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What the CBO Report Really Says about Energy Subsidies

J. Mijin Cha

The thing about data is that if you pick and choose, it can say exactly what you want it to. The Heritage Foundation did just that when they took a recently released CBO report and claimed that the tax code no longer favors fossil fuels.

The CBO report looked at energy-related tax preference since 1977 and, as seen below, fossil fuels received the lion’s share of tax preferences for over 30 years from 1977-2008. Starting from 2008, renewables did receive more tax preference than fossil fuels. But, that’s not the whole story.

The first big bump in renewable energy support came in 2008 with the Emergency Economic Stabilization Act of 2008, otherwise known as the first bailout for the financial system. In addition to bailing out Wall Street, energy efficiency and renewable energy production tax credits were extended. ARRA then further expanded the tax preferences for energy efficiency, renewable energy, and alternative vehicles as a way to stimulate the economy and ramp up investment in alternative energy sources.

So, from 2008-2011, renewable energy and energy efficiency did receive the majority of federal energy tax credits and incentives because it was seen as a way provide much needed economic stimulus.

However, and this is the part where looking at the rest of the data is helpful, four big renewable energy provisions expired at the end of December 2011. Together, those provisions make up 60 percent of the energy-related tax credits, or a little over $12 billion. The ethanol credit alone was accounted for about half of the amount. And, as we’ve mentioned before, these tax credits must be renewed every year instead of being permanent.

The CBO report points out that only four of the major tax preferences are permanent -- three of which are for fossil fuels and the remaining one is for nuclear energy. So, the only remaining tax credits and preferences are for fossil fuels and nuclear energy. This is part of the reason why advocates claim that the tax code favors fossil fuels -- their tax breaks are permanent and don’t just expire if Congress doesn’t take action. As a result, there is far more market stability and predictability.

And, despite the heavy bias towards fossil fuels, renewable energy investments are paying off. The green economy was one of the few areas that not only weathered the recession, but actually grew. There are over 2.7 million people employed in the green economy and because of investment and support, renewable energy production surpassed nuclear energy production for the first time in 2011. Fossil fuel production is dominant partly because it has received over 30 years of tax preferences. To now claim that everything is equal because renewables have received support for three years is not only intellectually dishonest, it doesn't make sense. Increasing investment and support will only further grow renewable energy production capacity.

President Obama recently released a proposal to increase tax credits for alternative fuel vehicles from $7,500 to $10,000. These types of tax credits are helpful to offset the initial higher cost and increase demand, which in turn will help to eventually lower the price tag. New technology and products are going to be more expensive when they first launch. It doesn’t mean they are bad or a wasteful. It is just the cycle of innovation. Think about where computers have come from when they were first introduced until now. Plus, U.S. electric cars are making great strides and the Chevy Volt was just named "European Car of the Year."

Tax credits, though, should only be part of the solution. As the CBO report points out, they are not necessarily the most efficient way to reduce environmental and external costs of energy. In fact, the CBO recommends a tax levy on energy sources that reflects the amount of costs associated with their production and use as a more efficient way forward. The CBO report also recommends government investment in research and development because private firms cannot capture the “spillover benefits” for society as a whole that result from it.

In other words, knowledge that is generated through research and development can have benefits for society, but not necessarily for a specific firm, therefore government funding is more appropriate. In fact, the CBO report explicitly makes the case for government intervention because there is no private market incentive to take into account environmental damage or other external costs that come from energy production and consumption.

What I really don’t get is this: conservatives take a strange amount of glee is denouncing green energy but a successful renewable energy sector will only benefit our economy through good jobs and helping wean us off of foreign oil. And regardless of politics, the fact remains that fossil fuels are finite and will eventually run out. What will we do then? To deal with that reality, technology must be developed and commercialized before we run out of energy. What’s not to get?