Tax Incentives Relative to Energy Production

The following sections estimate the value of tax incentives relative to the level of energy produced using fossil and renewable energy resources. Limitations of the Analysis

The analysis below provides a broad comparison of the relative tax support for fossil fuels as compared with the relative support for renewables. Interventions may be designed to achieve various economic, social, or other policy objectives. Tax expenditures are estimates . For example, the production activities deduction (Section 199), before being repealed in the 2017 tax act ( P.L. In 2017, most primary energy was produced using fossil fuels. The remaining U.S. primary energy production is attributable to nuclear electric and renewable energy resources. Energy Tax Incentives

The tax code supports the energy sector by providing a number of targeted tax incentives, or tax incentives only available for the energy industry. 115-97 ) did not directly change fossil-fuel-related tax provisions, other changes, including the reduced corporate tax rate, lowered the tax savings associated with various tax incentives for fossil fuels. While the majority of federal tax-related support for energy in 2017 can be attributed to either fossil fuels or renewables, provisions supporting energy efficiency, alternative technology vehicles, and nuclear energy also resulted in forgone revenue in 2017 and 2018. Fossil Fuels Versus Renewables: Relative Production and Tax Incentive Levels

 Table 3 provides a side-by-side comparison of fossil fuel and renewable production, along with the cost of tax incentives supporting fossil fuel and renewable energy resources. During 2017, 77.7% of U.S. primary energy production could be attributed to fossil fuel sources. Of the estimated $17.8 billion in energy tax provisions in 2017, an estimated $2.1 billion, or 11.8%, went toward supporting biofuels. The tax credits for alcohol fuels (including ethanol) expired at the end of 2011. Under current law, the tax credits for biodiesel and renewable diesel expired at the end of 2017. Expired tax incentives may be extended, however, as part of the "tax extenders." Beginning in the mid-2000s, the cost of energy tax incentives for renewables began to increase. Tax expenditures for the ITC and PTC have increased substantially in recent years. As a result of the extensions for wind and solar enacted in the Consolidated Appropriations Act, 2016 ( P.L. 114-113 ), ITC and PTC tax expenditures are projected to remain stable for several years. Over time as these incentives phase out, tax expenditures associated with these provisions will decline. In 2018, according to Treasury's tax expenditure estimates, tax expenditures supporting renewables totaled an estimated $8.4 billion. As a result, the amount of tax-related federal financial support for energy differs across energy sectors, and is not necessarily proportional to the amount of energy production from various energy sectors. The total amount of energy-related tax incentives is projected to decline under current law, although extensions of expired energy tax provisions, or other modifications to energy tax provisions, could change these figures. Over the longer term, the amount of tax-related support for the energy sector could decline if provisions are allowed to expire as scheduled under current law.
The U.S. tax code supports the energy sector by providing a number of targeted tax incentives, or tax incentives available only for the energy industry. Some policymakers have expressed interest in understanding how energy tax benefits are distributed across different domestic energy resources. For example, what percentage of energy-related tax benefits support fossil fuels (or support renewables)? How much domestic energy is produced using fossil fuels (or produced using renewables)? And how do these figures compare?
In 2017, the value of federal tax-related support for the energy sector was estimated to be $17.8 billion. Of this, $4.6 billion (25.8%) can be attributed to tax incentives supporting fossil fuels. Tax-related support for renewables was an estimated $11.6 billion in 2017 (or 65.2% of total tax-related support for energy). The remaining tax-related support went toward nuclear energy, efficiency measures, and alternative technology vehicles.
While the cost of tax incentives for renewables has exceeded the cost of incentives for fossil fuels in recent years, the majority of energy produced in the United States continues to be derived from fossil fuels. In 2017, fossil fuels accounted for 77.7% of U.S. primary energy production. The remaining primary energy production is attributable to renewable energy and nuclear electric resources, with shares of 12.8% and 9.5%, respectively.
The balance of energy-related tax incentives has changed over time, and it is projected to continue to change, under current law, in coming years. Factors that have contributed to recent changes in the balance of energy-related tax incentives include the following:
Increased tax expenditures for solar and wind. Tax expenditures associated with the energy credit for solar and the production tax credit for wind have increased substantially in recent years. Following the long-term extensions of these temporary tax benefits provided in the Consolidated Appropriations Act, 2016 (P.L. 114-113), tax expenditures for the solar energy credit are projected to remain stable for several years, before decreasing in the longer term. The expiration of tax-related support for renewable fuels. Tax-related support for renewable fuels declined substantially after the tax credits for alcohol fuels were allowed to expire at the end of 2011. Other fuels-related incentives also expired at the end of 2017 (although these may be extended as part of the "tax extenders"). Decline then increase in tax expenditures for fossil fuels. Tax expenditures for fossil fuels declined between 2017 and 2018, an indirect effect of the 2017 tax act (P.L. 115-97). Over time, however, the tax expenditures associated with permanent fossil fuels tax incentives are estimated to increase.
One starting point for evaluating energy tax policy may be a calculation of subsidy relative to production level. However, a complete policy analysis might consider why the level of federal financial support differs across various energy technologies. Tax incentives for energy may support various environmental or economic objectives. For example, tax incentives designed to reduce reliance on imported petroleum may be consistent with energy security goals. Tax incentives that promote renewable energy resources may be consistent with certain environmental objectives.