SUBSIDIES, EXTERNALITIES, AND CLIMATE CHANGE: WHETHER ELIMINATING ENERGY TAX SUBSIDIES AND TAXING CARBON IS ENOUGH BY HANNAH BENTLEY The author wishes to thank the following individuals and institutions for their invaluable assistance on this paper and the hard work on the issues it raises: Tax LLM Director Jennifer Kowal, Professor Theodore Seto, Professor Katherine Pratt, Professor Katherine Trisolini, Tax LLM Graduate Joel Wilde, Professor Ed Robbins, Loyola Law School Los Angeles; John Stephens, Director, Graduate Tax Program, Professor Richard Pomp, Assistant Dean Michelle Kirkland, Office of Academic Services, Professor Katrina Wyman, NYU Law School; Kelsang Tangpa and the students at the Mahamudra Kadampa Buddhist Center (Hermosa Beach, California); Geshe Norbu Chophol, Kensur Rinpoche Lobsang Jamyang, and the students at the Geden Shoeling Tibetan Manjushri Center (Westminster, California); Anna Rondon; Levon Bennally; and the Environmental Defense Fund 1 TABLE OF CONTENTS I. INTRODUCTION – WOULD ELIMINATING ENERGY TAX SUBSIDIES AND TAXING CARBON BE A GOOD IDEA?...............................................................4 II. TAX SUBSIDIES, OTHER SUBSIDIES, AND EXTERNALITIES – EFFICIENCY THEORY AND APPLICATION IN THREE CASES………………………………8 A. THE EFFICIENT MARKETPLACE PREMISE AND THE THEORY OF THE SECOND BEST…………………………………………………………….8 B. TAX SUBSIDIES AND THEIR RELATIONSHIP TO DIRECT EXPENDITURES AND EXTERNALITIES…………………………………………………………10 C. SUBSIDIES AND EXTERNALITIES IN THREE SECTORS: OIL AND GAS, NUCLEAR, AND SOLAR………………………………………………….12 D. ENERGY SUBSIDIES AND EXTERNALITIES – THREE CASES…………….13 1. OIL AND GAS…………………………………………………..13 a. TAX SUBSIDIES…………………………………………..14 b. OTHER SUBSIDIES……………………………………….18 c. EXTERNALITIES…………………………………………19 2. NUCLEAR ENERGY…………………………………………….22 a. INTRODUCTION…………………………………………..22 b. SUBSIDIES AND EXTERNALITIES ASSOCIATED WITH STEPS IN THE NUCLEAR FUEL CYCLE………………………….23 1. URANIUM MINING AND ENRICHMENT………………23 2. PLANT CONSTRUCTION……………………………...27 3. PLANT OPERATION…………………………………..31 4. SPENT FUEL PROCESSING, INTERIM STORAGE, AND PERMANENT SEQUESTRATION………………………33 5. PLANT AND SITE DECONTAMINATION AND DECOMMISSIONING………………………………….35 c. ENERGY, WATER AND PROLIFERATION COSTS………...43 d. SUMMARY OF SUBSIDIES AND EXTERNALITIES FOR NUCLEAR POWER………………………………………..44 3. SOLAR POWER…………………………………………………46 a. MAJOR SUBSIDIES……………………………………….46 i. NON-TAX SUBSIDIES………………………………...48 ii. TAX SUBSIDIES………………………………………50 2 1. THE PTC, ITC AND NEW TECHNOLOGY CREDITS………………………………………….50 2. THE ADVANCED ENERGY PROPERTY CREDIT ……………………………………………51 3. CREBS, AND NCREBS…………………………..52 b. EXTERNALITIES……………………………………....53 c. CONCLUSION ON SUBSIDIES AND EXTERNALITIES FOR SOLAR POWER………………………………………..55 III. CONCLUSION – WE NEED TO DO MORE THAN ELIMINATE TAX SUBSIDIES AND IMPOSE A CARBON TAX……………………………………………..56 APPENDIX I……………………………………………………………………….58 APPENDIX II………………………………………………………………………64 3 I. INTRODUCTION – WOULD ELIMINATING ENERGY TAX SUBSIDIES AND TAXING CARBON BE A GOOD IDEA? The Role of Energy and the Carbon Tax Efficiency Thesis. The energy industry is one of the most central components of the U.S. and global economies than energy – and it has led to extensive conflict and environmental impacts.1 Energy policy in the U.S. has been pursued largely through incentives in the Internal Revenue Code.2,3 Recently, economists and those motivated by economic efficiency theory have argued that this system of tax breaks is misguided.4 Many of them have suggested that universally eliminating tax subsidies for specific energy sources and directly taxing externalities would be preferable.5 In particular, they have suggested that eliminating tax subsidies 1 See, e.g., Daniel Yergin, The Quest: Energy, Security, and the Remaking of the Modern World, at 2 (2011), Michael J. Graetz, The End of Energy: The Unmaking of America’s Environment, Security, and Independence [Kindle location 112 of 5033] (2011), Daniel M. Kammen, Renewable Energy in U.S. Foreign Policy, 36 G.G.U. L. Rev. 327, 328 & n. 4 (2008), citing International Energy Agency, IEA Energy Technology R&D Statistics, 1974-1995 (Int’l Energy Agency, Org. for Econ. Cooperation & Dev., Paris 1997), and citing Kammen, Kapadia & Fripp, Putting Renewables to Work: How Many Jobs Can the Clean Energy Industry Generate? (Renewable and Appropriate Energy Laboratory, University of California, Berkeley (2004). 2 Clean Energy Tax Incentives: The Effect of Short-Term Extensions on Clean Energy Investment, Domestic Manufacturing, and Job Creation, S. Comm on Finance, Subcomm. on Energy, Natural Resources, and Infrastructure, 112th Cong., 1st Sess., (Statement of Molly Sherlock, Cong. Research Serv., at 10)(Dec. 14, 2011). See generally Staff of Joint Comm. on Taxation, 112th Cong., Tax Expenditures for Energy Production and Conservation, JCX-2S-09 (Comm. Print 2009). 3 The incentives began with those favoring domestic production of oil at the beginning of the twentieth century, when the U.S. was a net exporter. See Cong. Research Serv., Tax Expenditures: Compendium of Background Material on Individual Provisions S. Comm. on Budget, 111th Cong., S. Prt. 111-58, at 118 (Comm. Print 2010) (discussing percentage depletion and expensing of exploration and development costs); Energy Info. Admin., SR/CNEAF/2008-1, Federal Financial Interventions and Subsidies in Energy Markets 2007 (hereafter, “EIA 2007 Report”), at 11 & n.29 (Apr. 2008) (referring to original provision for expensing intangible drilling costs); Charles O. Galvin, Federal Income Tax – Percentage Depletion of Oil and Gas Wells, 21 Tex. L. Rev. 410, 411 (1943). 4 Staff for the Joint Committee on Taxation for example, has noted that the present approach is “incoherent” and “lacking well-defined objectives.” Staff of Joint Comm. on Taxation, Tax Expenditures for Energy Production and Conservation, supra n. [2], at 1. See also Staff of the Joint Comm. on Taxation, 112th Cong., Present Law and Analysis of Energy-Related Tax Expenditures and Energy-Related Expenditures Description of the Revenue Provisions Contained in H.R. 1380, the New Alternative Transportation to Give Americans Solutions Act of 2011, JCX-47-11, at 1 (Sept. 20, 2011). 5 See Sherlock Statement, supra note [2], at 10; Energy Policy and Tax Reform, Hearing Before 4 and placing a tax on carbon would be more efficient and equitable.6 Many believe that nuclear power would have a role to play if this were done. Among those who have argued that eliminating tax subsidies and imposing a carbon tax would be more efficient are William Gale and Benjamin Harris of the Tax Policy Institute, who note that all tax expenditures, including those for energy, are inefficient, and that: An energy tax, . a carbon tax . would include the social cost of producing and consuming carbon in the price of goods, reduce the U.S. economy’s dependence on foreign sources of energy, and mitigate economic effects of environmental deterioration. Furthermore, a tax on carbon . would create better market incentives for the production of energy-efficient goods, and could be used as a mechanism to phase out the panoply of targeted energy incentives.7 Molly Sherlock of the Congressional Resource Service has made the same point, perhaps more subtly: From an economic perspective, energy prices would ideally reflect the full social cost of energy production and consumption. The most economically efficient way to achieve this outcome would be to tax energy resources that have negative external costs, such as pollution. The history of U.S. energy tax policy indicates a preference for subsidies, rather than direct taxes.8 House Comm. on Ways and Means, Subcomm. on Select Revenue Measures, 112th Cong., 1st Sess. (Statement of Donald B. Marron, Urban-Brookings Tax Policy Center) (Sept. 22, 2011); William G. Gale and Benjamin P. Harris, Tax Policy Center, Reforming Taxes and Raising Revenue: Part of the Fiscal Solution (May 1, 2011), reprinted at 2011 Tax Notes Today, 2011 TNT 109-39 (June 7, 2011); John M. Broder, Obama’s Bid to End Oil Subsidies Revives Debate, N.Y. Times A14 (Jan. 31, 2011), avail. at http://www.nytimes.com/2011/02/01/science/earth/01subsidy.html?_r=1 (last viewed June 1, 2012)(quoting David W. Kreutzer, Heritage Foundation, and H. Jeffrey Leonard, Global Environment Fund, and Douglas Koplow, Earth Track, as supporting end to all energy subsidies); Jeffrey Leonard, Getting the Energy Sector Off the Dole, Washington Monthly (Jan./Feb. 2011), avail. at http://www.washingtonmonthly.com/features/2011/1101.leonard-2.html (last viewed June 1, 2012). 6 See, e.g., Marron Statement, supra note [5]. 7 Gale & Harris, supra note [2], at 11 (discussing tax expenditures), 29 (energy taxes). Gale and Harris’ paper provided a global analysis of tax reform in light of the impending fiscal cliff, and had a section on energy policy and the possibility of the carbon tax as a revenue source. 8 Sherlock, supra note [2], at 8. 5 Others have argued that simply eliminating the tax subsidies, which largely favor oil and gas and nuclear power, could get us a long step forward. When the Obama Administration repeated its calls for eliminating some oil subsidies, the New York Times reported, Mr. Obama’s proposal rekindles a long running debate over federal subsidies for energy of all kinds, including petroleum, coal, hydropower, wind, solar and biofuels. Opposition to such subsidies . spans the ideological spectrum, from conservative economists, who believe such breaks distort the marketplace to environmentalists