Gilbert E. Metcalf

Energy Tax Incentives and the Alternative Minimum Tax

Curtis Carlson et al. — Thu, 14 Jul 2011 14:38:00 PDT

We take a first look at limitations on the use of energy-related tax credits contained in the General Business Credit (GBC) due to limitations within the regular corporate income tax as well as the AMT. Between 2000 and 2005, firms were unable to use all energy-related tax credits due to GBC limitations in the regular tax. The AMT has a smaller but still pronounced impact on the ability of firms to use these credits. Finally we provide some illustrative calculations to demonstrate how the AMT can lead to very different levelized costs of producing electricity from a wind power project.

The 'New' View of Investment Decisions and Public Policy Analysis: An Application to Green Lights and Cold Refrigerators

Gilbert E. Metcalf et al. — Sat, 12 Mar 2011 04:40:48 PST

Recent research in investment theory emphasizes the importance of sunk investment costs, uncertainty in returns, and flexibility in investment timing. Allowing for the presence of these characteristics alters traditional discounted cash flow rules for when to invest. Those rules will recommend investing at lower rate-of-return thresholds than is optimal. This article describes this research and suggests the range of potential situations to which the theory applies. It also discusses the implications for policy analysis and suggests that government programs to encourage investment may, in some cases, be inappropriate. After discussing a wide array of possible applications, we focus on one in particular: programs to encourage energy-efficient investment. The examples suggest the importance of applying the new investment theory for economic analysis of investment in energy-efficient technologies.

Federal Tax Policy Towards Energy

Gilbert E. Metcalf — Tue, 22 Feb 2011 12:44:02 PST

On Aug. 8, 2005, President Bush signed the Energy Policy Act of 2005 (PL 109-58). This was the first major piece of energy legislation enacted since 1992 following five years of Congressional efforts to pass energy legislation. Among other things, the law contains tax incentives worth over $14 billion between 2005 and 2015. These incentives represent both pre-existing initiatives that the law extends as well as new initiatives.

In this paper I survey federal tax energy policy focusing both on programs that affect energy supply and demand. I briefly discuss the distributional and incentive impacts of many of these incentives. In particular, I make a rough calculation of the impact of tax incentives for domestic oil production on world oil supply and prices and find that the incentives for domestic production have negligible impact on world supply or prices despite the United States being the third largest oil producing country in the world.

Finally, I present results from a model of electricity pricing to assess the impact of the federal tax incentives directed at electricity generation. I find that nuclear power and renewable electricity sources benefit substantially from accelerated depreciation and that the production and investment tax credits make clean coal technologies cost competitive with pulverized coal and wind and biomass cost competitive with natural gas.

On the Rebound: Letter to the Editor

Gilbert E. Metcalf — Tue, 11 Jan 2011 08:00:47 PST

U.S. Energy Tax Policy

Gilbert E. Metcalf — Thu, 11 Nov 2010 05:41:57 PST

An edited volume on energy and climate policy with contributions by leading researchers in tax, energy, and environmental policy.

Submission on the Use of Carbon Fees To Achieve Fiscal Sustainability in the Federal Budget

Gilbert E. Metcalf — Mon, 26 Jul 2010 14:41:41 PDT

The National Commission on Fiscal Responsibility and Reform should consider a carbon fee as an instrument to enhance the federal budget's fiscal sustainability. A carbon fee would provide significant environmental and efficiency benefits for the U.S. economy in comparison to alternative revenue raising tools available to the federal government. A carbon fee is a predictable source of revenue that could substantially contribute to reducing the federal debt. A carbon charge that begins in the neighborhood of $30 per ton of carbon dioxide equivalent (nominal dollars) could raise revenue between 2015 and 2050 that in present value terms equals roughly 40 percent of the projected net government debt in 2015.

I recommend a phased implementation of a carbon fee that grows over time in a predictable manner. Revenue from the fee should initially be targeted to transition assistance to households with particular focus on low-income households and workers in carbon-intensive industries. Over time, the use of revenue should shift from transition assistance to debt reduction.

Distributional Implications of Alternative U.S. Greenhouse Gas Control Measures

Sebastian Rausch et al. — Tue, 13 Jul 2010 17:28:59 PDT

We analyze the distributional and efficiency impacts of different allowance allocation schemes motivated by recently proposed U.S. climate legislation for a national cap and trade system using a new dynamic computable general equilibrium model of the U.S. economy. The USREP model tracks nine different income groups and twelve different geographic regions within the U.S. We find that the allocation schemes in all proposals are progressive over the lower half of the income distribution and proportional in the upper half of the income distribution. Scenarios based on the Cantwell-Collins allocation proposal are less progressive in early years and have lower welfare costs due to smaller redistribution to low income households and, consequently, lower income-induced increases in energy demand and less savings and investment. Scenarios based on the three other allocation schemes tend to overcompensate some adversely affected income groups and regions in early years, but this dissip ates over time as the allowance allocation effect becomes weaker. Finally, we find that carbon pricing by itself (ignoring the return of carbon revenues through allowance allocations) is proportional to modestly progressive. This striking result follows from the dominance of the sources over uses side impacts of the policy and stands in sharp contrast to previous work that has focused only on the uses side. The main reason is that lower income households derive a large fraction of income from government transfers, and we hold the transfers constant in real terms, reflecting the fact that transfers are generally indexed to inflation. As a result, this source of income is unaffected by carbon pricing while wage and capital income is affected.

Cost Containment in Climate Change Policy: Alternative Approaches to Mitigating Price Volatility

Gilbert E. Metcalf — Wed, 06 Jan 2010 13:53:37 PST

Cap and trade systems are emerging as the front-running policy choice to address climate change concerns in many countries. One of the apparent attractions of this approach is the ability to achieve hard limits on emissions over a control period. The cost of achieving this certainty on emission limits is price volatility. I discuss and evaluate various approaches within cap and trade systems to reduce price volatility. A fundamental trade-off exists between certainty of emission limits and price volatility. A pure carbon tax sacrifices certainty of emission limits in favor of price stability. I discuss how a hybrid carbon tax can be designed to achieve a balance between price stability and emissions certainty. This hybrid, dubbed the Responsive Emissions Autonomous Carbon Tax (REACT), combines the short-run price stability of a carbon tax with the long-run certainty of emission reductions over a control period.

Investment in Energy Infrastructure and the Tax Code

Gilbert E. Metcalf — Mon, 30 Nov 2009 10:38:10 PST

Federal tax policy provides a broad array of incentives for energy investment. I review those policies and construct estimates of marginal effective tax rates for different energy capital investments as of 2007. Effective tax rates vary widely across investment classes. I then consider investment in wind generation capital and regress investment against a user cost of capital measure along with other controls. I find that wind investment is strongly responsive to changes in tax policy. Based on the coefficient estimates the elasticity of investment with respect to the user cost of capital is in the range of -1 to -2. I also demonstrate that the federal production tax credit plays a key role in driving wind investment over the past eighteen years.

Plugging 21st Century Technology Into a 19th Century Grid System

Gilbert E. Metcalf — Fri, 24 Jul 2009 09:54:51 PDT

Tax Policies for Low-Carbon Technologies

Gilbert E. Metcalf — Fri, 24 Jul 2009 09:53:51 PDT

Environmental Taxation: What Have We Learned in This Decade?

Gilbert E. Metcalf — Fri, 24 Jul 2009 09:52:15 PDT

Tax Policies for Low-Carbon Technologies

Gilbert E. Metcalf — Fri, 24 Jul 2009 09:49:31 PDT

The following paper discusses the difficulties of achieving climate change policy goals with low-carbon subsidies as opposed to using taxes to raise the price of carbon intensive activities. First, subsidies lower the cost of energy, and thus, encourage consumer demand responses that work in opposition to the goal of reducing emissions. Second, it is difficult to achieve technology neutrality with subsidies. Third, many subsidies are inframarginal. Finally, subsidies often suffer from unintended interactions with other policies. The paper concludes with some observations on the use of price-based instruments and discusses how a carbon tax could be designed to achieve environmental goals over a control period.

The Design of a Carbon Tax

Gilbert E. Metcalf et al. — Fri, 24 Jul 2009 09:46:44 PDT

We consider the design of a tax on greenhouse gas emissions for the United States. We consider three major issues: the tax rate (including the use of the revenues and rate changes over time), the optimal tax base, and international trade concerns. We show that a well-designed carbon tax can capture about 80% of U.S. emissions by taxing only a few thousand taxpayers, and almost 90% with a modest additional cost. We recommend full or partial delegation of rate setting authority to an agency to ensure that rates reflect current information about the costs of carbon emissions and abatement. Adjustments should be made to the income tax to ensure that a carbon tax is revenue neutral and distributionally neutral. Finally, we propose an origin-basis system for trade with countries that have an adequate carbon tax, and a system of border taxes for imports from countries without a carbon tax. We suggest a system that imposes presumptive border tax adjustments, allowing an individual firm to prove that a different rate should apply. The presumptive tax could be based on average emissions for production of the item by either the exporting country or the importing country.

The Incidence of a U.S. Carbon Tax: A Lifetime and Regional Analysis

Kevin Hassett et al. — Wed, 10 Jun 2009 14:19:15 PDT

This paper measures the direct and indirect incidence of a carbon tax using current income and two measures of lifetime income to rank households. Our results suggest that carbon taxes are more regressive when annual income is used as a measure of economic welfare than when lifetime income measures are used. Further, the direct component of the tax, in any given year, is significantly more regressive than the indirect component. We observe a modest shift over time with the direct component of carbon taxes becoming less regressive and the indirect component becoming more regressive. These effects mostly offset each other and the distribution of the total tax burden has not changed much over time. In addition we find that regional variation has fluctuated over the years of our analysis. By 2003 there is little systematic variation in carbon tax burdens across regions of the country.

Market-based Policy Options to Control U.S. Greenhouse Gas Emissions

Gilbert E. Metcalf — Wed, 10 Jun 2009 14:14:13 PDT

The United States is moving closer to enacting a policy to reduce domestic emissions of greenhouse gases. A key element in any plan to reduce emissions will be to place a price on greenhouse gas emissions. This paper discusses the different approaches that can be taken to price emissions and assesses their strengths and weaknesses.

Reacting to Greenhouse Gas Emissions: A Carbon Tax to Meet Emission Targets

Gilbert E. Metcalf — Wed, 08 Apr 2009 05:17:41 PDT

In previous papers I have described a revenue and distributionally neutral approach to reducing U.S. greenhouse gas emissions that uses a carbon tax. The revenue from the carbon tax is used to finance an environmental earned income tax credit designed to be distributionally neutral. The carbon tax reform proposal is also revenue neutral and avoids conflating carbon policy with debates over the appropriate size of the federal budget. This paper describes a variant to address concerns of environmentalists that a carbon tax does not provide certainty of emission reductions over the control period. The Responsive Emissions Autonomous Carbon Tax (REACT) combines the short-run price stability of a carbon tax with the long-run certainty of emission reductions over a control period.

"Policy Options for Controlling Greenhouse Gas Emissions: Implications for Agriculture" (with John M. Reilly)

Gilbert E. Metcalf — Sun, 18 Jan 2009 14:01:35 PST

Household Energy Conservation Investment and the Uninformed Consumer Hypothesis (with Alexander M. Brill and Kevin A. Hassett)

Gilbert E. Metcalf — Fri, 16 Jan 2009 07:01:34 PST

Oligopoly Deregulation in General Equilibrium: A Tax Neutralization Result (with George Norman)

Gilbert E. Metcalf — Fri, 16 Jan 2009 07:01:01 PST