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The clumsy way Congress picks energy winners

Illustration: Rebecca Zisser / Axios

Congress is doubling down on the least efficient and most expensive way to advance energy and climate policy: through a multi-billion dollar maze of tax subsidies.

Why it matters: The massive tax bill Congress is set to approve this week does little to simplify complicated tax laws that impact the energy industry, keeping intact most energy subsidies totaling tens of billions of dollars. The prospect of a tax on carbon emissions, which would both raise revenue for the federal government and help level the playing field between polluting and non-polluting energy resources, never had a chance.

"You're just giving away money for no good purpose. It's a very blunt instrument to change firms' behavior. Subsidies are just the wrong way to go," says Gilbert Metcalf, an economist at Tufts University. "Except for the political fact it's easier to give people money than to tax them."

Taxpayers for Common Sense, a nonpartisan think tank, tallied up nearly $50 billion worth of subsidies going mostly to the fossil-fuel sectors over 10 years that were kept intact. These subsidies, which have been in the tax code for decades, include an accounting measure for oil, natural gas and coal known as "last in, first out" and a percentage depletion allowance for oil and gas, according to the list compiled by the group and shared with Axios. Congress may also pass a separate bill extending another round of subsidies, including those in the energy industry.

The group says it had backed the approach initially proposed by Republican leaders on the House tax committee that would have started with a blank slate with all subsidies for energy and other industries — "where everything is out and then must be deliberately put back in and paid for," says Autumn Hanna, senior program director at the taxpayers group. "This bill, however, went in with a scalpel and carved out only a few things."

In light of that approach, lobbyists from clean-energy industries have been scrambling to ensure the scalpel didn't go after their more recently approved subsidies either. Subsidies for wind (~$24 billion), solar (~$12 billion) and electric car (~$4.4 billion) over five years were not cut in the final legislation alongside the fossil-fuel subsidies. Earlier proposals had curtailed the wind subsidy and scrapped altogether the electric car subsidy. The wind and solar subsidies are set to expire in the coming years, based off a 2015 law.

Subsidies versus carbon tax

The upshot to all of these energy subsidies is best described as the opposite of a tax on carbon emissions. Congress is paying billions of dollars in tax credits for clean energy while doing nothing to put a monetary price on the climate-change impact of fossil fuels. In fact, it's sustaining subsidies for those industries too.

  • A carbon tax is controversial for several reasons, including what to do with the revenue raised. Quiet efforts are underway to build political support for a carbon tax, but it's not likely to happen any time soon.

"In a perfect world, you would tax the thing you want less of and provide a revenue stream to the Treasury, instead of crediting clean energy and draining the Treasury," says David Brown, a lobbyist for Exelon, the nation's largest operator of nuclear power plants, which don't emit carbon. "From an economic perspective, it's not ideal. From a political perspective, it may be as good as it gets."

  • Exelon is pushing a proposal to create a new tax credit that would cost nearly $5 billion over the next four years. Brown says his company supports a carbon tax but isn't pushing for one because of the high political hurdles. Exelon's tax credit proposal faces long odds of passing, though it has slightly better odds than a separate, $65 billion coal tax credit proposal because nuclear's carbon-free profile garners it bipartisan backing.

Adele Morris, an economist at the Brookings Institution who recently hosted an event about a carbon tax that I spoke at, says a carbon tax achieves two things on top of raising government revenue, that subsidies don't:

  1. Transition from dirtier energy technologies to cleaner ones.
  2. Energy conservation through higher prices.

"There's no way to mirror the market outcomes of a carbon tax with some portfolio of subsidies because you're not going to be producing that same incentive to conserve energy," Morris says.

What's next: The fight over a carbon tax is likely to pick up next year.

The Center on Global Energy Policy, a think tank at Columbia University, is launching a series of reports and events focused on how to design a carbon tax and what implications could come from one.

Separately, the Climate Leadership Council, a coalition of oil and gas executives and conservative political leaders from prior Republican administrations, is working to build support among congressional Republicans and others for a carbon tax where the revenue goes back to consumers in the form of monthly dividend checks.

Tom Pyle, who heads the American Energy Alliance, a conservative energy advocacy group, is opposed to that plan, along with most subsidies and environmental regulations. His group is evaluating the impacts of it, though he wouldn't offer more details on when his group would announce anything about its work. You can expect something public on the matter early next year.

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