Effects of U.S. Tax Policy on Greenhouse Gas Emissions (2013) / Chapter Skim
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3 Energy-Related Tax Expenditures
3 Energy-Related Tax Expenditures
Pages 52-80
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From page 52... ...
This chapter analyzes the impact of other energy-related tax expenditures, focusing on credits for electricity production from renewable resources (the renewable energy production and investment tax credits) and the depletion allowance tax preference (the tax provisions that allows 53
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From page 53... ...
This chapter analyzes the impact of other energy-related tax expenditures, focusing on credits for electricity production from renewable resources (the renewable energy production and investment tax credits) and the depletion allowance tax preference (the tax provisions that allows 53
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From page 54... ...
In some cases, the magnitude of the shift in supply or demand is small; hence, so is the estimated impact on energy consumption and CO2 emissions. For example, the excess of percentage over cost depletion for natural gas lowers the cost of producing natural gas; however, the provision affects only independent producers, so the impact on natural gas production is small.
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From page 55... ...
Regardless of the findings on capacity, none of these studies estimated the production tax credit's impact on greenhouse gas emissions. For other provisions discussed in this chapter, the existing literature was even thinner.
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From page 56... ...
U.S. Shale Gas 50% higher Reserves Renewable Portfolio Yes Yes Yes Yes No Standards Revenue Code (IRC)
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From page 57... ...
. The Low-Gas-Prices scenario assumed 50 percent higher ultimate re covery of natural gas from shale relative to the Reference scenario.
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From page 58... ...
RENEWABLE ELECTRICITY TAX CREDITS (ENERGY PRODUCTION AND INVESTMENT TAX CREDITS) Legal Description and Expected Impact At the time of our analysis, taxpayers could claim a nonrefundable credit of 2.3 cents per kWh of electricity generated from wind, biomass, and geothermal energy resources and a credit of 1.1 cents per kWh for electricity generated from solar energy, small irrigation power, and municipal solid waste (trash
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From page 59... ...
(Base Value) No PTC/ITC Depletion No PTC/ITC Depletion Cumulative 2010-2035 Reference Scenario 141,201 360 -37 0.3% -0.03% High Economic Growth 147,675 393 58 0.3% 0.04% High Oil Prices 138,695 Nc 286 nc 0.2% Low Gas Prices 140,616 -129 11 -0.1% 0.0% Average Annual 2010-2035 Reference Scenario 5,883 15 -1.5 0.3% -0.03% High Economic Growth 6,153 16 2.4 0.3% 0.04% High Oil Prices 5,779 Nc 12 nc 0.2% Low Gas Prices 5,859 -5.4 -0.5 -0.1% 0.0% Source: NEMS-NAS model for this study.
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From page 60... ...
(Base Value) No-RPS Scenario No PTC/ITC No PTC/ITC Cumulative 2010-2035 Reference Scenario 141,201 141,576 762 0.5% Average Annual 2010-2035 Reference Scenario 5,883 5,899 32 0.5% Source: NEMS-NAS model results for this study.
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From page 61... ...
This will help readers understand the logic of the modeling results as well as give a glimpse into the complexity of the energy system and the difficulty of accurately capturing all the forces at work. In each scenario, the baseline includes several production tax credits and investment tax credits related to renewable power generation, extending to the end of the NEMS-NAS forecast period (i.e., 2035)
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From page 62... ...
In all scenarios, nonrenewable tax credits remain unchanged, including credits for advanced coal, nuclear,7 and combined heat and power.8 The ARRA enabled renewable project developers to choose a cash grant or a 30 percent ITC in lieu of a 10-year PTC. The NEMS-NAS Reference scenario assumes the following (values in 2009 USD, increasing with projected inflation)
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From page 63... ...
. Generation from both coal and natural gas increases due to the removal of the tax credits, while renewable generation, especially end-use solar PV, decreases compared to the Reference scenario.
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From page 64... ...
Removing the tax credits thus results in a decline in PVS investments. Because the EIA's Reference scenario predicts such rapid growth from learning by doing, the decline from removing the tax preference is large for PV.10 Utility-scale wind deployment is also reduced by more than 15 GW by 2035.
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From page 65... ...
FIGURE 3-3 Changes in Electricity Generating Capacity Caused by Removing the PTC/ITC Compared to the Reference Scenario.
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From page 66... ...
. Investment tax credits help reduce utility costs for building new generation, and production tax credits reduce the cost of generation, both of which contribute to lower electricity rates for consumers in the Reference scenario baseline.
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From page 67... ...
The government's revenue losses on renewable electric generation facilities are between $4 and 5 billion per year in the Reference scenario. More than half of the expenditures, between $2 and 3 billion per year, come from investment tax credits to end-use renewable installations.
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From page 68... ...
CO2 Emissions Given the small changes in generation in the No-ITC/PTC scenario, changes to overall emissions from the domestic electric power sector also are small. Compared to the Reference scenario, removing the renewable electricity tax credits change CO2 emissions on average by 15 MMT per year, or about 0.3 percent of power-sector emissions.
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From page 69... ...
The Role of Renewable Portfolio Standards As a final sensitivity run, we examined the impacts of changing tax provisions if state Renewable Portfolio Standards are removed. This scenario is important for illustrating the interaction of regulatory mandates with tax policy.
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From page 70... ...
The depletion allowance permits owners of oil and gas wells to deduct the decline in the value of their reserves as oil or gas is extracted and sold. The allowance, which is a form of cost recovery for capital investments, can be calculated using either cost depletion or percentage depletion.
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From page 71... ...
In the Cost-Depletion scenario, where cost depletion replaces the percentage depletion allowance, capital recovery is slower, resulting in higher drilling costs, and reducing incentives to explore and develop new supply. Less investment in drilling would be expected to reduce domestic production and raise the price of natural gas.
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From page 72... ...
This, in turn, reduces natural gas consumption by 2 percent, on average. A sensitivity scenario was run where a cost depletion allowance of 22 percent was applied to the same resources that were otherwise receiving the benefit of the 15 percent allowance, further lowering exploration and production costs.
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From page 73... ...
also declines. Sensitivity Analysis The impact of removing percentage depletion was examined for three alternative economic assumptions: high macroeconomic growth, high oil prices, and low natural gas prices.
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From page 74... ...
The Low-Natural-Gas-Prices scenario reduces the impact of the excess of percentage over cost depletion. As intuition would suggest, the primary impact of the move to cost depletion from percentage depletion is to increase the cost of natural gas production and prices, with the High-Macroeconomic-Growth scenario showing the largest difference and the Low-Natural-Gas-Prices scenario showing the least difference.
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From page 75... ...
To a first approximation, the depletion allowance produces no impact on greenhouse gas emissions. While natural gas production goes down when percentage depletion is removed, the complex substitution patterns lead to largely offsetting forces and to a minimal overall impact on CO2 and other GHG emissions.
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From page 76... ...
provides tax credits equal to 30 percent of the cost, with no cap through 2016, for construction of geothermal heat pumps, solar energy systems, solar water heaters, and small wind-energy systems and fuel cells.12 The energy-efficiency products must be placed in service before the end of 2016. The credits are valid only for improvements made to the taxpayer's principal residence, except for qualified geothermal, solar, and wind property, which can be installed on any home used as a residence by the taxpayer.
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From page 77... ...
SPECIAL TAX RATE ON NUCLEAR DECOMMISSIONING RESERVE FUNDS Legal Description Nuclear power plant operators can elect to set aside reserve funds for the decommissioning of plants. The code provides for special tax treatment of these funds in two ways.
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From page 78... ...
Analysis and Summary The committee was unable to find any detailed and reliable estimates of the impact of the nuclear decommissioning tax preference on greenhouse gas emissions.16 This is a particularly difficult provision to analyze for several reasons. First, nuclear power plants have a very long useful lifespans (the lifetime of the plant could well be at least 60 years)
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From page 79... ...
One important result is that the net estimated impact of the modeled provisions is very small. The central estimate of the net impact of the renewable tax credits, the depletion allowance, and the nuclear decommissioning credit is about 0.1 percent of total national GHG emissions over the next quarter-century.
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From page 80... ...
For both the impact of tax credits for energy efficiency in homes and the nuclear decommissioning tax preference, the uncertainties about future tax, regulatory, financial, and behavioral responses are so large that the committee was unable to provide what it regarded as reliable estimates. For other provisions, the estimates cannot resolve whether the net impact is negative or positive.
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