The realistic and the optimal ways to overhaul energy taxes

Back in December, Max Baucus, the chairman of the Senate Finance Committee, came out with a pretty bold proposal to simplify America’s energy taxes, and to focus them on a simple goal: that the US should emit less carbon. That should be a pretty easy thing to do, in theory: you just raise taxes on the more carbon-intensive energy sources, while not raising them, or even cutting them, on sustainable energy sources. Except that’s not the way the US tax code works. America, it turns out, doesn’t really tax energy at all: instead, it subsidizes energy. And the amounts of money involved are very large:

Under current law, there are 42 different energy tax incentives, including more than a dozen preferences for fossil fuels, ten different incentives for renewable fuels and alternative vehicles, and six different credits for clean electricity. Of the 42 different energy incentives, 25 are temporary and expire every year or two, and the credits for clean electricity alone have been adjusted 14 times since 1978 – an average of every two and a half years. If Congress continues to extend current incentives, they will cost nearly $150 billion over 10 years.

As a result, Baucus can’t simply tweak energy taxes; instead, he has to tweak energy subsidies. His proposal is a good one: he essentially consolidates all those 42 existing subsidies into two new ones — one for electricity, and one for transportation fuel. In both cases, tax credits get handed out in direct proportion to how clean the facility is. Once carbon emissions have reached 75% of their current level, the subsidy phases out.

Charles Komanoff, of the Carbon Tax Center, responded to Baucus’s discussion draft last month, in testimony to his committee. Komanoff’s paper is conceptually simple: he asks what the outcome would be if instead of subsidizing clean energy, the government decided to go ahead and tax carbon emissions directly.

via The realistic and the optimal ways to overhaul energy taxes | Felix Salmon.

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