Happy Earth Day!

Whether you’ll carry on today like normal or go out and do something earth-y, as taxpayers, we are stuck with the costs of climate change. Wildfires, floods, hurricanes, droughts, you name it. They all cost taxpayers dearly, and the costs are rising.

We could write all day about federal policies impacting climate policy. But with Tax Day colliding with Earth Day this week, we’re zeroing in on energy tax expenditures impacting the climate.

It’s a timely topic given Congress is contemplating a pared down version of last year’s budget reconciliation bill. There’s talk of a narrower package centered around “clean energy” tax credits intended to benefit the climate. However, the devil is always in the details.

There are ample opportunities to address climate change within a revamped Build Back Better (BBB) bill. However, simply enacting new policies without first reforming existing ones won’t solve climate change. Many status quo tax credits, for instance, create perverse incentives, distort markets, and work at cross purposes with climate goals.

A few noteworthy examples:

• Entrenched oil and gas tax breaks: Provisions in the tax code designed to allow oil and gas companies to reduce their tax bills have been on the books for decades, some for more than a century. At last count, they cost taxpayers $3.2 billion in lost revenue for FY2022. Eliminating them would have been an easy way to raise revenue for BBB, but even the bolder House bill didn’t touch most of them. These provisions let companies bend standard accounting rules, by overstating the cost of their inventory, writing off drilling and exploration costs before wells ever start generating revenue, claiming they paid foreign taxes they didn’t, and claiming a standard deduction measured as a flat percent of income with no connection to a company’s costs. Sound wonky? That’s the point. Complexity favors corporate lobbyists who substitute the rules’ technicality for merit and the industry’s legion of accountants. By padding Big Oil’s near-record profits, the tax breaks certainly do not favor the climate.
• Greenwashing and carbon capture credits: “Greenwashing” is when companies or others adopt environmentally- or climate-friendly language or pet projects to win approval or hide underlying, unfriendly practices. Trapping carbon before it enters the atmosphere certainly sounds climate friendly. But in reality, carbon capture, use, and sequestration (CCUS) technologies are most often employed to trap carbon and pump it underground to goose more oil and gas out of existing wells. And our tax code rewards companies for doing so, at a cost of roughly $1.2 billion for 45Q tax credits so far. Now, new industries like biofuels plants are claiming CCUS will tip their climate ledgers into the green. In reality, it’s just more greenwashing, waste, and wishful thinking.
• Biomass based diesel tax credit: The $3 billion/year tax break for biodiesel and “renewable” diesel incentivizes the use of food-based (mostly soy) biofuels. It props up a rapidly expanding, heavily subsidized industry. Instead of extending the credit later this year, as Congress has done repeatedly since 2004, the climate – and taxpayers – would be better off if the tax break ended. Studies found biofuels tax credits actually increase greenhouse gas (GHG) emissions.
• Cellulosic biofuel tax credit: This little-used tax credit was intended to prop up the cellulosic biofuels industry, and eventually lead to 16 billion gallons of low-carbon biofuels production annually. Fuels were intended to be produced from non-food feedstocks like corn cobs, wood residues, and switchgrass. However, despite decades of tax credits, mandates, loan guarantees, and subsidies, the industry has yet to really get off the ground. Cellulosic biofuels have met just five percent of the target Congress set in 2007 (through the Renewable Fuel Standard). A once-promised climate savior has instead become a pit for taxpayer dollars.
• Biomass tax credit: While the production tax credit for biomass expired at the end of 2021, it’s routinely been on Congress’s end-of-year tax extension wish list (sometimes retroactively). Several energy tax credits – including those for biomass – fail to require projects to reduce GHG emissions in exchange for generous taxpayer support.

As Congress contemplates reviving some form of the BBB, policymakers should ensure any package meets the following principles: (1) is fiscally responsible response in pursuit of legitimate public needs, (2) doesn’t plant fiscally reckless future liabilities, (3) promotes resilience, instead of dependence on federal spending, and (4) does more than provide dollars but also makes change. We’ve said it before, and we’ll say it again.

More specifically for energy, eliminating wasteful, counterproductive tax breaks would benefit the climate – and taxpayers. This could happen through a revamped reconciliation bill or a tax extenders package later this year. Calls to revive similar false climate solutions through different avenues (loan guarantees, accelerator programs, etc.) should be scrapped in favor of investments in real common sense climate solutions.

Please stay tuned next week as we dig deeper.