Effects of U.S. Tax Policy on Greenhouse Gas Emissions
Committee on the Effects of Provisions in the
Internal Revenue Code on Greenhouse Gas Emissions
Board on Science, Technology, and Economic Policy
Policy and Global Affairs
William D. Nordhaus, Editor
Stephen A. Merrill, Editor
Paul T. Beaton, Editor
Copyright © National Academy of Sciences. All rights reserved.
Effects of U.S. Tax Policy on Greenhouse Gas Emissions
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Effects of U.S. Tax Policy on Greenhouse Gas Emissions
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Copyright © National Academy of Sciences. All rights reserved.
Effects of U.S. Tax Policy on Greenhouse Gas Emissions
Copyright © National Academy of Sciences. All rights reserved.
Effects of U.S. Tax Policy on Greenhouse Gas Emissions
COMMITTEE ON THE EFFECTS OF PROVISIONS IN THE
INTERNAL REVENUE CODE ON GREENHOUSE GAS EMISSIONS
William D. Nordhaus, Chair, Sterling Professor of Economics, Yale University
Maureen L. Cropper, Professor of Economics, University of Maryland,
College Park
Francisco de la Chesnaye, Program Manager and Senior Economist, Electric
Power Research Institute
Noah Diffenbaugh, Center Fellow, Woods Institute for the Environment,
Assistant Professor, School of Earth Sciences, Stanford University
David G. Hawkins, Director of Climate Programs, Natural Resources
Defense Council
Roberta F. Mann, Frank Nash Professor of Law University of Oregon School
of Law
Brian C. Murray, Research Professor and Director of Economic Analysis,
Nicholas Institute for Environmental Policy Solutions, Duke University
John M. Reilly, Co-Director of Joint Program on the Science and Policy of
Global Change, Senior Lecturer, Sloan School of Management, The
Massachusetts Institute of Technology
Drew Shindell, Senior Scientist, NASA Goddard Institute for Space Studies
Eric Toder, Institute Fellow, Urban Institute, Co-Director, Urban-Brookings
Tax Policy Center
Roberton C. Williams, III, Associate Professor, University of Maryland,
College Park
Catherine Wolfram, Flood Foundation Professor of Business Administration,
Haas School of Business, University of California, Berkeley
Project Staff
Stephen A. Merrill, Study Director
Paul T. Beaton, Program Officer
Aqila Coulthurst, Program Coordinator
Cynthia Getner, Financial Officer
v
Copyright © National Academy of Sciences. All rights reserved.
Effects of U.S. Tax Policy on Greenhouse Gas Emissions
BOARD ON SCIENCE, TECHNOLOGY,
AND ECONOMIC POLICY (STEP)
For the National Research Council (NRC), this project was overseen by
the Board on Science, Technology and Economic Policy (STEP), a standing
board of the NRC established by the National Academies of Sciences and Engineering and the Institute of Medicine in 1991. The mandate of the STEP Board
is to advise federal, state, and local governments and inform the public about
economic and related public policies to promote the creation, diffusion, and application of new scientific and technical knowledge to enhance the productivity
and competitiveness of the U.S. economy and foster economic prosperity for all
Americans. The STEP Board and its committees marshal research and the expertise of scholars, industrial managers, investors, and former public officials in a
wide range of policy areas that affect the speed and direction of scientific and
technological change and their contributions to the growth of the U.S. and global
economies. Results are communicated through reports, conferences, workshops,
briefings, and electronic media subject to the procedures of the National Academies to ensure their authoritativeness, independence, and objectivity. The
members of the STEP Board and the NRC staff are listed below:
Paul Joskow (Chair), President, Alfred P. Sloan Foundation
Ernst Berndt, Louis E. Seley Professor in Applied Economics, Massachusetts
Institute of Technology
Jeff Bingaman, Former U.S. Senator, New Mexico
Ralph J. Cicerone (ex-officio), President, National Academy of Sciences
John Donovan, Senior Executive Vice President, AT&T Technology and
Network Operations, AT&T Inc.
Ellen Dulberger, Managing Partner, Ellen Dulberger Enterprises LLC
Harvey V. Fineberg (ex-officio), President, Institute of Medicine
Alan Garber, Provost, Harvard University
Ralph Gomory, Research Professor, Stern School of Business, New York
University
John Hennessy, President, Stanford University
William H. Janeway, Managing Director and Senior Advisor, Warburg
Pincus, LLC
Richard Lester, Japan Steel Industry Professor, Head, Nuclear Science
and Engineering, Founding Director, Industrial Performance Center
Massachusetts Institute of Technology
David Morgenthaler, Founding Partner, Morgenthaler Ventures
Luis M. Proenza, President and Chief Executive Officer, University of Akron
William J. Raduchel, Independent Director and Investor
Kathryn L. Shaw, Ernest C. Arbuckle Professor of Economics, Graduate
School of Business, Stanford University
vi
Copyright © National Academy of Sciences. All rights reserved.
Effects of U.S. Tax Policy on Greenhouse Gas Emissions
Laura D’Andrea Tyson, S. K. and Angela Chan Professor of Global
Management, Haas School of Business, University of California
at Berkeley
Hal Varian, Chief Economist, Google, Inc.
Charles M. Vest (ex-officio), President, National Academy of Engineering
Alan Wm. Wolff, Senior Counsel, McKenna, Long & Aldridge LLP
Staff
Stephen A. Merrill, Executive Director
Charles W. Wessner, Program Director
Paul T. Beaton, Program Officer
McAlister Clabaugh, Program Officer
Aqila Coulthurst, Program Coordinator
David Dawson, Senior Program Assistant
Sujai Shivakumar, Senior Program Officer
David Dierksheide, Program Officer
Cynthia Getner, Financial Officer
vii
Copyright © National Academy of Sciences. All rights reserved.
Effects of U.S. Tax Policy on Greenhouse Gas Emissions
Copyright © National Academy of Sciences. All rights reserved.
Effects of U.S. Tax Policy on Greenhouse Gas Emissions
Preface
The U.S. Congress directed the U.S. Department of the Treasury to request that the National Academy of Sciences undertake “a comprehensive review of the Internal Revenue Code of 1986 to identify the types of and specific
tax provisions that have the largest effects on carbon and other greenhouse gas
emissions and to estimate the magnitude of those effects” (P.L. 110-343, Division B, Title I, Sec. 117). Congress appropriated funds for this study in its 2010
appropriations (P.L. 111-117; Division C, Title I, Sec. 126).
After the National Academies accepted this assignment, the National Research Council established the ad hoc Committee on the Effects of Provisions in
the Internal Revenue Code on Greenhouse Gas Emissions, which prepared this
report. Appendix B contains biographical information on the committee members.
The committee met five times as it worked to prepare this report. At its
first meeting in April 2011, the committee held an open session for interested
members of the public to make presentations to the committee. The following
individuals responded to notice of that open session and made oral presentations
to the committee: Elizabeth Paranhos (on behalf of Environmental Defense
Fund); Jay Pendergrass (Environmental Law Institute); and Eric Pica (Friends of
the Earth). Two individuals could not attend in person but submitted written
statements: Janet Milne (Environmental Tax Policy Institute at Vermont Law
School); and Douglas Koplow (Earth Track). Additionally, the following individuals made presentations at the invitation of the committee: Mun Ho (Resources for the Future); Gilbert Metcalf (Tufts University); and Ian Parry (International Monetary Fund). During later meetings, the committee also requested
presentations from the following individuals: Alan Krupnik (Resources for the
Future); Stephen P. A. Brown (University of Nevada, Las Vegas); and Lessly
Goudarzi and Frances Wood (OnLocation, Inc.). We are grateful for the
thoughtful presentations that these individuals made.
The committee also made use of peer-reviewed scientific literature, working papers, government agency reports, and think tank reports as it deliberated
and in producing this report. The committee extends its thanks to Danny
Cullenward (Stanford University), Kathleen Foreman (University of California,
ix
Copyright © National Academy of Sciences. All rights reserved.
Effects of U.S. Tax Policy on Greenhouse Gas Emissions
x
Preface
Berkeley), and Ritadhi Chakravarti (formerly of the Urban Institute) for help
with reviews of relevant literature. These literature reviews were crucial for understanding and framing the need to undertake original economic modeling in
order to respond to Congress’s request.
At the core of this study is the committee’s analysis of original economic
modeling of tax policies performed by independent consultants. This report would
not have been possible without their expertise and willingness to work with the
committee through an iterative and often challenging process to understand each
model’s capabilities and, thus, which tax policies it could realistically model. All
of the consultants produced excellent reports explaining results for the committee
and did so in a timely manner and responsive to the specifications outlined by the
committee. Readers can download those reports at the National Academies Press
website, http://www.nap.edu/catalog.php?record_id=18299. The committee and
the nation are indebted to the following: Lessly Goudarzi (OnLocation, Inc.),
Frances Wood (OnLocation, Inc.), Dale W. Jorgenson (Dale Jorgenson Associates), Richard Goettle (Dale Jorgenson Associates), Wyatt Thompson (The Food
and Agriculture Policy Research Institute, University of Missouri), Stephen P. A.
Brown (Center for Business and Economic Research, Lee Business School, University of Nevada, Las Vegas), and Ryan Kennelly (Center for Business and Economic Research, Lee Business School, University of Nevada, Las Vegas).
Before committing funds, staff time, and other resources to the modeling
exercises, the committee asked for independent experts to consider the choices
of models to use and underlying methodology and offer critiques and suggestions. The committee is grateful to Richard Newell (Nicholas School of the Environment, Duke University) and William Pizer (Sanford School of Public Policy, Duke University) for carefully evaluating its plan for modeling selected tax
policies and the committee’s deliberative process for choosing those policies.
Their comments and suggestions proved helpful in shaping the committee’s final
requests to the independent modeling consultants. We are highly indebted for
their assistance. Despite this assistance, the committee remains solely responsible for all modeling decisions.
This report has been reviewed in draft form by individuals chosen for their
diverse perspectives and technical expertise, in accordance with procedures approved by the National Academies’ Report Review Committee. The purpose of
this independent review is to provide candid and critical comments that will
assist the institution in making its published report as sound as possible and to
ensure that the report meets institutional standards for objectivity, evidence, and
responsiveness to the study charge. The review comments and draft manuscript
remain confidential to protect the integrity of the process.
We wish to thank the following individuals for their review of this report:
Amos Avidan, Bechtel Corporation; John Birge, University of Chicago; Steven
Davis, University of California, Irvine; Austen Goolsbee, University of Chicago;
Lawrence Goulder, Stanford University; Russell Lee, Oak Ridge National Laboratory; Bruce McCarl, Texas A&M University; Dave McCurdy, American Gas Association; Gilbert Metcalf, Tufts University; Peter Merrill, Pricewater-
Copyright © National Academy of Sciences. All rights reserved.
Effects of U.S. Tax Policy on Greenhouse Gas Emissions
xi
Preface
houseCoopers LLP; Janet Milne, University of Vermont; William Pizer, Duke
University; Mark Schwartz, PIRA University; Philip Tabas, The Nature Conservancy; Susan Tierney, Analysis Group Inc.; David Weisbach, University of
Chicago; and John Weyant, Stanford University.
Although the reviewers listed above have provided many constructive
comments and suggestions, they were not asked to endorse the conclusions or
recommendations, nor did they see the final draft of the report before its release.
The review of this report was overseen by T.J. Glauthier, TJG Energy Associates, LLC and Charles Manski, Northwestern University. Appointed by the National Academies, they were responsible for making certain that an independent
examination of this report was carried out in accordance with institutional procedures and that all review comments were carefully considered. Responsibility
for the final content of this report rests entirely with the authoring committee
and the institution.
The committee could not have completed its work without the assistance
of the talented and dedicated staff of the National Research Council’s Board on
Science, Technology, and Economic Policy (STEP). Stephen Merrill (director of
STEP) served as study director, assisted by Paul Beaton (STEP) and Aqila
Coulthurst (STEP). The committee is also indebted to Lint Barrage (Yale University), who served as an independent consultant to the committee, providing
assistance with literature reviews, technical advice, and regularly briefing the
committee on the details of relevant topics when requested. Several participants
of the National Academies’ Christine Mirzayan Science and Technology Policy
Fellowship program provided additional scientific and technical assistance:
Christopher Avery, Carrie Chen, Adnan Aslam, Marilyn Waite, and Vincent
Huang. Karin Matchett served as an editor of the final report.
William D. Nordhaus, Chair
Committee on Effects of Provisions
in the Internal Revenue Code on
Greenhouse Gas Emissions
Copyright © National Academy of Sciences. All rights reserved.
Effects of U.S. Tax Policy on Greenhouse Gas Emissions
Copyright © National Academy of Sciences. All rights reserved.
Effects of U.S. Tax Policy on Greenhouse Gas Emissions
Contents
SUMMARY ...............................................................................................................1
1
OVERVIEW AND SCOPE OF THE STUDY ............................................11
2
METHODS FOR EVALUATING TAX POLICY EFFECTS
ON GREENHOUSE GAS EMISSIONS......................................................23
3
ENERGY-RELATED TAX EXPENDITURES ..........................................53
4
ENERGY-RELATED EXCISE TAXES .....................................................81
5
BIOFUELS SUBSIDIES ...............................................................................91
6
GREENHOUSE GAS EMISSIONS AND BROAD-BASED
TAX EXPENDITURES ..............................................................................113
7
SUMMARY OF FINDINGS AND RECOMMENDATIONS
AND USE OF TAX POLICY TO ADDRESS CLIMATE
CHANGE POLICY .....................................................................................135
REFERENCES ......................................................................................................157
APPENDIXES
A
MODELING APPROACHES TO THE EFFECTS OF TAX
POLICY ON GHG EMISSIONS ...............................................................165
B
BIOGRAPHICAL INFORMATION OF COMMITTEE
AND STAFF ................................................................................................175
TABLES AND FIGURES
TABLES
2-1
The 10 Largest Excise Tax Collections for Fiscal Year 2010, 28
xiii
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Effects of U.S. Tax Policy on Greenhouse Gas Emissions
xiv
2-2
2-3
2-4
3-1
3-2a
3-2b
4-1
4-2
5-1
5-2
5-3
5-4
5-5
6-1
6-2
6-3
6-4
6-5
7-1
Contents
The 10 Largest Energy Tax Policies (by dollars of foregone revenue), 30
The 10 Largest Broad-based Tax Expenditures, 31
Provisions Modeled for This Study and Where Discussed in
This Report, 49
Assumptions Underlying NEMS Scenarios, 56
Summary of CO2 Emissions Impacts, 59
Summary of CO2 Emissions Impacts, 60
Summary Impacts of Removing Federal Highway Fuels Taxes
Across Four Models, 83
Summary Appraisal of Studies of Impact of Removing Highway
Fuels Taxes, 88
Key Modeling Assumptions, 97
Removal of Biofuel Provisions – Key Modeling Results, 100
Effect of the RFS2 Mandate on Model Projections for the “Removing
All Biofuel Provisions” Scenario: Key Modeling Results, 105
Alternative Emission Coefficients for Gasoline and Biofuels Based
on Study, 107
Sensitivity of GHG Impacts from Variations in Biofuel GHG Emission
Coefficients: Removing all Provisions Scenario, 107
Energy Intensities of Different Sectors, 116
Effects of Different Revenue Recycling Options, 118
Estimated Effects Relative to Base Case of Eliminating Accelerated
Depreciation Preference on Key Economic Variables, 2010-2035, 118
Estimated Effects of Eliminating the Home Mortgage Interest Deduction
Relative to Base Case, 2010-2035, 127
Estimated Effects Relative to Base Case of Eliminating the Exclusion for
Employer-supplied Health Insurance, 2010-2035, 132
Summary of Modeling Results 1, 150
FIGURES
1-1
3-1
3-2
3-3
3-4
3-5
3-6
3-7
3-8
Schematic representation of how taxes affect GHG emissions
through the market, 18
Total U. S. Electricity Generation, in Terawatt hours (TWh) – Reference
Scenario and No-PTC/ITC Scenario, 64
Changes in Electricity Generation Caused, in Terawatt hours (TWh), by
Removing the PTC/ITC Compared to the Reference Scenario, 65
Changes in Electricity Generating Capacity Caused by Removing
the PTC/ITC Compared to the Reference Scenario, 65
Changes in Non-Hydro Renewable Generation Caused by Removing
the PTC/ITC Compared to the Reference Scenario, 66
U.S. Average Retail Electricity Prices under the Reference Scenario
and the No-PTC/ITC Scenario, 66
PTC/ITC Tax Expenditures – Various Scenarios, 68
Power Sector CO2 Emissions – Four Scenarios, 69
Natural Gas Consumption Under Three Scenarios, 72
Copyright © National Academy of Sciences. All rights reserved.
Effects of U.S. Tax Policy on Greenhouse Gas Emissions
xv
Contents
3-9
3-10
5-1
5-2
5-3
5-4
Natural Gas Prices Under Several Scenarios, 73
Changes in CO2 Emissions under the Cost Depletion Scenario, 75
Effects of biofuel provisions removal on biofuel production levels, 108
Effects of removing the biofuel provisions on total energy
expenditures, 109
Effects of biofuel provisions removal on federal revenue, 109
Effects of biofuel provisions removal on U.S. CO2 emissions, 109
Copyright © National Academy of Sciences. All rights reserved.
Effects of U.S. Tax Policy on Greenhouse Gas Emissions
Copyright © National Academy of Sciences. All rights reserved.
Effects of U.S. Tax Policy on Greenhouse Gas Emissions
Summary
STUDY ORIGINS AND SCOPE
The U.S. Congress charged the National Academies with conducting “a
comprehensive review of the Internal Revenue Code to identify the types of and
specific tax provisions that have the largest effects on carbon and other greenhouse gas emissions and to estimate the magnitude of those effects.” To address
such a broad charge, the National Academies appointed a committee composed
of experts in tax policy, energy and environmental modeling, economics, environmental law, climate science, and related areas.
For scientific background informing the study, the committee relied on the
earlier findings and studies by the National Academies, the U.S. government,
and other research organizations. The committee has relied on earlier reports and
studies to set the boundaries of the economic, environmental, and regulatory
assumptions for the present study. The major economic and environmental assumptions are those developed by the U.S. Energy Information Administration
(EIA) in its annual reports and modeling. Additionally, the committee has relied
upon publicly available data provided by the U.S. Environmental Protection
Agency, which inventories greenhouse gas (GHG) emissions from different
sources in the United States.
The tax system affects emissions primarily through changes in the prices
of inputs and outputs or goods and services. Most of the tax provisions considered in this report relate directly to the production or consumption of different
energy sources. However, there is a substantial set of tax expenditures that we
call “broad-based” that favor certain categories of consumption—among them,
employer-provided health care, owner-occupied housing, and purchase of new
plants and equipment. The committee examined both tax expenditures and excise taxes that could have a significant impact on GHG emissions.
SELECTION OF TAX PROVISIONS AND METHODS OF ANALYSIS
Limited time and other resources compelled the committee to focus its
work. Accordingly, the committee decided to concentrate its attention on four
groups of tax code provisions and some related regulatory policies. Table 2-4
(Chapter 2) lists the tax code provisions examined and their associated revenue
1
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Effects of U.S. Tax Policy on Greenhouse Gas Emissions
2
Effects of U.S. Tax Policy on Greenhouse Gas Emissions
consequences and lists the chapters where the analysis of each provision is discussed.
In the end, the committee analyzed tax provisions that account for 46 percent of all energy-related excise tax revenues as well as those accounting for 71
percent of the calculated revenue loss from the 10 largest energy-related tax expenditures in 2011. As estimated by the Treasury Department, the broad-based
tax expenditures selected account for about one-third of the cost of all tax expenditures that year.
REVIEW OF EXISTING RESEARCH
The next step was to review existing research on the impact of the tax
code on greenhouse gas emissions. This was undertaken by the committee, the
staff, and a team of consultants hired specifically for this study.
The committee found that a substantial body of research relating tax policy to greenhouse gas emissions is limited to two areas: highway taxes and emissions taxes. Studies of the impact of highway motor fuels taxes, particularly
those on gasoline, go back decades. However, most of these studies do not incorporate important features of the U.S. tax or other regulatory mandates, such
as biofuels taxes and subsidies, or Corporate Average Fuel Economy (CAFE)
standards, and very few examine the impacts on GHG emissions. Moreover,
most studies do not incorporate the GHG impacts coming from linkages to the
rest of the economy.
A second set of studies examines the efficiency and effectiveness of taxes
on GHG emissions. These studies incorporate both empirical studies as well as
model simulations. Such studies include both individual models and model
comparison studies, and consider taxes for the United States as well as for other
countries.
In view of the insufficiency of existing research and need to use a unified
set of baseline assumptions to compare effects of different tax provisions, the
committee concluded that it would be necessary to commission new economic
modeling studies capable of estimating these effects on investment decisions,
their effects in turn on energy production and consumption, and the resulting
effects on emissions. Chapter 2 describes in detail the models and the rationale
for their selection.
The models used in the analysis have different structures and assumptions
(as described in Appendix A), and most are limited in their capacity. For example, some were unable to analyze global as well as U.S. emissions, and only one
could analyze the general equilibrium or economy-wide impacts of tax policies.
For these reasons, readers should regard the numerical results as suggestive rather than definitive.
For each of the models, the committee specified a set of baseline assumptions on gross domestic product (GDP) growth, oil prices, and the regulatory
environment, as well as the tax system. The rate of U.S. GDP growth and path
Copyright © National Academy of Sciences. All rights reserved.
Effects of U.S. Tax Policy on Greenhouse Gas Emissions
3
Summary
of world oil prices are those used in the Energy Information Administration’s
baseline, the Annual Energy Outlook for 2011 (AEO11), used widely in the energy and economic modeling community. The tax code and regulatory environment of 2011 was chosen by the committee as the basis of its analysis, in part
because these are also included in the AEO11 baseline. Tax code provisions that
have expired or are scheduled to expire are assumed to be extended indefinitely
in our reference scenario. The committee took regulations in place in 2011 as the
regulatory baseline. The time period of the study was generally 2010–2035. To
estimate the effects on emissions of particular tax code provisions, the committee instructed the modeling consultants to run scenarios where they removed
each of the taxes or tax preferences from the baseline one at a time, keeping all
other policies, assumptions, and taxes unchanged. One model, which focused on
agricultural markets, is designed to represent changes in global GHG emissions.
The others—two focused on the energy sector and one focused economy-wide—
can estimate only domestic U.S. emissions. Nevertheless, the first-order tax policy effects of principal interest to Congress are on U.S. GHG emissions.1
PROVISION-BY-PROVISION FINDINGS
Production Tax Credits for Renewable Electricity
The production and investment tax credits for renewable electricity provide a tax credit of 2.0 cents per kWh of power for the first 10 years of electricity production generated from qualifying renewable sources (primarily solar,
wind, and biomass) or a credit equal to 30 percent of investment in qualifying
equipment. These credits lower the cost of electricity generated from renewable
resources, encouraging their substitution for fossil fuels and thereby tend to reduce GHG emissions. The committee’s analysis indicates that these provisions
do lower CO2 emissions under the macroeconomic conditions in the AEO11
reference and high GDP growth cases, but the impact is small, about 0.3 percent
of U.S. CO2 in the reference case.
Oil and Gas Depletion Allowances
The percentage depletion allowance permits independent (nonintegrated)
domestic producers of oil and gas to deduct a percentage of gross income associated with sale of the commodity up to certain limits. The depletion rate is set at
15 percent of gross revenues associated with production. In modeling completed
1
This original modeling was undertaken by four independent consultants. Each of
those consultants produced reports to the committee detailing the results of their modeling efforts. Readers can download those reports at the National Academies Press website,
http://www.nap.edu/catalog.php?record_id=18299.
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