, Las Vegas. 16 OnLocation, Inc., of Vienna, Virginia.
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An important advantage of the CBER model is that it was developed with an objective of investigating the effects of subsidies, mostly tax expenditures, on CO2 emissions in the energy sector. The developers invested considerable effort in representing most of the energy-specific tax code provisions.
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the implications of land-use change for GHG emissions. Given consideration of budget and ability of different groups to produce timely analysis, we decided that Missouri University's implementation of the Food and Agriculture Policy Research Institute's model, FAPRI-MU, best fit the requirements.20 This model has the combination of detailed agriculture and crop 19 These include macroeconomic models such as Emissions Predictions and Policy Analysis (EPPA)
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From page 41... ...
And, similarly a model that simplifies the agricultural sector as producing a single product is less able than a detailed model of the agricultural sector, with a full range of crops and livestock, to trace how a biofuels policy may affect corn production and land-use change. So the economy-wide models are most useful for considering the broad-based tax provisions and for capturing general equilibrium effects of tax policies, but are less useful for capturing sectoral details.
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From page 42... ...
This means that the model assumes that firms and consumers know the trajectory of oil prices, GDP growth, and other important factors. Forward-looking models clearly overestimate the capability of agents to look forward, but the implications of this assumption for estimating the impacts of tax policy on GHG emissions is unclear.
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From page 43... ...
GOVERNMENTAL POLICIES TO PROMOTE INNOVATION AND LOW-CARBON TECHNOLOGIES The economic analysis of subsidies and tax expenditures for standard goods and services like shoes and pizzas finds that they lead to economic distortions and reduce national output and economic welfare. When there are no market failures, subsidies may distort prices and outputs away from their marketdetermined levels.
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From page 44... ...
energy system and other sectors will be needed to reduce GHG emissions significantly, and this will re quire an infusion of financial and human resources to support each phase of the process…. Resources that are critical for technology innovation in clude money for R&D and people with the requisite training, skills, and creativity to innovate.
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From page 45... ...
TAX BASELINE FOR MODELING AND ANALYTICAL APPROACH Baseline Assumptions In addition to choosing which models to use and which provisions to analyze, the committee needed to select a baseline to use as a comparison for evaluating the effects of changing tax policies on greenhouse gas emissions. A base
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From page 46... ...
Treatment of Revenue Changes Another important issue that required attention was to determine how to treat changes in government revenues that would follow changes in tax provisions. Removing provisions from the tax code will change the revenues coming to the government.
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Offset Revenue Changes Using Lump-sum Payments The committee directed the IGEM team to recycle revenues in two different ways: through lump-sum changes in the tax system and through proportional changes in tax rates. A lump-sum change is one that changes taxes or government transfer payments by a fixed amount that does not depend on household behavior.
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From page 48... ...
from distortionary taxes, while assuming that all revenue gains are returned to taxpayers with lump-sum subsidies ignores the extra benefit that could arise from reducing distortionary taxes. Offset Revenue Changes by Adjusting Tax Rates An alternative approach is to assume that revenue changes induced by changing a tax provision are offset by raising or lowering marginal tax rates.
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From page 49... ...
Excess of percentage over cost depletion for Chapter 3 NEMS-NAS oil and gas wells Credit for energy efficiency improvements to Chapter 3 Models not Used existing homes for Analysis Special tax rate on nuclear decommissioning Chapter 3 Models not Used reserve funds for Analysis Excise tax on highway motor fuels (gasoline Chapter 4 NEMS-NAS; and diesel) CBER; FAPRI-MU; IGEM Excise tax on aviation fuel Chapter 4 CBER Alcohol fuel credit and excise tax exemption Chapter 5 NEMS-NAS; FAPRI-MU Biodiesel producer tax credit Chapter 5 NEMS-NAS; FAPRI-MU Exclusion of employer contributions for medical Chapter 6 IGEM insurance premiums and medical care Deductibility of mortgage interest on owner- Chapter 6 IGEM occupied homes Accelerated depreciation of machinery and Chapter 6 IGEM equipment (normal tax method)
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How to handle the revenue changes that accompany a change in tax policy was of particular concern to both reviewers. Our choice to request that IGEM analyses be performed both with the revenue being offset by changing tax rates and by lump-sum rebates arose in part from our discussions.
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From page 51... ...
Rather, in the following chapters, the committee describes the issues that arise in interpreting the model results as well as the confidence that should be placed in the results. SUMMARY The committee commissioned four modeling groups to conduct new studies investigating the implications of tax code provisions on GHG emissions.
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