POLITICS:

Deficit panel cuts energy subsidies and perhaps carbon emissions, too

The president's deficit commission proposed slashing energy tax breaks yesterday, a move that could make renewable power more competitive and help chisel down greenhouse gas emissions. But the plan is brimming with political pitfalls and vagueness around whether clean power subsidies might also be axed to curb the nation's rising debt.

Some economists and observers had hoped the anticipated report would recommend raising needed revenue through a new tax on carbon emissions, arguing it would decrease both personal income taxes and air pollution. No carbon tax was included, and a former economic adviser to President Obama called it a "missed opportunity" to redefine the embattled debate on climate change.

"I find it puzzling that the commission did not look to taxes on carbon emissions as a source of revenue," said Michael Greenstone, the former chief economist of the president's Council of Economic Advisers. "It would be natural to use this moment when the budget deficit must be addressed to tax things that we don't like. In this case, it's carbon."

"This does not have to be thought about or talked about as a climate policy," he added. "It would be smart budget policy."

Still, Greenstone and others say the 18-member commission successfully highlighted the nation's economic emergency. The bipartisan group of lawmakers and industry executives rolled out a whopping plan to achieve $4 trillion in deficit reduction by 2020. The plan meets the president's goal of balancing the budget, not including the interest payments on the national debt, by 2015.

"After all the talk about debt and deficits, it is long past time for America's leaders to put up or shut up," the report says. "The era of debt denial is over, and there can be no turning back."

Good for clean power?

The commission's spending reductions hinge on eliminating 75 tax subsidies for corporations and individual taxpayers. Called tax expenditures, these subsidies cost $1.1 trillion a year, according to the commission, and amount to special interest gifts lacking the level of congressional scrutiny attached to direct spending programs. Controversial congressional earmarks, by comparison, amount to just $16 billion annually.

It's unclear if the commission has targeted every tax deduction, exemption, credit and exclusion on the books, but some analysts assume that's the case, because of the penetrating savings outlined in the report.

If that's the case, tax subsidies for fossil fuel and clean energy companies could be in the crosshairs. Incentives for wind and solar power, like the production tax credit, might be lumped together with oil and gas tax breaks dating back to the 1920s in some cases. The tax credit for corn ethanol, amounting to 40 cents a gallon and poised to expire, could also be a victim of the proposal, analysts say.

Tony Kreindler of the Environmental Defense Fund thinks the plan might benefit clean power developers, who have seen shorter-lived tax incentives than fossil fuel industries.

"It could be a very good way of providing a level playing field for renewables," he said of the proposed cuts.

The energy sector overall received about $10 billion in tax subsidies in 2007, according to a report by the Center for American Progress, which used data collected by the Energy Information Administration. Those tax breaks eclipsed the government's direct spending to the sector that year on things like research and development. It came to $6 billion.

So far, environmentalists and the oil and gas industry are approaching the commission's report with caution. It may be because the recommendations face a grueling political test that is bound to ignite sharp opposition from special interests who face leaner times.

Bigger subsidies than energy

The commission sought to soften the impact of subtracting subsidies by offering to lower tax rates for Americans, including energy corporations. But Stephen Comstock, the manager of tax policy for the American Petroleum Institute, expressed concern that the pain of diminished tax breaks might not be completely offset by lower taxes.

"We've been targeted so much, we're a little bit leery," Comstock said.

The commission offered a range of potential tax rates, from 23 percent to 29 percent. Currently, oil and gas companies pay 33 percent after receiving a manufacturer's deduction that slices 2 percent off their set rate. That deduction is probably one of the tax subsidies that the commission wants to be eliminated. It would cost the industry billions, Comstock said.

Energy companies account for a small portion of the nation's tax breaks. Homeowners, by comparison, are expected to receive $104 billion next year after claiming deductions on their mortgage interest. And employers who contribute to employee health care are expected to receive $177 billion in deductions.

"Unfortunately you're not going to balance the budget by ending tax subsidies for the oil and gas sector," said Richard Caperton, an energy policy analyst with the Center for American Progress, a liberal think tank. "But it would send a very important message that we're not subsidizing fossil fuel anymore."

That could help reduce greenhouse emissions by making fossil fuels more expensive, and renewable energy more competitive, analysts say.

"That would be something that potentially benefits the climate and makes economic sense," said Joel Darmstadter, a senior fellow at Resources for the Future. It's no price on carbon, he adds, but for climate advocates it might be "third or fourth best to congressional willingness to embrace a carbon tax."

Climate patchwork 'only way forward'

The commission proposed several other steps that could indirectly reduce emissions. It wants the gasoline tax to rise 15 cents a gallon by 2015. It also promotes telecommuting for federal employees, freezing the government's vehicle fleet and reducing federal travel. And it wants electricity prices to increase under the Tennessee Valley Authority and the Department of Energy, which owns hydroelectric power plants.

Those, along with U.S. EPA regulation of greenhouse gases and California's global warming law, might amount to a patchwork climate policy. The alternative could be nothing, given Congress' inability to tackle comprehensive emission reductions.

"Each of these on their own are not tremendously important for climate change [and] CO2 emissions, but the package together may be the only way forward," said economist Robert Stavins, co-director of the Project on International Climate Agreements at Harvard University.

The commission's proposals are controversial and ripe for political deadlock. Its chairmen, Democrat Erskine Bowles and Republican Alan Simpson, hope that 14 members will support the report in a vote on Friday so it can be forwarded to Congress as a roadmap for legislation.

But the knotty political issues involved in eliminating tax subsidies and other elements in the report make Greenstone, the former Obama adviser, wonder why a carbon tax isn't being considered. A $15 fee on every ton of carbon could generate between $50 billion and $100 billion in revenue each year. That means Americans could keep their mortgage interest deduction and other tax breaks, he said.

"The wrangling about the changes in the tax code are going to be enormous," Greenstone said. "A very clean way to raise a comparable amount of money by 2015, which is not without its own political problems of course, is just to tax something we don't like. And that is carbon emissions."

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