New Study: Tax Subsidies Do Little To Reduce Greenhouse Gas Emissions

The other day, President Obama proposed a modest and largely aspirational plan to respond to climate change. Unlike some of his past efforts, it did not include new proposals for highly targeted tax subsidies aimed at reducing the use of carbon-based fuels by encouraging “green” energy.

The tax breaks were missing in large part because Obama wanted a plan that would not require congressional approval (which he will not get). But a new congressionally mandated study by the National Academy of Sciences concludes that extending the sort of energy-related tax preferences that are already scattered throughout the Revenue Code would do little or nothing to reduce greenhouse gasses.

The report’s conclusion is damning: Although the Code included $48 billion in energy-sector tax preferences in 2010-2011, their effects were essentially nil. “The combined effect of energy-related subsidies for renewable sources and fossil fuels is very small, probably less than 1 percent of U.S. emissions, and could be either positive or negative.”

That’s not to say the tax code could not be a useful tool for reducing greenhouse gasses. For example, a broad-based carbon tax (or its cousin, a cap-and-trade system) could be powerful way to reduce emissions.  But while that idea is dear to the hearts of economists, lawmakers are terrified to even talk about it.

The NAS report did conclude that one set of subsides—tax incentives for research and development in low-carbon technology—may be effective. However, the panel could not model those preferences.

The NAS committee was chaired by Yale economist Bill Nordhaus and included highly-respected lawyers, economists, and scientists. My Tax Policy Center colleague Eric Toder was a member.  The panel based its conclusions in part on the results of four separate energy models and looked at projected effects of current tax preferences over more than two decades (2010-2035 in most cases).

While the panel found that most individual tax preferences had little or no effect on greenhouse gasses, it did conclude that one actually made matters worse. Subsidies for ethanol production “clearly increased greenhouse gas emissions by lowering fuel prices and encouraging consumption and through changes in land use.”

The commission report has some self-acknowledged shortcomings: The panel could not model some important subsidies and the effects of many preferences are confounded by their interactions with regulations that sometimes reinforce and sometimes offset the tax subsidies.

It would be nice to think that Obama read the NAS report before proposing his own climate change action plan, and that it helped convince him to avoid the use of new tax subsidies. That’s probably not how it happened, but there are some important lessons for future policy in the NAS paper.