100 Years of Certainty and the Future of the Energy Tax Code

Congress has spent much of this year debating budget matters and the fate of the nation’s tax policy. A central theme of any tax policy debate raised by just about everyone is “market certainty.” The fact is that for the past 100 years “certainty” in our energy tax code has meant directly subsidizing the fossil fuel industry’s ability to pollute. 

The truth is that “certainty”—at least how it is conventionally defined in economic circles—cannot be the only factor in judging policy choices.  There is much more at stake and we can’t let the tedium and obscurity of the tax code mask the fundamental ethical questions that lie beneath the code. Our tax code reflects our social priorities and values, though often refracted through the fun house mirror of political logic: The very obscurity of the issues used to distort the real motivations and consequences of the decisions being made.   

As Congress debates the future of American tax policy, both those distortions and fundamental questions are coming into rare focus—and are particularly acute when it comes to how the tax code shapes our nation’s energy and environmental policy. In order to responsibly deploy tax policy as a tool to address society’s evolving needs, decision makers would be advantaged by employing a more expansive definition of certainty that confronts the deeper question of what type of future we are shaping for the next generation

Immediately at stake are a host of important tax provisions that support the clean energy economy which are set to expire at the end of this year if Congress does not take action. With precious little time left before the end of the year our elected leaders will have to make a choice whether to continue the status quo or chart a new course that stops privileging these established, polluting industries over cleaner, healthier alternatives.

100 Years of Fossil Subsidies

Predictably some will assert that when the fossil fuel industry’s suite of permanent tax privileges was put in place the consequences of its pollution were unknown and the industry nascent enough to justify Federal support. Whether that is true or not, today the fossil fuel industry is fully mature and massively wealthy, and wields unprecedented global might. No one who engages in the painful ritual of emptying their wallet to fill their gas tank could agree with a straight face that Big Oil needs Federal support to thrive after a hundred years of subsidies.

Another certainty is that, left unchecked, the pollution caused by the nation’s dependence on fossil fuels will impoverish the next generation.  The science is clear: The consequences of carbon pollution cannot be denied. Without deliberate and consistent action our children will face more extreme weather, more illness, and more global instability; in short,  massive uncertainty regarding their future quality of life.

A third reality is that the clean energy sector has been stuck in a constant boom-bust cycle imposed by Congress’ inability to provide permanent, predictable support. Just as it is undeniable that the fossil fuel industry does not deserve more public support, it is inarguable that continued support for the clean energy sector is necessary. 

 A simple fairness argument makes clear that just to level the playing field, clean energy would need quite a few more years of policy support just to catch-up. But the real reason to continue to invest in solar, wind, and energy efficiency is that they are key to cutting carbon pollution by the amount science dictates is necessary to escape the rising tide of climate change.

In short, we owe it to the next generation to make a sharp course correction in our tax policy to honestly reflect the realities outlined above.  When Congress returns to debate tax policy that means two things:

Tax Extenders

First, Congress must act to defuse the ticking time-bomb threatening the continued strength of the clean energy sector by extending the provisions set to expire this year. These incentives include the production tax credit (PTC) for wind which helps support thousands of jobs across the country; incentives for the development of off-shore wind, a potentially huge resource that America has yet to tap, although European countries have relied on offshore wind for more than twenty years; and a host of provisions that promote energy efficiency, like credits for homeowners to upgrade their homes and incentives for businesses to invest in money saving, pollution-cutting technologies.    

The potential of these credits to continue building a stronger, cleaner economy is huge. According to a McKinsey & Company analysis, efficiency alone could reduce projected U.S. energy consumption by 23 percent, save consumers $1.2 trillion, and create up to 900,000 jobs.  Similarly, continued investment in wind and solar could double the current production in those industries and add another 200,000 jobs. Failure to renew and update the credit for off-shore wind would stifle its growth just as it is reaching a critical juncture and rob the U.S. consumer of 4.2 terawatts in potential pollution-cutting, domestic, reliable energy. That is roughly four times the generating capacity of the current U.S. electric grid.  

In sum, pulling the rug out from under the clean energy sector now would cost jobs, suppress innovation, and drive away investors who would then lack a clear roadmap for the future. Most importantly, it would slow the urgently needed transition to low-carbon energy sources vital to protecting our children’s future.

A Cleaner Path

Second, as Congress continues to reflect on a broader tax overhaul, it must recognize that any tax policy should be judged by its contribution to meeting our obligation to reduce carbon pollution and pass on a cleaner, healthier, safer planet.

The discussion draft released in November by Chairman Baucus took an important step in that direction by eliminating several unneeded subsidies for mature and polluting technologies. For instance, the proposal eliminates deduction of intangible drilling costs and the percentage depletion allowance. These two unnecessary subsidies have long cost taxpayers billions per year on technologies that contribute to, rather than remedy, our pressing environmental problems. The proposal also eliminates the 179C refinery expensing option which allows oil refiners to immediately deduct 50% of refining investments. More however, can and should be done to end Big Oil’s 100 years of certainty, as NRDC Executive Director Peter Lehner lays out here.

As the Baucus draft continues to evolve, it also should provide the clean energy sector greater stability. Doing so will benefit the economy, but most importantly without these incentives the steep climb to climate stability will only be that much harder to overcome.

A first step in further developing the Baucus draft involves should be to rethinking the proposed elimination of the 179D incentive that helps businesses invest in energy efficiency. Additionally, the existing provisions that support energy efficiency, clean energy, and clean vehicles must be continued and enhanced to maximize the growth of these domestic, renewable, 21st century resources. 

At the end of the day, when redefining the nation’s tax policy Congress is making an ethical choice, a critical decision on how to reflect our social values in the tax code. The certainty we need is one that provides a healthier future. Any final energy tax package must not allow the inertia of history, industry’s deep pockets, or lack of political will to distort the outcome.