January 19, 2009

The Energy Tax Code

Aside from the question of pricing the externalities of carbon emissions, a key question about the future of US energy policy is whether the existing tax code is well-suited for promoting a sustainable system of energy. This Oil Drum post provides a good overview of what the situation is like now. Here's the nickel version:
  • The tax code is not at all generous with respect to investments in the electric grid. The effective tax rate on these investments is very close to the unadjusted statutory tax rate of about 39%. If investment is to be encouraged in the electric grid, Dr. Metcalf believes that this tax rate must be lowered.
  • The current tax code, especially since enactment of the Energy Policy Act of 2005, strongly encourages investment in nuclear, wind, and solar power, which enjoy tax subsidies ranging from nearly 100 percent, for nuclear, to more than 200 percent, for solar. In other words, tax subsidies for these forms of energy generation are sufficiently generous that investors may use them to offset tax liabilities for capital gains and income derived from non-energy investments. The telephone discussion indicated that these provisions are not currently working as intended for wind and solar, because of lack of "tax appetite".

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