Green Tax Incentives Just Don't Work

June 25, 2013

According to KPMG, the US tax code promotes environmental initiatives more than any other nation. With President Obama set to announce a new plan for environmental policy today, the effectiveness of “green” policy tools will again be a topic of public debate. Meanwhile, a recent report by the National Research Council sheds light on the effectiveness of green tax incentives. The NRC report focuses on the effect of these incentives on greenhouse gas output, analyzing whether the US tax code has succeeded in reducing greenhouse gas emissions.

Regardless of whether or not CO2 actually has a high social cost—the Economist reports a new “cooling” consensus—this report is interesting because it suggests that current green tax incentives do very little to reduce emissions. So either they are expensive and ineffective ways of limiting carbon, or they are expensive and ineffective ways of giving unnecessary corporate welfare through tax favoritism. Among the green taxes and incentives that the NRC assessed were various renewable energy production tax credits, like the recently-expired wind energy credit. The NRC also reviewed credits relating to capital depreciation and investment, and even healthcare and homeownership. Crucially, the study found that major policies like the gas tax had little effect on greenhouse gas emissions, while production tax credits subsidizing renewable energy sources, such as wind energy, only reduced greenhouse gas emissions by 0.3 percent, despite costs running into the billions.

This study should remind lawmakers and investors of a simple truth: the best decisions are based on long-term economic factors and market conditions. When businesses make decisions to leverage government favoritism, they fail. Tax incentives are an inefficient and distortionary way of achieving policy goals, and, in the case of green incentives, haven’t even made substantial progress to achieve their stated goals. With new tax proposals on the table intended to aid renewable energy firms, we should not forget the mistakes of the past.

For more on environmental tax policy, click here.

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