THE BLOG
06/22/2013 12:55 pm ET Updated Aug 22, 2013

The Tax Code Flunks a Carbon Audit

Policy geeks - I use that term with love -- have been waiting patiently for the National Academy of Sciences (NAS) to reveal how the U.S. tax code influences America's greenhouse gas emissions.

The NAS began a "carbon audit" of the code two years ago at the direction of Congress, thanks to an amendment slipped into legislation by Rep. Earl Blumenauer of Oregon. The results were due last fall but weren't released to the public until last week.

What did the auditors find? Their conclusions may be disappointing to those who believe that an effective strategy for cutting America's carbon emissions is to eliminate tax breaks for oil, gas and coal while increasing tax advantages for energy efficiency and renewable energy.

A 12-person committee chaired by Yale economist William Nordhaus conducted the audit. It generally concluded that as the tax code is structured now, tax breaks for fossil fuels don't result in significant greenhouse gas emissions and tax incentives for clean energy don't contribute much to reducing emissions.

The committee conceded that it studied only parts of the encyclopedic tax code because even two years and $1.5 million were insufficient time and resources. It acknowledged that it couldn't be precise about the code's impact on carbon emissions because of the complicated ecology of regulations that directly or indirectly affect energy use. It also cited a lack of adequate modeling tools. However, it did venture a few conclusions.

First, the overall impact of energy-related provisions in the tax code probably is less than 1% of total U.S. emissions. "The national and global emissions reductions necessary to meet internationally agreed-upon climate objectives are many times larger than those resulting from current tax subsidies," the committee said.

Second, as they are structured and at their current scale, energy subsidies in the tax code today cost the government $48 billion in 2011 and 2012. Given their low impact, they turned out to be a "poor tool" for emission reductions.

Third, some tax policies are more effective than others. The committee said, for example, that ethanol subsidies caused more emissions than they offset. On the other hand, renewable energy production tax credits (PTCs) do appear to reduce greenhouse gas emissions, but they are too small to produce meaningful progress.

Fourth, if Congress retools the tax code in a way that boosts the economy - presumably, one goal of tax reform - the increased economic activity probably would result in more greenhouse gas emissions. However, the committee speculated that "effective tax reform will increase the nation's productivity and living standards, thereby providing more than sufficient resources to pay for reducing the additional GHG emissions." (The problem, of course, is that we need to cut emissions far deeper than merely offsetting new growth. The challenge is to increase national productivity and quality of life while decreasing emissions, which is why clean energy is important.)

After 180 pages of analysis and discussion, the report's bottom line is this: "Tax policy can make a substantial contribution to meeting the nation's climate-change objectives, but the current approaches will not accomplish that...If tax expenditures are to be made an effective tool for reducing GHG emissions, much more care will need to be applied to designing the provisions to avoid inefficiencies and perverse offsetting effects."

The bottom-bottom line is this: Even intelligent tax policy is not the best approach to slowing climate change. "The most efficient way to reduce GHG emissions is through policies that create a market price for CO2 and other GHGs," the committee concluded. "In order to meet ambitious climate-change objectives, a different approach that targets GHG emissions directly through taxes or tradable allowances will be both necessary and more efficient."

In other words, the most effective fiscal weapon against climate change is a carbon tax that is uniform across the economy and free of loopholes, or a comprehensive cap-and-trade system that covers all major emission sources. Either approach is more reliable and efficient than "targeting capital goods, processes, or products that are only indirectly linked to emissions," the committee found.

The Nordhaus committee was not asked to make specific policy recommendations, so it didn't. But because we won't get climate pricing out of the 113th Congress short of divine intervention, there are several things the Obama Administration can do.

The President can unleash his inner poker player and negotiate hard for tax reforms that produce much more consequential emission reductions. His Administration can regulate major emission sources such as power plants so aggressively that Congress decides a carbon price is the lesser evil.

The President can argue that whatever the nuances and complexities of the tax code may be, it is better to have federal fiscal policies that support clean energy and reduce climate change while discouraging things that endanger the health and safety of the American people.

The President can comb through his executive authorities for tools to "price carbon" in other ways - for example, by raising royalties for oil production on public lands. And rather than talking about a carbon price or a carbon tax, the President might call for a "climate security surcharge" in every speech, budget, news conference and talk show appearance, so deeply planting its necessity in the American psyche that the 114th Congress can't ignore it.

It may not work, but it can't hurt. Right?

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