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Green Tax Incentives Just Don’t Work

2 min readBy: Lyman Stone

According to KPMG, the US taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. 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 depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. and investment, and even healthcare and homeownership. Crucially, the study found that major policies like the gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. had little effect on greenhouse gas emissions, while production tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s 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.

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