Energy Tax Policy: Issues in the 112th Congress
Congressional research reportSep 24, 2012
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Energy Tax Policy: Issues in the 112th Congress
Molly F. Sherlock
Specialist in Public Finance
Margot L. Crandall-Hollick
Analyst in Public Finance
September 24, 2012
Congressional Research Service
7-5700
www.crs.gov
R41769
CRS Report for Congress
Prepared for Members and Committees of Congress
Energy Tax Policy: Issues in the 112th Congress
Summary
Energy tax policy has been actively debated in the 112th Congress. Much of this debate has
centered around proposals in the President’s FY2012 and FY2013 budgets, proposals to eliminate
certain tax preferences, and proposals to extend other expired or expiring provisions. The Obama
Administration has proposed a number of changes in energy tax policy with the intent of
correcting perceived distortions in the market and encouraging conservation and the use of
renewable energy. Specifically, the Administration seeks to eliminate a number of existing tax
incentives for fossil fuels. Further, the Administration has proposed expanding select incentives
for commercial-building energy efficiency, extending incentives to promote manufacturing of
advanced energy technologies, extending certain renewable energy incentives, and modifying
incentives for alternative technology vehicles.
In early 2012, Congress considered the possible extension of certain temporary energy tax
provisions, which had either expired at the end of 2011 or were scheduled to expire in coming
years (see S.Amdt. 1812 to S. 1813 and S. 2204). S. 2204 would pay for the extension of certain
expired and expiring provisions by eliminating certain tax incentives for oil and gas. Many of the
provision that expired at the end of 2011 were previously granted a temporary extension as part of
the Tax Relief, Unemployment Reauthorization, and Job Creation Act (P.L. 111-312), enacted in
December 2010. Many of these provisions would be extended by “tax extender” legislation
introduced in the Senate, the Family and Business Tax Cut Certainty Act of 2012 (S. 3521).
Energy tax policy involves the use of one of the government’s main fiscal instruments, taxes
(both as an incentive and as a disincentive) to alter the allocation or configuration of energy
resources and their use. In theory, energy taxes and subsidies, like tax policy instruments in
general, are intended either to correct a problem or distortion in the energy markets or to achieve
some economic (efficiency, equity, or even macroeconomic) objective. In practice, however,
energy tax policy in the United States is made in a political setting, determined by fiscal dictates
and the views and interests of the key players in this setting, including policymakers, special
interest groups, and academic scholars. As a result, enacted tax policy embodies compromises
between economic and political goals, which could either mitigate or compound existing
distortions.
The economic rationale for government intervention in energy markets is commonly based on the
government’s perceived ability to correct for market failures. Market failures, such as
externalities, principal-agent problems, and informational asymmetries, result in an economically
inefficient allocation of resources—in which society does not maximize well-being. To correct for
these market failures governments can utilize several policy options, including taxes, subsidies,
and regulation, in an effort to achieve policy goals.
Current energy policy reflects efforts to achieve both current and past policy objectives. Recent
legislative efforts have primarily focused on renewable energy production and conservation to
address environmental concerns. In contrast, past efforts attempted to reduce reliance on foreign
energy sources through increased domestic production of fossil fuels. Legislation enacted in the
111th Congress focusing on encouraging renewable energy production and conservation reduces
reliance on imported, foreign oil, while also addressing environmental concerns by reducing the
use of fossil fuels. Favorable tax preferences given to domestic fossil fuel energy sources also
promote domestic energy production, reducing the demand for imported oil.
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Energy Tax Policy: Issues in the 112th Congress
Contents
Introduction...................................................................................................................................... 1
Policy Intervention in Energy Markets ............................................................................................ 2
Rationale for Intervention in Energy Markets ........................................................................... 2
Externalities......................................................................................................................... 3
Principal-Agent and Informational Inefficiencies ............................................................... 3
National Security................................................................................................................. 4
Potential Interventions in Energy Markets ................................................................................ 5
Taxes as a User Charge.............................................................................................................. 7
Current Status of U.S. Energy Tax Policy........................................................................................ 7
Fossil Fuels.............................................................................................................................. 15
Renewable Energy Resources ................................................................................................. 16
Energy Efficiency and Conservation ....................................................................................... 17
Alternative Technology Vehicle Credits .................................................................................. 18
Other Energy Tax Provisions................................................................................................... 18
Energy Tax Issues in the 112th Congress........................................................................................ 19
The President’s Fiscal Year 2013 Budget Proposal ................................................................. 19
Expired and Expiring Energy Tax Provisions.......................................................................... 20
The Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (P.L.
111-312)................................................................................................................................ 23
The American Recovery and Reinvestment Act of 2009 (P.L. 111-5)..................................... 23
Carbon Tax / Climate Change.................................................................................................. 24
Tables
Table 1. Energy Tax Provisions ....................................................................................................... 8
Table 2. Energy Tax Provisions Expiring at the End of 2011 ........................................................ 21
Appendixes
Appendix. Energy Tax Legislation Prior to the 111th Congress..................................................... 26
Contacts
Author Contact Information........................................................................................................... 28
Acknowledgments ......................................................................................................................... 28
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Energy Tax Policy: Issues in the 112th Congress
Introduction
Energy tax policy involves the use of one of the government’s main fiscal instruments, taxes
(both as an incentive and as a disincentive) to alter the allocation or configuration of energy
resources and their use. In theory, energy taxes and subsidies, like tax policy instruments in
general, are intended either to correct a problem or distortion in the energy markets or to achieve
some economic (efficiency, equity, or even macroeconomic) objective. In practice, however,
energy tax policy in the United States is made in a political setting, determined by fiscal dictates
and the views and interests of the key players in this setting, including policymakers, special
interest groups, and academic scholars. As a result, enacted tax policy embodies compromises
between economic and political goals, which could either mitigate or compound existing
distortions.
U.S energy tax policy as it presently stands aims to address concerns regarding the environment
as well as those surrounding national security. Incentives promoting renewable energy
production, energy efficiency and conservation, and alternative technology vehicles address both
environmental and national security concerns. Tax incentives for the domestic production of fossil
fuels also promote energy security by attempting to reduce the nation’s reliance on foreign,
imported energy sources.
The President’s FY2012 and FY2013 budgets provide one starting point for evaluating energy tax
policy in the 112th Congress. These budgets contain proposals that would scale back existing tax
incentives for fossil fuels, enhance tax incentives for energy efficiency in commercial buildings,
extend expired and expiring tax incentives for renewables, and use tax credits to promote
advanced energy manufacturing.1
The 112th Congress may take a closer look at a number of energy tax incentives, and pare back
energy-related tax expenditures, as part of the broader deficit reduction strategy. The 112th
Congress may also consider acting to extend a number of expired and expiring energy tax
provisions. A number of energy-related tax incentives expired at the end of 2011.2 A number of
expiring incentives would be extended in the Family and Business Tax Cut Certainty Act of 2012
(S. 3521).
The primary vehicle for energy tax legislation in the 111th Congress was the American Recovery
and Reinvestment Act of 2009 (ARRA; P.L. 111-5). This legislation contained a number of
provisions that expanded and extended incentives for renewable energy, energy conservation, and
alternative technology vehicles. Many of these and other energy provisions were extended for an
additional year through the end of 2011 by the Tax Relief, Unemployment Reauthorization, and
Job Creation Act of 2010 (P.L. 111-312).
1
For more information, Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2012
Revenue Proposals, Washington, DC, February 2011, available at http://www.treasury.gov/resource-center/tax-policy/
Pages/Greenbook.aspx; and Department of the Treasury, General Explanations of the Administration’s Fiscal Year
2013 Revenue Proposals, Washington, DC, February 2012, available at http://www.treasury.gov/resource-center/taxpolicy/Pages/Greenbook.aspx.
2
For more information on expired tax provisions and tax extenders, see CRS Report R42105, Tax Provisions Expiring
in 2011 and “Tax Extenders”, by Molly F. Sherlock.
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The 111th Congress also considered comprehensive climate legislation. On June 26, 2009, the
House passed the American Clean Energy and Security Act of 2009 (H.R. 2454), that would have
established a greenhouse gas emissions cap-and-trade program. At the start of the 112th Congress,
the focus of energy tax policy appears to have shifted away from comprehensive climate
legislation.
The idea of applying tax policy instruments to energy markets is not new, but until the 1970s,
energy tax policy had been little used, except to promote domestic fossil fuel production.
Recurrent energy-related problems since the 1970s—oil embargoes, oil price and supply shocks,
wide petroleum price variations and price spikes, large geographical price disparities, tight energy
supplies, and rising oil import dependence, as well as increased concern for the environment—
have caused policymakers to look toward energy taxes and subsidies with greater frequency. The
direction of U.S. energy tax policy has changed several times since the 1970s. At the start of the
112th Congress, energy tax policy appears to be designed to encourage energy efficiency and
renewable energy production while continuing to promote U.S. energy security.
The economic rationale for interventions in energy markets helps inform the debate surrounding
energy tax policy. This report begins by providing background on the economic rationale for
energy market interventions, highlighting various market failures. After identifying possible
market failures in the production and consumption of energy, possible interventions are discussed.
The report concludes with an analysis of the current status of energy tax policy.
The Appendix of this report provides a brief summary of energy tax policies enacted in the 108th,
109th, and 110th Congresses.
Policy Intervention in Energy Markets
The primary goal of taxes in the U.S. economy is to raise revenues. There are times, however,
when tax policy can be used to achieve other goals. These include the use of tax policy as an
economic stimulus (for example the “Making Work Pay” tax credit included in ARRA which
provided a tax credit of up to $400 to many American workers) or to achieve social objectives
(for example, encouraging greater labor force participation by subsidizing low-wage work with
the Earned Income Tax Credit or EITC) . Tax policy can also be used to correct for market
failures (for example, the under or over supply of a good), which without intervention result in
market inefficiencies. There are a number of market failures surrounding the production and
consumption of energy. Tax policy, as it relates to energy, can be used to address these market
failures.
Rationale for Intervention in Energy Markets
There are a variety of circumstances in which government intervention in energy markets may
improve market outcomes. Generally, government intervention has the potential to improve
market outcomes when there are likely to be market failures. Externalities represent one of the
most important market failures in energy’s production and consumption. Market failures in
energy markets also arise from principal-agent problems and information failures. Concerns
regarding national security are used to rationalize intervention in energy markets as well.
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Externalities
An externality is a spillover from an economic transaction to a third party, one not directly
involved in the transaction itself. Externalities are often present in energy markets as both the
production and consumption of energy often involve external costs (or benefits) not taken into
account by those involved in the energy-related transaction. Instead, these externalities are
imposed on an unaffiliated third party. In the presence of externalities, the market outcome will
likely lead to an economically inefficient level of production or consumption.
When externalities are present, markets fail to establish energy prices equal to the full cost to
society of supplying the good. The result is a system where price signals are inaccurate, such that
the socially optimal level of output, or allocative efficiency, is not achieved. Economic theory
suggests that a tax be imposed on activities associated with external costs, while activities
associated with external benefits be subsidized—in order to equate the social and private
marginal costs. These taxes or subsidies will result in a more efficient allocation of resources.
Many energy production and consumption activities result in negative externalities, perhaps the
most recognized being environmental damage. Air pollution results from mining activities as well
as from the transportation, refining, and industrial and consumer use of oil, gas, and coal.
Industrial activity can also produce effluents that contaminate water supplies and lead to other
damages to the land. These environmental damages can lead to lung damage and a variety of
other health problems. The use of fossil fuels, both in the production of energy (i.e., coal-fired
power plants) and at the consumer level (i.e., using gasoline to power automobiles), and the
associated greenhouse gas emissions have contributed to global climate change.3
There may also be market failures associated with external benefits stemming from the process of
learning-by-doing. Learning-by-doing refers to the tendency for production costs to decline with
experience. As firms become more experienced in the manufacturing and use of energy-efficient
technologies their knowledge may spill over to other firms without compensation. In energy
markets, early adopters of energy-efficient technologies and practices may not be fully
compensated for the value of the knowledge they generate.4
Principal-Agent and Informational Inefficiencies
Market failures in energy use may also arise due to the principal-agent problem.5 Generally, the
principal-agent problem exists when one party, the agent, undertakes activities on the behalf of
another party, the principal. When the incentives of the agent differ from those of the principal,
the agent’s activities are not undertaken in a way that is consistent with the principal’s best
interest. The result is an inefficient outcome. In energy markets, the principal-agent problem
commonly arises when one party is responsible for making equipment purchasing choices while
3
See CRS Report RL34513, Climate Change: Current Issues and Policy Tools, by Jane A. Leggett for an overview of
climate change issues and potential policy remedies.
4
Kenneth Gillingham, Richard G. Newell, and Karen Palmer, Energy Efficiency Economics and Policy, Resources for
the Future, RFF DP 09-13, Washington, DC, April 2009.
5
The extent of principal-agent problems in residential energy use is quantified in Scott Murtishaw and Jayant Sathaye,
Quantifying the Effect of the Principal-Agent Problem on U.S. Residential Energy Use, Lawrence Berkeley National
Labratory, August 12, 2006, http://www.escholarship.org/uc/item/6f14t11t.
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another party is responsible for paying the energy costs, which are related to the efficiency level
of the purchased equipment.
For residential rental properties, the incentives for the landlords and tenants surrounding the
adoption of energy-savings practices are often not aligned, demonstrating the principal-agent
problem. Landlords will tend to under-invest in energy-saving technologies for rental housing
when the benefits from such investments accrue to tenants (i.e., tenants are responsible for paying
their own utilities) and the landlord does not believe the costs of installing energy-saving devices
can be recouped via higher rents. Tenants do not have an incentive to invest in energy-savings
technologies in rental units when their expected tenure in a specific property is relatively short,
and they will not have enough time to reap the full benefits of the energy conserving investments.
There is also evidence that when utilities are included in the rent, tenants do not engage in energy
conserving behaviors. On the other hand, when tenants pay utilities on their own, energy-saving
practices are more frequently adopted.6 The implication is that inefficient energy use by tenants in
apartments where utilities are included as part of the rent would offset energy-saving investments
made by landlords; consequently, landlords under-invest in energy efficiency. In general, the
under-investment in energy conservation measures in rental housing provides economic rationale
for intervention.
In another example, the incentives of homebuilders and homebuyers may not be aligned.
Consequently, the principal-agent problem may result in an inefficient utilization of energyefficient products in newly constructed homes. Homebuilders may have an incentive to install
relatively low efficiency products to keep the cost of construction down, if they do not believe
that the cost of installing energy-efficient products will be recovered upon sale of the property.
The value of installing energy-efficient devices may not be recoverable, if builders are not able to
effectively communicate the value of energy-efficient devices once installed. Further, since
homebuilders are not able to observe the energy use level of prospective buyers they may not be
able to choose the products that best match the use patterns of the ultimate energy consumer. The
result may be less energy efficiency in new homes.
There are also informational problems that may lead to underinvestment in energy-efficient
technologies. For example, homeowners may not know the precise payback or rate of return of a
specific energy-efficient device. This may explain the so-called “energy paradox”—the empirical
observation that consumers require an abnormally high rate of return to undertake energyefficiency investments.7
National Security
Preserving national security is another often-cited rationale for intervention in energy markets.
Presently, much of the petroleum consumed in the United States is derived from foreign sources.
There are potentially a number of external costs associated with petroleum importation, especially
when imported from unstable countries and regions. First, a high level of reliance on imported oil
may contribute to a weakened system of national defense or contribute to military vulnerability in
the event of an oil embargo or other supply disruption. Second, there are costs to allocating more
6
Arik Levinson and Scott Niemann, “Energy Use by Apartment Tenants when Landlords Pay for Utilities,” Resource
and Energy Economics, vol. 26 (2004), pp. 51-75.
7
Gilbert E. Metcalf, “Using Tax Expenditures to Achieve Energy Policy Goals,” American Economic Review, vol. 98,
no. 2 (2008), pp. 90-94.
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resources to national defense than necessary when relying on high levels of imported oil.
Specifically, there is an opportunity cost associated with resources allocated to national defense,
as such resources are not available for other domestic policy initiatives and programs. To the
extent that petroleum importers fail to take these external costs into account, there is market
failure.
In addition, the economic well-being and economic security of the nation depends on having
stable energy sources. There are economic costs associated with unstable energy supplies.
Specifically, increasing unemployment and inflation may follow oil price spikes.8
Potential Interventions in Energy Markets
When there are negative externalities associated with an activity, correcting the economic
distortion with a tax, if done correctly, can improve economic efficiency.9 Conversely, when there
are positive externalities associated with an activity, a subsidy can improve economic efficiency.
The tax (subsidy) should be set equal to the monetary value of the damages (benefits) to third
parties imposed by the activity.10 The tax serves to increase the price of the activity, and reduce
the equilibrium quantity of the activity, while a subsidy reduces the price, increasing the
equilibrium quantity of the activity.
The production and consumption of fossil fuel energy can have negative externalities via
detrimental environmental impacts. While multiple policy options to address this externality
exist, economists tend to favor an emissions tax to address this externality because of such a tax’s
efficiency advantage.11 In recent years, proponents of greenhouse gas controls favored a cap and
trade policy as discussed below.
An alternative approach to reducing the use of fossil fuels has been to subsidize energy
production from alternative energy sources. There are concerns, however, that using subsidies to
stimulate demand for alternative fuels, as opposed to fossil fuels, may not be economically
efficient. First, subsidies reduce the average cost of energy, and as the average cost of energy
falls, the quantity of energy demanded increases, countering energy conservation initiatives.12
Second, while the subsidy is intended to enhance economic efficiency, subsidies may be
inefficient to the extent they are funded using distortionary taxes.13 Hence, the more economically
efficient alternative may be to place a tax on the undesirable activity.
8
See James D. Hamilton, Causes and Consequences of the Oil Shock of 2007-08, National Bureau of Economic
Research, Working Paper 15002, Cambridge, MA, May 2009. Hamilton evaluates the role of the oil shock of 20072008 in the succeeding economic recession.
9
There are non-tax options for addressing energy market failures such as regulation and private sector solutions. These
options are beyond the scope of this report.
10
Taxes imposed to correct for negative externalities are also known as Pigovian taxes, named after the economist who
developed the concept, Arthur Cecil Pigou.
11
See CRS Report R40242, Carbon Tax and Greenhouse Gas Control: Options and Considerations for Congress, by
Jonathan L. Ramseur and Larry Parker for a discussion of the relative merits and demerits of carbon taxes and cap-andtrade systems.
12
Gilbert E. Metcalf, Tax Policies for Low-Carbon Technologies, National Bureau of Economic Research, Working
Paper 15054, Cambridge, MA, June 2009.
13
Gilbert E. Metcalf, “Federal Tax Policy towards Energy,” Tax Policy and the Economy, vol. 21 (2007), pp. 145-184.
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Other energy-related activities may have positive externalities. There is the potential for learningby-doing from early adopters of energy-efficient technologies, indicating that there may be
positive external effects associated with these activities. For this reason, subsidies given to early
adopters may enhance economic efficiency. Further, positive externalities are associated with
R&D activities that lead directly to technological innovations.14 In addition to budgeted spending
on R&D, the tax code provides incentives for firms to engage in energy R&D (for example, the
energy research credit (IRC §41)).15
When principal-agent problems lead to a market failure, economically efficient corrective
measures would be those that increase the equilibrium quantity of the underprovided good. The
market for energy efficient technologies is one example of this type of market failure. Currently,
the definition of a taxpayer’s gross income excludes any subsidy provided by a public utility to a
consumer for the purchase or installation of energy-saving devices (see IRC §136). This
exclusion subsidizes energy-efficient devices. This exclusion does not specifically target the
inefficiency in rental housing created by the principal-agent problem, since the exclusion applies
to both owner- and non-owner-occupied property. Nonetheless, the exclusion may serve to
ameliorate some of the market failure in rental property.
There are also various options for market intervention to address the informational problem
associated with energy consumption and energy-efficient technologies. One option would be an
information-based solution, such as energy-efficiency labeling and education and awareness
campaigns. Alternatively, a tax-incentive-based approach—such as a credit or deduction for the
purchase of energy-efficient devices—could be used to address the market inefficiency. Given
that this market failure is an informational problem, it might be more efficient to pursue
information-based solutions (such as energy-efficiency labeling like the U.S. Environmental
Protection Agency’s Energy Star program).
Finally, there are questions regarding the most efficient and effective mode of intervention to
address the negative external costs, specifically national and economic security concerns,
associated with the consumption of imported oil. One option would be to impose a tax to correct
the distortion. There are two problems with imposing such a tax. First, a tax on imported oil is
likely to violate trade agreements. This has led policymakers to pursue policies that subsidize
domestic petroleum production.16 The second problem is that oil is a commodity priced on world
markets. The United States producing oil for its own use does not necessarily insulate consumers
from global fluctuations in oil prices. Additionally, to the extent that oil price fluctuations impact
export prices in other parts of the world, such as Europe and China, the United States is still likely
to experience economic impacts from oil price fluctuations.17
14
It should be noted that all R&D, not just R&D related to energy, is likely to have positive externalities. There is no
reason to believe that energy R&D has positive externalities that differ from R&D in general, and hence no reason to
believe that energy R&D deserves a differential subsidy.
15
See CRS Report RL31181, Research Tax Credit: Current Law, Legislation in the 112th Congress, and Policy Issues,
by Gary Guenther for an overview of the research tax credit, an umbrella credit under which the energy research credit
falls.
16
Subsidizing domestic production is also problematic in that such policies conflict with environmental objectives.
17
Gilbert E. Metcalf, “Using Tax Expenditures to Achieve Energy Policy Goals,” American Economic Review, vol. 98,
no. 2 (2008), pp. 90-94.
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Taxes as a User Charge
Energy taxes may be employed as user charges for a public good or a quasi-public good.18 In the
United States, non-toll highways and highway infrastructure have the public good property of
non-excludability. Highways are not likely to be provided by the market because public goods
and quasi-public goods are susceptible to the free-rider problem.19 If the private market fails to
provide a public good, like highways, then government intervention via provision of highways
can enhance economic efficiency. The federal excise tax on gasoline is often rationalized as a user
fee for the federal highway system.20 For the tax to be efficient and equitable, it would charge
individuals in proportion to their benefit from the public good (the highway system). In practice,
gas taxes do not reflect the cost to the user but instead depend on the fuel efficiency of a specific
vehicle.21 Furthermore, some of the revenues collected from the federal gas tax serve to subsidize
public transportation, undermining the view of the federal gas tax as a highway user fee.
Current Status of U.S. Energy Tax Policy
Current U.S. energy tax policy appears to be aimed at stemming growth in U.S. dependence on
imported oil, especially from volatile regions of the world.22 This reflects the belief that national
security is linked to energy security. Many of the specific policies currently in place are the result
of past legislative action and initiatives. The short-run policies aim to increase the domestic
energy production of fossil fuels, while the long-run policies appear to be aimed at promoting
energy conservation and the use of renewable energy sources. Recently, policies have been
adopted that support the transportation sector, with tax incentives for hybrid and plug-in electric
vehicles and alternative fuels. Table 1 contains a current list of energy-related tax expenditures
and other energy tax provisions.23
18
Public goods are those that are both non-rival (one person’s consumption of the good does not diminish another’s
ability to consume that same good) and non-excludable (it is either impossible or prohibitively expensive to prevent
consumption of the good once the good has been provided). Quasi-public goods are those that are either non-rival or
non-excludable.
19
The free-rider problem is the consequence of non-excludability. If all individuals are free to use a good once that
good has been provided, no single individual has an incentive to be the provider of that good. Instead, the individual
will wait for the good to be provided by another party. In the absence of government intervention, the market may fail
to provide goods that are subject to the free-rider problem.
20
For background information on the federal gas tax see CRS Report R40808, The Role of Federal Gasoline Excise
Taxes in Public Policy, by Robert Pirog.
21
Another argument is that the federal gas tax should be viewed as correcting the externalities associated with gasolinepowered vehicles. Even if the gas tax were to be viewed as one correcting for emissions, it would make more economic
sense to tax emissions rather than just those coming from the burning of fossil fuels by motor vehicles.
22
For information related to recent international events, see CRS Report R41632, Implications of Egypt’s Turmoil on
Global Oil and Natural Gas Supply, by Michael Ratner and CRS Report R41683, Middle East and North Africa
Unrest: Implications for Oil and Natural Gas Markets, by Michael Ratner.
23
Tax expenditures are government revenue losses attributable to tax provisions that allow for special exclusions,
exemptions, or deductions from income or provisions that provide special tax credits, preferential tax rates, of defer tax
liability. Technically, excise tax credits are not considered tax expenditures, since tax expenditures refer only to
provisions related to income tax liability.
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Table 1. Energy Tax Provisions
(billions of dollars)
Tax Provision
Description
Cost 20112015
Expiration
Date
I.R.C.
Section
Fossil Fuels
Expensing of percentage over cost
depletiona
Firms that extract oil or gas are permitted to deduct 15% of
sales (up to 25% for marginal wells depending on oil prices) to
recover their capital investment in a mineral reserve.
$5.5
none
611, 612,
613, 613A,
291
Expensing of exploration and
development costs
Firms engaged in the exploration and development of oil, gas,
or geothermal properties have the option of expensing
(deducting in the year paid or incurred) rather than capitalizing
(i.e., recovering such costs through depletion or depreciation)
certain intangible drilling and development costs (IDCs).
$4.4
none
263(c),
291, 616617,
57(a)(2),
59(e), 1254
Amortization of G&G expenditures
associated with oil and gas exploration
Under the Modified Accelerated Cost Recovery System
(MACRS), the cost of selected types of geological and
geophysical property is depreciated over 2 years for
independent producers.
$0.6
none
167(h)
Coal Production Creditsa
A $6.27-per-ton production credit for refined coal used to
produce steam, or a $2.20 per-ton production credit (all
adjusted for inflation from 1992) for coal reserves owned by
an Indian tribe.
$0.2
12/31/2011
(refined coal
excluding steel
industry fuel)
45
12/31/2012
(Indian coal)
Credits for investing in clean coal
facilities
CRS-8
Tax credit of 20% of investment for integrated gasification
combined cycle (IGCC) systems and 15% for other advanced
coal technology credit allocations made under the Energy
Policy Act of 2005 (P.L. 109-58). 30% credit for IGCC and
other advanced coal technology credit allocations under the
Energy Improvement and Extension Act of 2008 (P.L. 111343).
$1.0
credit allocation
limit
48A, 48B
Energy Tax Policy: Issues in the 112th Congress
Tax Provision
Description
Amortization of air and pollution control
facilities
Allows the pre-1976 5-year amortization period for
investments in pollution control equipment for coal-fired
electric generation plants available to those plants placed in
service on or after January 1, 1976. The 5-year amortization
incentive for pre-1976 plants applies only to pollution control
equipment with a useful life of 15 years or less. In that case
100% of the cost can be amortized over five years. If the
property or equipment has a useful life greater than 15 years,
then the proportion of the costs that can be amortized over
five years is less than 100%.
Cost 20112015
Expiration
Date
I.R.C.
Section
$0.8
none
169
Renewable Energy Resources
Credits for electricity production from
renewable resources (“PTC” or
“production tax credit”)b
Tax credit of 2.2¢/kWh for electricity produced from wind,
closed-loop biomass, and geothermal energy. Tax credit of
1.1¢/kWh for electricity produced from open-loop biomass,
solar, small irrigation, landfill gas, trash combustion, qualified
hydropower, marine and hydrokinetic sources. The tax credit
is available for 10 years after the date the facility is placed in
service.
$9.1
Property must
be placed in
service by
12/31/2013
(12/31/2012 for
wind)
45
Energy credit (“ITC” or “investment tax
credit”)b
Tax credit equal to 10% of investment in energy production
using geothermal, microturbine, or combined heat and power
methods. The tax credit is equal to 30% of investment in
energy production using solar electric, solar hot water, fuel
cell or small wind methods.
$2.5
none
(geothermal
excluding
geothermal heat
pumps)
48
12/31/2016
(other
technologies;
solar has
permanent 10%
credit after
2016)
Section 1603 grants in lieu of tax credits
CRS-9
Section 1603 allows taxpayers eligible for the PTC and ITC to
receive a one-time cash grant in lieu of tax credits. Eligible
facilities may qualify for a grant equal to 10% or 30%,
depending on technology type, of a qualifying project’s eligible
cost basis.
$15.9
Under
construction by
12/31/2011.
Placed-in-service
deadline
conforms with
PTC or ITC.
45, 48
Energy Tax Policy: Issues in the 112th Congress
Tax Provision
CRS-10
Description
Cost 20112015
Expiration
Date
I.R.C.
Section
Residential energy-efficient property
credit
Tax credit for 30% of the cost of the purchase of solar electric
property, solar water heating property, geothermal heat pump
property, or small wind energy property. Fuel cell power
plants receive 30% credit, limited to $500 for each 0.5 kilowatt
of capacity.
$0.9
12/31/2016
25D
Five-year cost recovery of certain energy
property
Accelerated depreciation allowances are provided under the
modified accelerated cost recovery system (MARCs) for
investments in certain energy property. Specifically, certain
solar, wind, geothermal, fuel cell, combined heat and power
(CHP), microturbine and biomass property has a five year
recovery period. Cellulosic biofuel plant property is allowed an
additional first-year depreciation deduction equal to 50% of
the property’s adjusted basis.
$1.1
12/31/2012
(placed in
service date for
cellulosic biofuel
property)
168
Credits for holders of clean renewable
energy bonds
Provides a tax credit for the holder of the bond against its
income tax. Clean Renewable Energy Bonds (“CREBs”) are
subject to a volume cap of $1.2 billion with a credit rate set to
allow the bond to be issued at par and without interest. New
Clean Renewable Energy Bonds (“New CREBs”) are subject to
a volume cap of $2.4 billion with a credit rate set at 70% of
what would permit the bond to be issued at par and without
interest.
$0.4
Credit for alcohol fuels, biodiesel, and
alternative fuelsa
Coordinated income and excise tax credits. Ethanol tax credit
generally 45¢ per gallon (extra 10¢ for small producers);
alcohol tax credit generally 60¢ per gallon for alcohol other
than ethanol; $1 per gallon for biodiesel, agri-biodiesel, and
renewable diesel (extra 10¢ for small producers of agribiodiesel); alternative fuels generally 50¢ per gallon; cellulosic
biofuels generally $1.01 per gallon. Passage of various
legislation in the 111th Congress made black liquor ineligible
for both the cellulosic biofuel producer credit and the
alternative fuels tax credit. Depending on the specific
incentive, tax credits go to fuel producers and/or blenders.
$11.8 (ii)
None
(other
technologies)
volume limited
(all authorized
CREB and new
CREB funds have
been allocated)
54, 54C
12/31/2011
(except for
cellulosic
biofuels
production
credit)
40, 40A,
6426,
6427(e)
12/31/2012
(cellulosic
biofuels credit)
Energy Tax Policy: Issues in the 112th Congress
Tax Provision
Advanced energy manufacturing tax
credit
Description
30% tax credit for qualified investments in advanced energy
property. A total of $2.3 billion was allocated for advanced
energy property investment tax credits, which were
competitively awarded by the Department of Energy (DOE)
and the Treasury.
Cost 20112015
Expiration
Date
I.R.C.
Section
$1.4
Capped (all
available credits
were allocated
in the first
allocation round
which ended
10/16/2009)
48C
Energy Efficiency and Conservation
CRS-11
Credit for nonbusiness energy propertya
Tax credit for 10% of the amount paid for qualified energyefficiency improvements and expenditures for residential
energy property including qualifying improvements to the
building’s envelope, the HVAC system, furnaces, or boilers.
Credit limited to $500. This credit replaces the 30% credit, up
to $1,500, that was available during 2009 and 2010.
$2.8
12/31/2011
25C
Deduction for expenditures on energyefficient commercial property
Tax deduction for the cost of building envelope components,
heating cooling systems, and lighting. The deduction is limited
to $1.80 per square foot.
$0.9
12/31/2013
179D
Exclusion of energy conservation
subsidies provided by public utilities
Subsidies are not taxable as income.
$0.1
none
136
Energy-efficient new home credita
Manufacturers of manufactured homes may claim $1,000 credit
for building homes 30% more efficient than the standard;
Contractors may claim $2,000 credit for building homes 50%
more efficient than the standard.
$0.1
12/31/2011
45L
Credit for producing energy-efficient
appliancesa
Tax credit based on energy efficiency. Maximum credit is $75
for dishwashers, $200 for refrigerators, and $225 for clothes
washers.
$0.4
12/31/2011
45M
Qualified energy conservation bonds
The Federal government has authorized the issue of $3.2
billion in Qualified Energy Conservation Bonds (“QECBs”).
QECBs provide a tax credit worth 70% of the tax credit bond
rate stipulated by the Secretary of the Treasury. QEC bonds
issued by state and local governments must fund an energysavings project, such as the green renovation of a public
building, R&D in alternative fuels, and public transportation
projects.
$0.2
volume limited
54D
Energy Tax Policy: Issues in the 112th Congress
Tax Provision
Description
Cost 20112015
Expiration
Date
I.R.C.
Section
$2.2
12/31/2010 for
hybrids
(12/31/2009 for
vehicles weighing
more than 8,500
pounds)
30, 30B,
30D
Alternative Technology Vehicles
Hybrid vehicles, other alternative fuel
vehicles, and plug-in electric vehicles
The first 60,000 hybrid cars or light trucks sold per
manufacturer are eligible for a credit of $400 to $2,400
(depending on fuel economy). An additional credit of $250 to
$1,000 is available depending on a vehicles expected lifetime
fuel savings. Heavy vehicles (those exceeding 8,500 pounds)
qualify for up to $30,000 in credits which are not subject to a
volume cap.
12/31/2014 for
fuel cell vehicles
Fuel cell vehicles receive a base credit of $4,000 (reduced to
$4,000 after 2009) for vehicles weighing less than 8,500
pounds. Heavier vehicles qualify for up to a $40,000 credit. An
additional credit of up to $4,000 is available for cars and light
trucks that exceed the 2002 base fuel economy.
12/31/2011 for
electric drive
low speed
vehicles and
conversion to
plug-in vehicle
A 10% credit, up to $2,500, is available for the cost of electricdrive low-speed neighborhood vehicle, motorcycle and threewheeled vehicles. A 10% credit, up to $4,000, is available for
conversion to a plug-in electric drive vehicle.
12/31/2010 for
advanced lean
burn vehicles,
and alternative
fuel vehicles
Lean burn vehicles are eligible for the same credit as hybrid
vehicles. Alternative fuel vehicles can qualify for a credit of up
to $4,000 for cars and light trucks and $32,000 for heavy
vehicles. Credit amount varies according to the vehicle’s
incremental cost and ratio of alternative fuel use. (expired)
Credit for plugin electric
vehicle volume
capped for each
manufacturer
Credits available for plug-in electric vehicles are available up to
$7,500 depending on kilowatt hour capacity of vehicle (prior
to 2010 the credit limit was higher, up to $15,000 for
qualifying heavy vehicles).
Credits for clean fuel vehicle refueling
property
CRS-12
A 30% credit for qualifying property, capped at $30,000 for
business property and $1,000 for nonbusiness property.
During 2009 and 2010, the credit was temporarily increased to
50%, capped at $50,000 for business property and $2,000 for
nonbusiness property. During 2009 and 2010, hydrogen
property was eligible for a credit up to $200,000.
$0.3
12/31/2011
(12/31/14 for
hydrogen
refueling
property)
30C
Energy Tax Policy: Issues in the 112th Congress
Tax Provision
Description
Cost 20112015
Expiration
Date
I.R.C.
Section
179(c)
Other / Miscellaneous
Election to expense 50% of qualified
property used to refine liquid fuels
A taxpayer may elect to expense 50% of the cost of any
qualified property used for processing liquid fuel from crude
oil or qualified fuels. The remainder is recovered using a 10year recovery period under the modified accelerated cost
recovery system (MACRS).
$3.0
12/31/2013
(property must
be under
contract for
construction by
1/1/10)
Exceptions for energy-related publicly
traded partnerships
Publicly traded partnerships are generally treated as
corporations. The exception from this rule occurs if at least 90
percent of its gross income is derived from interest, dividends,
real property rents, or certain other types of qualifying
income. Qualifying income includes income derived from
certain energy-related activities.
$1.2
none
7704, 851
Exclusion of interest on State and local
government private activity bonds for
energy production facilities
Exclusion of interest from private activity bonds used to
finance privately owned or operated sewage, water, solid
waste disposal, and heating and cooling facilities, certain
private electric and gas facilities, hydroelectric dam
enhancements, qualified green building and sustainable design
projects from tax.
$0.2
none
141, 142
Depreciation recovery periods for
energy specific items
Smart electric distribution property is allowed 10-year
depreciation under the modified accelerated cost recovery
system (MARCs). Certain electric transmission property is
allowed a 15-year depreciation. Natural gas distribution lines
are also allowed a 15-year depreciation.
$2.1
various
168(e)
Deferral of gains from the sale of electric
transmission propertya
A taxpayer may elect to recognize the gain from the sale of
certain electric transmission property over an eight year
period.
$1.1
12/31/2011
451
Source: CRS compilation based on data from U.S. Congress, Joint Committee on Taxation, Estimates of Federal Expenditures for Fiscal Years 2011–2015, committee print,
112th Congress, January 17, 2012, JCS-1-12, U.S. Congress, Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 111th Congress, committee
print, 111th Congress, March 2011, JCS-2-11, and the President’s FY2013 budget, Analytical Perspectives.
Notes: Provisions estimated as de minimis (i.e., estimated to have a revenue loss of less than $50 million over the 2011 through 2015 period) are not included in Table 1.
(i) = less than $50 million per year; (ii) = This figure includes the reduction in excise tax receipts for alcohol fuels, biodiesel, and alternative fuel mixtures.
a.
Indicates that the provision was extended or modified by The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312).
b.
Qualifying property that was under construction prior to the end of 2011 may be eligible for the Section 1603 Grant in Lieu of Tax Credit.
CRS-13
Energy Tax Policy: Issues in the 112th Congress
Energy efficiency, conservation measures, and domestic production of energy from renewable
resources help reduce demand for fossil fuels by reducing energy demand and by diversifying the
sources from which energy can be derived to meet U.S. demand. Unlike domestic fossil fuel
subsidies, these policies are long-term because they require a commitment in the face of volatility
in fossil fuel prices. Many renewable energy technologies may not have reached the stage where
they are competitive in the market without subsidization.
Current energy tax policy is also the result of prior policy action undertaken in an effort to
achieve the nation’s long-standing goal of enhancing U.S. energy security. For example, the
promotion of domestic fossil fuel production, the current principle short-run strategy, was a
central tenet of energy tax policy from 1918 through the late 1960s. Further, the current long-run
policies of conservation and alternative fuel sources have origins in tax policies from the 1970s.
Energy tax policy proposed in the Obama Administration’s Fiscal Year 2013 Budget Proposal
differs substantially from current U.S. energy tax policy. If fully enacted, the FY2013 budget
would reduce or eliminate several energy tax policies that encourage energy production from the
coal, oil, and gas industries, while expanding incentives for energy efficiency, renewable energy,
and advanced energy manufacturing. This reflects the shift in energy tax policy from one
primarily focused on enhancing U.S. energy security through diversification of energy resources
towards a tax policy that more readily incorporates environmental concerns (tax policy that
discourages the use of fossil fuels, regardless of their nation of origin).
Energy tax policy—like all tax policy—can lead to unanticipated consequences. Notably, this
issue arose in the 111th Congress in its deliberations concerning “black liquor.” In the context of
taxes, the term “black liquor” referred to a process in which pulp mills use a mixture of
conventional fuel and a byproduct of the pulping process as an energy source for the mill.
According to changes enacted in The Safe, Accountable, Flexible, Efficient Transportation Equity
Act: A Legacy for Users (P.L. 109-59; SAFETEA-LU), “black liquor” was eligible for the
alternative fuels tax credit, which was not the congressional intent of the provision.24 The IRS
later ruled that black liquor would be eligible for the cellulosic biofuel producer credit after the
alternative fuels mixture credit expired at the end of 2009.
Recognizing the unintended consequence, Senate Finance Committee Chairman Max Baucus25
stated in response to draft legislation, “Our measure ensures this tax credit is used consistently as
the law intended, not through an unintended loophole.” Senator Charles Grassley26 made similar
statements, noting “The paper industry was not intended to receive the alternative fuels tax credit
when the credit was enacted.” Under The Health Care and Education Reconciliation Act of 2010
(P.L. 111-152), black liquor was made ineligible for the cellulosic biofuel producer credit,
24
See Martin A. Sullivan, “IRS Allows New $25 Billion Tax Break for Paper Industry,” Tax Notes, October 19, 2009,
pp. 271-272 for additional information concerning the original legislative intent of the modification of the alternative
fuels tax credit in SAFETEA-LU. When enacted, the modification to the alternative fuels tax credit was estimated to
cost less than $100 million annually. During the first six months of 2009, more than $2.5 billion were claimed for this
tax credit, mostly by the paper industry. In addition, the Joint Committee on Taxation estimated that $23.6 billion will
be saved between 2010-2019 from excluding black liquor from the cellulosic biofuel producers credit.
25
U.S. Congress, Senate Committee on Finance, “Baucus, Grassley Release Staff Draft of Legislation to Close
Alternative Fuels Tax Credit Loophole,” press release, June 11, 2009, http://finance.senate.gov/press/Gpress/2009/
prg061109.pdf.
26
Ibid.
Congressional Research Service
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Energy Tax Policy: Issues in the 112th Congress
reducing revenue losses by $23.6 billion between 2011 and 2019.27 In addition, with the passage
of The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (P.L.
111-312) at the end of 2010, black liquor could no longer qualify for the alternative fuels tax
credit. However, taxpayers may still be claiming tax credits for black liquor, as previously unused
credits may be carried forward.
A further unintended consequence of energy tax credits—such as those for ethanol—is that by
reducing the total cost of blended fuels, they may actually increase the consumption of fossil fuels
that the credits were designed to reduce.28
Fossil Fuels
There are a number of tax incentives currently available for energy production using fossil fuels.
They can be broadly categorized as either enhancing capital cost recovery or subsidizing
extraction of high-cost fossil fuels. The fossil fuels related incentives listed in Table 1 are
estimated to reduce federal tax revenues by $12.5 billion between 2011 and 2015.
Among the capital cost subsidies, the allowance of the percentage depletion method is estimated
to cost the most in foregone revenue, $5.5 billion between 2011 and 2015.29 Under percentage
depletion, a deduction equal to a fixed percentage of the revenue from the sale of a mineral is
allowed. Total lifetime deductions, using this method, typically exceed the capital invested in the
project. To the extent that percentage depletion deductions exceed project investment, percentage
depletion becomes a production subsidy, instead of an investment subsidy. Other capital cost
recovery provisions include expensing of intangible drilling costs related to exploration and
development and a decrease in the amortization period for certain geological and geophysical
property.30 The expensing of exploration and development costs is also a relatively large tax
expenditure, estimated to cost the federal government $4.4 billion in revenue losses over the 2011
through 2015 budget window.
Compared to the capital cost recovery provisions, tax expenditures intended to offset high
extraction or refining costs are small. Credits for refined coal production and enhanced oil
recovery costs are estimated to cost $0.2 billion between 2010 and 2014.31 Credits for investing in
clean coal facilities collectively are estimated to cost approximately $1.0 billion between 2011
and 2015.
27
See Joint Committee on Taxation, JCX-17-10, available at http://www.jct.gov/publications.html?func=showdown&
id=3672.
28
Harry De Gorter and David R. Just, “The Law of Unintended Consequences: How the U.S. Biofuel Tax Credit with a
Mandate Subsidizes Oil Consumption and Has No Impact on Ethanol Consumption,” Cornell University Working
Paper Series, 2007-20 2008.
29
The tax expenditure for percentage depletion is computed by subtracting the value of cost depletion, the standard
depletion method, from the value of percentage depletion. The resulting lifetime excess is the tax expenditure.
30
Expensing costs means to deduct the full cost of an investment in the current tax year, rather than depreciated the
costs over a period of time.
31
The enhanced oil recovery credit was estimated at less than $50 million for 2011 through 2015 and is therefore not
included in Table 1. The tax credit for refined coal expired at the end of 2011.
Congressional Research Service
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Energy Tax Policy: Issues in the 112th Congress
Renewable Energy Resources
Several tax incentives subsidize the production of energy from renewable sources. While the
specific incentives differ in design, they generally work to increase the after-tax return on an
investment in renewable energy production by providing tax incentives on the condition of
eligible investment or production. Between 2011 and 2015, the total cost of tax provisions related
to the production of renewable energy is estimated to be $43.1 billion.
In the past, the primary tax incentive for renewable energy has been the credit for electricity
production from renewable sources (the production tax credit or “PTC”). Section 1603 of the
American Recovery and Reinvestment Act allowed projects eligible for the renewable PTC or
investment tax credit (ITC) to claim a one-time grant in lieu of the tax credits. This grant was
available for projects that were under construction before the end of 2011. Since grants will be
paid out when facilities are placed in service, outlays will continue through 2016. Between 20112015, this provision is estimated to result in outlays of $15.9 billion. Since the grant is paid out at
the start of a project, the cost of the grant program will be partially offset by reduced PTC claims
over time.32 Allowing investors to take a one time grant instead of future tax credits is intended to
address uncertainty renewable energy investors may have regarding their future tax positions.33
Since the grant program was allowed to expire at the end of 2011, new renewable energy projects
are not eligible. Renewable energy projects, however, may still be eligible for the ITC or PTC,
depending on the credit expiration date for various technologies.
Other renewable energy production tax incentives include credits for the production or blending
of alcohol fuels, including ethanol, and renewable diesel. The majority of the budgetary impact of
these credits derives from the impact they have on reducing excise tax receipts, as opposed to
revenue losses associated with income tax credits. The tax credits for alcohol fuels, biodiesel, and
alternative fuels also expired at the end of 2011. Even though these credits have expired, these
fuels-related incentives have an estimated cost of $11.8 billion over the 2011 through 2015
budget window.
Several other tax expenditures related to renewable energy have budgetary effects. First, there is
the energy credit (sometimes called the investment tax credit or “ITC”), which provides a credit
equal to either 10% or 30% of eligible investment in renewable energy production.34 Second,
there is the residential energy-efficient property credit, which provides a tax credit for the
installation of renewable electricity generating property for a residential dwelling. Third, the
reduced depreciable life for renewable energy investments provides an additional subsidy for
businesses. Finally, clean renewable energy bonds (CREBs) and new clean renewable energy
bonds (new CREBs) are subsidized in that issuers are not required to pay interest to investors, as
32
Projects eligible for the PTC can claim the credit for 10 years. Thus, as projects in 2010 elect to receive a grant rather
than claim the PTC over time, PTC claims in the out years will be less than what they would have been in absence of
the grant program.
33
For a more in-depth analysis of the Section 1603 grant program, see CRS Report R41635, ARRA Section 1603
Grants in Lieu of Tax Credits for Renewable Energy: Overview, Analysis, and Policy Options, by Phillip Brown and
Molly F. Sherlock.
34
During 2009, 2010, and 2011, ITC-eligible property placed under construction may elect to receive a Section 1603
grant from the Treasury in lieu of claiming the ITC.
Congressional Research Service
16
Energy Tax Policy: Issues in the 112th Congress
investors receive a federal tax credit in lieu of interest payments.35 Taken together, these four
provisions are expected to result in $4.9 billion in federal revenue losses between 2011 and 2015.
As part of the American Recovery and Reinvestment Act, Congress created the advanced energy
manufacturing tax credit (sometimes referred to as the manufacturing tax credit “MTC” or “48C”
in reference to its applicable section of the tax code). This provision competitively awarded $2.3
billion of tax credits to businesses that made investments in manufacturing clean energy
technologies. Over the 2011 through 2015 period, revenue losses associated with this provision
are estimated to be $1.4 billion.36 According to the Obama Administration, more than 500
businesses requested $8 billion in tax credits, more than three times the amount of available
credits.37 The FY2013 budget has called for providing an additional $5 billion in credits to meet
the demand for this program.
Energy Efficiency and Conservation
Incentives for energy efficiency and conservation primarily operate by providing incentives to
owners of residential and commercial property that undertake energy-efficient upgrades. There
are also incentives to manufacturers of energy-efficient appliances and for the issuance of
qualified energy conservation bonds. Between 2011 and 2015, the total cost of tax expenditures
related to energy conservation is estimated to be $4.5 billion.
The bulk of spending on energy conservation encourages property owners to undertake energyefficiency improvements on existing buildings. During 2010, taxpayers were eligible for up to
$1,500 in tax credits for expenditures on qualifying energy-efficiency property, such as windows,
doors, furnaces, and boilers. For 2011, the maximum credit amount was reduced to $500. Like
many other energy-related tax incentives, this provision expired at the end of 2011. Energyefficient improvements for commercial property, including upgrades to a building’s envelope,
heating and cooling, or lighting system are eligible for a tax deduction, limited to $1.80 per
square foot. Finally, the exclusion of subsidies provided by utility companies to energy consumers
undertaking energy-efficiency upgrades from income increases the value of such subsidies,
encouraging individuals to undertake such improvements.
There were two additional tax incentives designed to encourage manufacturers to build energyefficient products that expired at the end of 2011. First, the energy-efficient home credit provided
homebuilders up to a $2,000 credit for new energy-efficient homes. Second, the energy-efficient
appliances manufacturer credit provided a tax credit for producers of energy-efficient
dishwashers, refrigerators, and clothes washers.
Qualified energy conservation bonds (QECBs) also encourage energy conservation, by providing
subsidized financing to energy conservation projects and other renewable energy projects.38
35
See CRS Report R40523, Tax Credit Bonds: Overview and Analysis, by Steven Maguire for additional information
on tax credit bonds. Currently, funding for new CREB issues is no longer available.
36
The tax expenditure estimate is less than the value of the credits awarded as some credits may be carried forward
beyond the budget window being examined while others may not be claimed at all.
37
For more information on the selected projects see White House: Office of the Press Secretary, “Fact Sheet: $2.3
Billion in New Clean Energy Manufacturing Tax Credits,” press release, January 8, 2010, http://www.whitehouse.gov/
the-press-office/fact-sheet-23-billion-new-clean-energy-manufacturing-tax-credits.
38
QECBs can be used to finance a broad range of energy efficiency and renewable energy projects. Eligible projects
(continued...)
Congressional Research Service
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Energy Tax Policy: Issues in the 112th Congress
QECBs are tax credit bonds, where the holder of the bond receives a federal tax credit in lieu of
interest payments.
Alternative Technology Vehicle Credits
Beginning in 2009, plug-in electric drive motor vehicles became eligible for a tax credit. Plug-in
electric drive motor vehicles are eligible for a tax credit of up to $7,500. The credit will begin to
phase out for each manufacturer once a certain number of qualified plug-in vehicles have been
sold. In addition, since 2006, the tax code has at times provided incentives for other alternative
technology vehicles.39 Vehicles eligible for tax incentives have included qualified fuel cell
vehicles, hybrid vehicles, advanced lean burn technology vehicles, and alternative fuel vehicles,
with credit amounts varying by the specific technology and vehicle type. The tax credit for hybrid
vehicles, advanced lean burn technology vehicles, and other alternative fuel vehicles expired at
the end of 2010. The tax credit for qualified fuel cell vehicles is scheduled to expire at the end of
2014. Between 2011 and 2015, the total cost of tax expenditures related to hybrid, alternative
technology, and plug-in electric vehicles is estimated to be $2.2 billion.
Other Energy Tax Provisions
There are a number of other energy tax provisions that do not fall under the fossil fuels,
renewable energy resources, energy efficiency and conservation, or alternative vehicle technology
categories. The largest of these tax expenditures is the provision allowing taxpayers to expense
50% of the cost of property used to process qualified fuels (with an estimated budget cost of $3.0
billion over the 2011 through 2015 budget window).40 The remaining provisions include those
giving special tax treatment for energy-related publicly traded partnerships,41 accelerated
depreciation for various energy specific items, excluding interest from private activity bonds
related to energy production, deferral of gains from the sale of electric transmission property and
credits for installing clean fuel vehicle refueling property. Between 2010 and 2014, the total cost
of tax expenditures related to other energy tax provisions is estimated to be $6.6 billion.42
(...continued)
include energy efficiency upgrades for public buildings, renewable energy projects (including those eligible for
CREBs), energy research and development projects, mass commuting facilities, and energy efficiency education
campaigns.
39
CRS Report R40168, Alternative Fuels and Advanced Technology Vehicles: Issues in Congress, by Brent D.
Yacobucci discusses congressional issues specifically related to advanced technology vehicles.
40
It could be argued that this tax expenditure benefits fossil fuels, as many of the beneficiaries are believed to be crude
oil refineries. For additional information, see CRS Report R41478, The U.S. Oil Refining Industry: Background in
Changing Markets and Fuel Policies, by Anthony Andrews, Robert Pirog, and Molly F. Sherlock.
41
The majority of energy-related publicly traded partnerships are in the oil and gas sector.
42
If the revenue losses from the election to expense 50% of qualified refinery expenses and the exceptions for energyrelated publicly traded partnerships were allocated to fossil fuels, fossil fuel related tax incentives would increase by
$4.2 billion, leaving total tax expenditures in the other category at $2.4 billion.
Congressional Research Service
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Energy Tax Policy: Issues in the 112th Congress
Energy Tax Issues in the 112th Congress
In the FY2013 budget, President Obama proposes to eliminate several incentives for oil, gas, and
coal, while expanding certain incentives for energy efficiency, renewable energy, alternative
energy manufacturing, and alternative technology vehicles. Similar proposals have appeared in
the President’s previous budgets. The 112th Congress has also considered the extension of certain
expired and expiring energy tax incentives.
The President’s Fiscal Year 2013 Budget Proposal
The President’s FY2013 budget proposal contains a number of fossil fuel energy tax related
provisions.43 Broadly, the budget seeks to repeal a number of tax preferences that benefit for the
oil, gas, and coal industries. Some of those proposed for repeal are targeted incentives, available
only for the oil, gas, and coal industries. Specifically, the President’s FY2013 budget proposes to
eliminate expensing of IDCs, the percentage depletion allowance, and the domestic
manufacturing deduction for oil, gas, and coal producers. Revenues from eliminating the
domestic manufacturing deduction for oil and gas would be used to provide an enhanced
incentive for certain advanced manufacturing activities. Additionally, for oil and gas producers,
the proposals suggests repealing the enhanced oil recovery credit, the credit for production from
marginal wells, the credit for tertiary injects, and increasing the amortization period for
geological and geophysical expenses. The President’s FY2013 budget also proposes repealing the
capital gains treatment for coal royalties. Repealing the tax preferences for fossil fuels would
generate an estimated $29.6 billion in revenues between 2013 and 2022.44
Other incentives the budget proposes to repeal include those that benefit oil and gas producers,
but are also available for other sectors. These include the modifications to foreign tax credit rules
for dual capacity taxpayers as well as the repeal of last-in, first-out (LIFO) inventory accounting
methods.
The budget would also modify certain tax provisions used to finance environmental clean up. The
budget proposes to reinstate the superfund tax, which would levy a 9.7-cents-per-barrel excise tax
on domestically produced crude oil and crude oil imports.45 In addition, in order to increase
funding for the Oil Spill Liability Trust Fund in response to the Deepwater Horizon Oil Spill, the
FY2013 budget proposal would increase the current excise tax on domestic crude and imported
petroleum products from 8 cents per barrel, to 9 cents per barrel. The tax would be increased
again, to 10 cents per barrel, beginning in 2017. Reinstating the superfund excise tax would
generate an estimated $8.2 billion between 2013 and 2022. The one-cent increase in the oil spill
liability trust fund tax would generate an estimated $0.7 billion in revenues between 2013 and
2022.
43
For more information, see CRS Report R42374, Oil and Natural Gas Industry Tax Issues in the FY2013 Budget
Proposal, by Robert Pirog.
44
This figure does not include revenues from repealing the production activities deduction for fossil fuels, as these
revenues are assumed to be used to provide an enhanced deduction for qualifying advanced manufacturing activities.
45
The superfund excise tax would also be levied on hazardous chemicals and imported materials used in the
manufacture of hazardous chemicals, at a rate varying from 22 cents to $4.87 per ton.
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Energy Tax Policy: Issues in the 112th Congress
Taken as a whole, these provisions raise the cost of coal, oil, and gas production and can be
viewed as reducing the cost of alternative energy production relative to energy production from
conventional energy sources. That is, if enacted, the FY2013 budget proposal would decrease the
relative cost of alternative energy production by increasing the cost of coal, oil, and gas
production.46
The President’s FY2013 budget proposal would also modify existing tax incentives designed to
promote energy efficiency and clean energy manufacturing. The FY2013 budget calls for
converting the Section 179D tax deduction for expenditures for commercial building property
into a credit. The modification would also require that the credit be linked to measurable
improvements in the building’s energy efficiency. This change to the existing tax incentives for
energy-efficiency in commercial buildings would result in an estimated $1.7 billion in additional
revenue losses.
The President’s FY2013 budget proposes increasing the allocation for the Advanced Energy
Manufacturing Credit by $5 billion to meet the large demand for the original allocation of $2.3
billion. The purpose of this tax credit was to increase investment in facilities that produce clean
energy technologies. According to the administration, since demand for this credit exceed the
$2.3 billion cap, less than one third of eligible applicants actually received the credit.
The FY2013 budget also proposes replacing the current plug-in electric vehicle credit with a
credit for advanced technology vehicles. This modification would make the credit available to a
wider range of technologies, encouraging greater use of advanced technology vehicles. This
provision is part of the President’s larger goal to put 1 million electric vehicles on the road by
2015.47 Providing a tax credit for advanced technology vehicles would result in an estimated $2.0
billion in revenue loss between 2013 and 2022.
Finally, the President’s FY2013 budget would extend certain expired and expiring energy tax
provisions. Specifically, the proposal would extend the renewable energy PTC, ITC, and Section
1603 grants in lieu of tax credits program. Further, the Administration proposes to extend,
through 2013, tax incentives for biodiesel, renewable diesel, and alternative fuels, several
incentives designed to promote energy efficiency, and certain incentives related to alternative
technology vehicles.
Expired and Expiring Energy Tax Provisions48
A number of energy tax provisions expired at the end of 2011, with others scheduled to expire at
the end of 2012 (see Table 2). Many of those scheduled to expire were temporarily extended
under the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010. Expired
incentives include those designed to promote energy efficiency, provisions to encourage
investment in renewable energy, various tax credits that support electric and alternative-fuel
vehicles, as well as tax incentives for alcohol fuels and biofuels.
46
Note that the FY2013 budget proposal represents one of many possible options to reduce the economic distortions
associated with the tax treatment of energy production.
47
For more information see the Department of Energy’s report “One Million Electric Vehicles by 2015”
http://www.energy.gov/news/documents/1_Million_Electric_Vehicle_Report_Final.pdf.
48
For a full list of expiring tax provisions, see U.S. Congress, Joint Committee on Taxation, List of Expiring Federal
Tax Provisions: 2010–2020, committee print, 112th Cong., 1st sess., January 11, 2011, JCX-2-11.
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Table 2. Energy Tax Provisions Expiring at the End of 2011
(billions of dollars)
Provision
IRC Section
Extended
Through
2013 Under
S. 3521?
10-Year
Revenue
Cost of
Extension
Through
2013
Expiring in 2012
Cellulosic biofuel producer credit
40(b)(6)(H)
YES
0.1a
Production tax credit (PTC) for wind
45(d)
YES
12.2b
Credit for production of Indian coal
45(e)(10)(A)(i)
YES
(i)
Election to claim the ITC in lieu of the PTC for wind
48(a)(5)
YES
0.1b
Special depreciation allowance for cellulosic biofuel plant
property
168(l)
YES
(i)
Incentives for alcohol fuels
40(e)(1)(A),
(h)(1), (h)(2)
6426(b)(6)
6427(e)(6)(A)
NO
Section 1603 Grants in Lieu or Tax Credits
48(d)
NO
Incentives for biodiesel and renewable diesel
40A
6426(c)(6)
6427 (e)(6)(B)
YES
2.2
Credit for nonbusiness energy property
25C(g)
YES
2.4
Coal production credit (refined coal facilities placed in service
date)
45(d)(8)
NO
Suspension of 100% of net income limitation on percentage
depletion for oil and gas from marginal wells
613A(c)(6)(H)(ii)
NO
Incentives for alternative fuel and alternative fuel mixtures
(other than liquefied hydrogen)
6426(d)(5)
6427 (e)(6)(c)
6426 (e)(3)
YES
0.4
Credit for construction of energy-efficient new homes
45L(g)
YES
0.2
Credit for energy-efficient appliances
45M(b)
YES
0.7
Alternative fuel vehicle refueling property (non-hydrogen)
30C(g)(2)
YES
(i)
Special rules for sales or disposition to implement Federal
Energy Regulatory Commission (“FERC”) or State electric
restructuring policy
451 (i)
YES
—
Credit for electric drive low-speed vehicles, motorcycles and
three-wheeled vehicles
30(f)
YES
(i)c
Conversion credit for plug-in electric vehicles
30b(i)(4)
NO
Expired in 2011
Source: U.S. Congress, Joint Committee on Taxation, List Of Expiring Federal Tax Provisions 2011-2021,
committee print, 112th Congress, January 13, 2012, JCX-1-12; U.S. Congress, Joint Committee on Taxation,
Estimated Revenue Effects of the Revenue Provisions Contained in the “Family and Business Tax Cut Certainty Act of
2012,” as Reported by the Senate Committee on Finance, committee print, 112th Congress, 2nd session, August 28,
2012, http://www.finance.senate.gov/legislation/details/?id=1cb48bce-5056-a032-5255-272274d52b64; and U.S.
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Congress, Senate Committee on Finance, Family and Business Tax Cut Certainty Act of 2012, 112th Congress, 2nd
session, August 28, 2012, Report 112-208.
Notes: An (i) indicates a positive revenue loss of less than $50 million. An (ii) indicates that this is part of a
proposal in the President’s FY2013 budget to extend and modify certain energy tax credits, including the PTC,
ITC, and grants in lieu of tax credits. As proposed, extending and expanding these provisions would cost $3.9
billion over 10 years.
a.
In addition to extending the cellulosic biofuel producer credit through 2013, this legislation would expand
the definition of qualifying fuel to include algae-based fuel.
b.
The extension proposed in S. 3521 would extend the PTC for wind through 2012, while also changing the
December 31, 2013, expiration date from a placed-in-service deadline to a construction start date for all
qualifying technologies. This change would also apply to the ability to claim the ITC in lieu of the PTC.
c.
S. 3521 would extend current tax credits for two-wheeled and three-wheeled vehicles, but not extend
expired credits for low-speed vehicles. The credits would be available under IRC §30D, which provides tax
credits for plug-in electric vehicles.
In early 2012, the Senate considered measures to extend some of the provisions listed in Table 2.
On March 13, 2012, the Senate considered an amendment that would have extended several
expiring energy tax incentives (S.Amdt. 1812 to S. 1813).49 This amendment was not agreed to.
The Senate also considered another measure proposing to extend the provisions included in
S.Amdt. 1812 to S. 1813. The Repeal Big Oil Tax Subsidies Act (S. 2204) would have extended a
number of renewable energy incentives, paying for the extension by scaling back certain tax
incentives for major integrated oil companies. The JCT estimated that extending certain expiring
energy provisions through 2012, as proposed in S. 2204, would cost $11.7 billion over the 2012
through 2021 budget window.50 Repealing certain tax incentives for major integrated oil and gas
companies was estimated to raise $24.0 billion in additional revenues over the same time
period.51
Legislation has been introduced in the Senate that would extend most of the “tax extender”
provisions, including a number of the energy-related provisions. Table 2 notes which expired and
expiring energy tax provisions would be extended under the Family and Business Tax Cut
Certainty Act of 2012 (S. 3521), and the estimated cost of extending these provisions through
2013. In total, extending the energy-related provisions in S. 3521 through 2013 would cost an
estimated $18.1 billion over the 2013 to 2022 budget window.
49
Specifically, this amendment sought to extend expired tax credits for residential energy efficiency, credits for plug-in
electric vehicles, credits for alternative fuel refueling property, incentives for biodiesel and renewable diesel, credits for
refined coal production, credits for manufacturers of energy-efficient new homes and appliances, allocate additional
funds for the advanced energy manufacturing tax credit, modify and extend credits for cellulosic biofuel producers,
extend the special allowance for cellulosic biofuel producers, extend the suspension of limitation on percentage
depletion for marginal wells, and extend alternative fuels excise tax credits. The amendment would also have extended
the Section 1603 grant in lieu of tax credit program and the ability to elect to receive the ITC instead of the PTC,
providing a longer extension for offshore wind.
50
This majority of this cost is attributable to provisions that would extend the PTC, extend the ITC in lieu of the PTC
for offshore wind, extend the Section 1603 grants in lieu of tax credits program, expand the qualifying advanced energy
manufacturing tax credit program, extend residential energy efficiency incentives, and extend incentives for biodiesel
and renewable diesel.
51
U.S. Congress, Joint Committee on Taxation, Estimated Budget Effects of S. 2204, the “Repeal Big Oil Tax Subsidies
Act” Scheduled for Consideration on the Senate Floor on March 26, 2012, committee print, 112th Cong., March 23,
2012, JCX-29-12.
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The Tax Relief, Unemployment Reauthorization, and Job Creation
Act of 2010 (P.L. 111-312)
A number of expiring energy tax provisions were temporarily extended in the Tax Relief,
Unemployment Reauthorization, and Job Creation Act of 2010. The one-year extension of tax
credits for alcohol fuels, including ethanol, was estimated to cost $4.9 billion. Extending the
Section 1603 grant in lieu of tax credits program for one year was estimated to cost $3.0 billion.
The retroactive extension of tax incentives for biodiesel and renewable diesel, which had expired
at the end of 2009, was estimated to cost $2.0 billion. Other provisions that were extended
included tax credits for residential energy efficiency improvements,52 energy efficient appliance
manufacturers, and energy efficient new homes. Tax provisions related to refined coal, alternative
fuel mixtures, electric transmission restructuring, percentage depletion for oil and gas production,
and alternative fuel vehicle refueling property were also extended. Some of the provisions
extended under P.L. 111-312 had been included in earlier versions of “tax extender” legislation.53
The American Recovery and Reinvestment Act of 2009 (P.L. 111-5)
ARRA modified incentives for renewable energy production, energy conservation, alternative
technology vehicles, as well as a number of other energy tax incentives.54 Collectively, ARRA’s
energy tax provisions lowered the cost of selected renewable energy relative to energy from other
sources, such as oil and gas. Provisions enacted under ARRA extended and expanded a number of
incentives for investment in renewable energy. The renewable energy production tax credit (PTC)
was extended through 2012 for wind and 2013 for other eligible technologies, the energy credit
(ITC) was expanded for small wind property, and taxpayers were given the option of receiving a
direct grant from the Treasury in lieu of tax credits under the Section 1603 grant program.55
Renewable energy production was also encouraged by ARRA’s provision increasing the funds
available for the issue of new clean renewable energy bonds. Residential incentives for renewable
energy property were expanded under ARRA, as property-specific credit caps for residential
renewable energy property were removed.
ARRA contained two tax provisions specifically encouraging energy conservation. The first
provision modified the tax credits for energy-efficient improvements to existing homes by
temporarily increasing the credit rate and removing credit caps previously associated with
specific types of property. For qualified energy-efficiency improvements, such as the installation
of energy-efficient building envelope components, furnaces, or boilers, installed during 2009 and
2010, taxpayers could claim a 30% tax credit.56 ARRA also removed property-by-property caps
on the tax credit and replaced them with a $1,500 cap for the total amount of the credit claimed
during 2009 and 2010.57 This cap has since been reduced to $500 for 2011. The second energy
52
These credits were extended at a reduced rate, 10% as opposed to 30%. The limit associated with the credit was also
reduced, from $1,500 to $500. Property specific caps for certain types of investments were reinstated.
53
For more information, see CRS Report RL32367, Certain Temporary Tax Provisions that Expired in December 2009
(“Extenders”), by James M. Bickley.
54
For information on all energy provisions in ARRA see CRS Report R40412, Energy Provisions in the American
Recovery and Reinvestment Act of 2009 (P.L. 111-5), coordinated by Fred Sissine.
55
The renewable energy PTC for wind facilities was extended through 2012.
56
Prior to ARRA, the credit rate was 10%.
57
Prior to ARRA, the credit caps ranged from $50 to $300, depending on the type of property installed. The credit was
(continued...)
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conservation provision increased funds available for the issue of qualified energy conservation
bonds.
To further promote alternative technology vehicles, tax provisions enacted under ARRA modified
the credits for alternative fuel vehicles and plug-in electric vehicles. Additionally, a tax credit for
plug-in vehicle conversion was introduced.
There were also a number of other energy tax provisions in ARRA. First, the credit rates and
limits for refueling and recharging property were temporarily increased. Second, the recovery
period for depreciating smart meters was temporarily decreased from 10 years to five years.
Third, a 20% tax credit was introduced for expenses related to qualified energy research.
Carbon Tax / Climate Change58
Legislation has been introduced in the 112th Congress to limit carbon and greenhouse gas (GHG)
emissions (see the Save Our Climate Act of 2011 (H.R. 3242) and the Managed Carbon Price Act
of 2012 (H.R. 6338)).59 Members in the 111th Congress introduced seven stand-alone proposals
that would have controlled GHG emissions. The proposals employed market-based approaches—
either a cap-and-trade or carbon tax system, or some combination thereof—to reduce GHG
emissions. The legislative proposals varied in their overall approaches in controlling GHG
emissions. Some controlled emissions by setting a quantity (or cap); others controlled emissions
by setting a price (or tax/fee). In addition, the proposals differed in their inclusion of particular
design elements, such as whether or not to allow offsets (emission reduction opportunities from
economic sectors not directly addressed by the primary approach).
Three of the proposals—H.R. 594 (Stark), H.R. 1337 (Larson), and H.R. 2380 (Inglis)—would
have used a carbon tax approach to address carbon dioxide (CO2) emissions from fossil fuel
combustion. H.R. 1683 (McDermott) would have established a program that may be described as
a dynamic carbon tax: the tax rate would be linked with annual emission allocations (or caps).
These carbon tax proposals, however, were not widely seen as the primary energy and climate
change legislative proposal in the 111th Congress. Instead, cap-and-trade programs constituted the
primary energy and climate change legislative proposals in the 111th Congress. Cap-and-trade
legislative vehicles included H.R. 2454 and S. 1733. The American Clean Energy and Security
Act of 2009 (H.R. 2454) (Waxman/Markey) which passed the House would have established capand-trade programs.60 The Clean Energy Jobs and American Power Act (S. 1733), which was
(...continued)
limited to $500 total for the 2006 and 2007 tax years combined. The credit was not available in 2008. The $1,500 limit
applies to cumulative spending in the 2009 and 2010 tax years.
58
Carbon tax and climate change issues are largely beyond the scope of this report. See CRS Report R42731, Carbon
Tax: Deficit Reduction and Other Considerations, by Jonathan L. Ramseur, Jane A. Leggett, and Molly F. Sherlock;
CRS Report R40242, Carbon Tax and Greenhouse Gas Control: Options and Considerations for Congress, by
Jonathan L. Ramseur and Larry Parker; and CRS Report R40556, Market-Based Greenhouse Gas Control: Selected
Proposals in the 111th Congress, by Larry Parker, Brent D. Yacobucci, and Jonathan L. Ramseur for a complete
discussion on carbon tax (and other market-based approaches) to control greenhouse gas emissions.
59
Greenhouse gases are those that trap heat in the earth’s atmosphere. Carbon dioxide is a greenhouse gas that enters
the atmosphere through the burning of fossil fuels, solid waste, and wood products, among other activities. Increases in
the level of greenhouse gases in the earth’s atmosphere are thought to be associated with climate change.
60
See CRS Report R40643, Greenhouse Gas Legislation: Summary and Analysis of H.R. 2454 as Passed by the House
(continued...)
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considered and ordered to be reported by the Committee on the Environment and Public Works,
would have also relied on a cap-and-trade program to reduce greenhouse gas emissions.61 H.R.
1666 (Doggett) would have also created a cap-and-trade system, but in the early years of the
program, the number of emission allowances distributed would be based on achieving a specified
allowance price. The latter proposal would not have allowed offsets to be used for compliance
purposes, while the former two would have allowed covered entities to satisfy an increasing
percentage (approximately 30% in 2012) of their compliance obligation with offsets.
A key element in GHG emission reduction bills was how, to whom, and for what purpose the
value of emission allowances or carbon tax revenue would have been distributed. The distribution
strategy is a critical policy decision, because it would affect (1) the overall cost of the program
and (2) how program costs are distributed throughout the economy. In the early years of the
program, H.R. 2454 would have distributed allowances at no cost to both covered and noncovered entities to support various policy objectives. In addition, an increasing percentage
(approximately 18% in 2016) of the allowances would have been sold through auction. Auction
revenues would also have been used to further various policy objectives.
(...continued)
of Representatives, coordinated by Mark Holt and Gene Whitney, for a detailed analysis of H.R. 2454.
61
For a comparison of H.R. 2454 and S. 1733 see CRS Report R40896, Climate Change: Comparison of the Cap-andTrade Provisions in H.R. 2454 and S. 1733, by Brent D. Yacobucci, Jonathan L. Ramseur, and Larry Parker.
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Appendix. Energy Tax Legislation Prior to the
111th Congress
This appendix describes legislation enacted during the 108th, 109th, and 110th Congresses that
shaped current energy tax policy.
Enacted Legislation in the 108th and 109th Congresses
The Working Families Tax Relief Act of 2004 (P.L. 108-311)
Several energy tax incentives were extended as part of the Working Families Tax Relief Act of
2004, a $146 billion package of middle class and business tax breaks. This legislation, which was
signed into law on October 4, 2004, retroactively extended four energy tax subsidies: the §45
renewable energy production tax credit, suspension of the 100% net income limitation for the oil
and gas percentage depletion allowance, the $4,000 tax credit for electric vehicles, and the
deduction for clean fuel vehicles (which ranges from $2,000 to $50,000). The §45 tax credit and
the suspension of the 100% net income limitation had each expired on January 1, 2004 but were
retroactively extended through December 31, 2005. The electric vehicle credit and the cleanvehicle income tax deduction were in the process of being phased-out (phase-out had begun on
January 1, 2004). The Working Families Tax Relief Act of 2004 suspended the phase-out—
providing 100% of the tax breaks—through 2005. The tax breaks were resumed beginning on
January 1, 2006, when only 25% of the tax break was available.
The American Jobs Creation Act of 2004 (P.L. 108-357)
The American Jobs Creation Act of 2004 was enacted on October 22, 2004. It included about $5
billion in energy tax incentives primarily targeted at renewable energy as well as alcohol and
biofuels. In particular, the act created the production tax credit, eliminated reduced tax rates for
most blended alcohol fuels, established the biodiesel fuel and small refiner tax credits, and
allowed a credit for oil and gas produced from marginal wells.62
The Energy Policy Act of 2005 (P.L. 109-58)
The Energy Policy Act of 2005 was enacted on August 8, 2005. It included an estimated $9
billion, over five years, in tax incentives distributed among renewable energy, conservation, and
traditional energy sources. Among the larger provisions of the act, in revenue cost terms, were the
enactment of several alternative technology vehicle credits, enactment of three investment credits
for clean coal, and the extension of the production tax credit.
62
The alcohol fuel mixture tax credit, which became law in 2005, has been the source of controversy as the credit has
been claimed by a number of paper companies that burn “black liquor,” a practice that was not anticipated when the
legislation was drafted. When the credit was initially enacted, it was expected to cost less than $100 million annually.
During the first 6 months of 2009, more than $2.5 billion has been claimed for this tax credit. For more information see
Martin A. Sullivan, “IRS Allows New $25 Billion Tax Break for Paper Industry,” Tax Notes, October 19, 2009, pp.
271-272 and Chuck O'Toole, “Baucus, Grassley Draft Bill to End ‘Black Liquor’ Subsidy,” Tax Notes, June 15, 2009,
pp. 1312-1313.
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The Tax Increase Prevention and Reconciliation Act (P.L. 109-222)
The Tax Increase Prevention and Reconciliation Act (P.L. 109-222) was enacted May 17, 2006. It
reduced the value of the subsidy by raising the amortization period from two years to five years,
still faster than the capitalization treatment before the 2005 act, but slower than the treatment
under that act. The higher amortization period applies only to the major integrated oil
companies—independent (unintegrated) oil companies may continue to amortize all geological
and geophysical (G&G) costs over two years—and it applies to abandoned as well as successful
properties. This change increased taxes on major integrated oil companies by an estimated $189
million over 10 years, effectively rescinding about 20% of the nearly $1.1 billion 11-year tax for
oil and gas production under the Energy Policy Act of 2005.
The Tax Relief and Health Care Act of 2006 (P.L. 109-432)
At the end of 2006, the 109th Congress enacted a tax extenders package that included extension of
numerous renewable energy and excise tax provisions. Many of the renewable energy provisions
in this bill had already been extended under the Energy Policy Act of 2005 and were not set to
expire until the end of 2007 or later. The Tax Relief and Health Care Act of 2006 provided for
one-year extensions of these provisions.
Enacted Legislation in the 110th Congress
Energy tax policy in the 110th Congress represented a shift towards increased taxes (via the
removal of subsidies) on the oil and gas industry while also emphasizing energy conservation and
alternative and renewable fuels, as opposed to conventional hydrocarbons.63 This policy direction
appeared to be the result of high crude oil and petroleum product prices and oil and gas industry
profits, along with the political realignment of the Congress after the 2006 congressional
elections. The shift was manifested by proposals to reduce oil and gas production incentives or
subsidies, which were initially incorporated into, but ultimately dropped from comprehensive
energy policy legislation. Later in the 110th Congress, enacted legislation focused on increasing
incentives for renewable energy production, rather than reducing tax incentives available to the
oil and gas industries. The fact that tax incentives for oil and gas were left in place is in part a
reflection of the deteriorating business climate during 2008.
Energy Independence and Security Act of 2007 (P.L. 110-140)
The Energy Independence and Security Act of 2007 (P.L. 110-140; H.R. 6) contained a number of
provisions designed to increase energy efficiency and the availability of renewable energy.
Specifically, the act increased the target fuel efficiency for combined fleets of cars and light
trucks, increased renewable fuel standards, and increased a number of energy-efficiency standards
for household and commercial appliance equipment.
63
There is an important economic distinction between a subsidy and a tax benefit. As is discussed elsewhere in this
report, firms receive a variety of tax benefits that are not necessarily targeted subsidies (or tax expenditures) because
they are available generally.
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Energy Tax Provisions in the Food, Conservation, and Energy Act of 2008 (P.L.
110-234)
The Food, Conservation, and Energy Act of 2008 (P.L. 110-234), otherwise referred to as the
2008 Farm Bill, contained two energy tax provisions.64 The first provision promotes cellulosic
biofuels through a production credit of $1.01 per gallon, which applies to fuels produced from
qualifying cellulosic feedstocks. The second provision, the ethanol blender’s tax credit (which
applies to both domestic and foreign sourced ethanol), was reduced from $0.51 per gallon to
$0.45 per gallon.65
The Emergency Economic Stabilization Act of 2008 (P.L. 110-343)
The Emergency Economic Stabilization Act of 2008 (P.L. 110-343), included $17 billion in
energy tax incentives. These provisions were primarily extensions of existing provisions
(extenders), but also including several new energy tax incentives. The new provisions included
$10.9 billion in renewable energy tax incentives aimed at clean energy production, $2.6 billion in
incentives targeted toward cleaner vehicles and fuels, and $3.5 billion in tax breaks to promote
energy conservation and energy efficiency. The cost of the energy tax extenders legislation in the
Emergency Economic Stabilization Act of 2008 was fully financed, or paid for, by raising taxes
on the oil and gas industry (mostly by reducing oil and gas tax breaks) and by other tax increases.
Author Contact Information
Molly F. Sherlock
Specialist in Public Finance
msherlock@crs.loc.gov, 7-7797
Margot L. Crandall-Hollick
Analyst in Public Finance
mcrandallhollick@crs.loc.gov, 7-7582
Acknowledgments
Portions of this report are drawn from prior reports written by Donald Marples and Salvatore Lazarri.
64
See CRS Report RL34696, The 2008 Farm Bill: Major Provisions and Legislative Action, coordinated by Renée
Johnson for a complete description of the provisions in the 2008 Farm Bill.
65
For cellulosic ethanol, the value of the cellulosic biofuel production credit is reduced by the value of the ethanol
blender’s credit and the small ethanol producer credit—so that the combined value of the credits equals $1.01. Thus,
the credit for cellulosic ethanol is currently $0.46 per gallon ($1.01 minus $0.45 minus $0.10 [the small ethanol
producer credit]). If the blender’s credit and small ethanol producer credit were reduced (or eliminated), the value of
the cellulosic ethanol production credit would increase to keep the combined value at $1.01.
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This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.