An effective energy tax policy that serves the best interests of the American people should correct market failures, promote cost-effectiveness, and enable review and reform in order to improve policy over time. In my testimony before the House Energy and Commerce Committee (Subcommittee on Energy) today, I apply these principles to the tax expenditures that subsidize fossil fuels, showing how these expenditures fall short on each principle.
The current slate of fossil fuel tax benefits do not target externalities, although some past subsidies—such as the unconventional natural gas production tax credit—targeted the market failure associated with innovation. These subsidies have very little impact on production—and hence market outcomes, like prices—as I explained in a 2014 Resources article, Money for Nothing: The Case for Eliminating US Fossil Fuel Subsidies. And the absence of a sunset provision for fossil fuel tax expenditures, in contrast to most tax benefits for renewables and energy efficiency, means that there are no natural legislative opportunities for review and reform. I conclude by noting how these principles could inform both better design of subsidy policies but also tax reform that places a price on carbon in order to finance lower labor and capital income tax rates.