In his campaign, President Obama promised broad changes in fiscal policy aimed at reducing greenhouse gasses. His proposal was built on several revenue elements. A package of new tax subsidies would encourage and support production and consumption of alternative energy. A “cap and trade” program would require energy producers to buy permits granting them the right to emit a fixed level of CO2 and other pollutants linked to global warming. While “cap and trade” is not explicitly a tax, it operates much like one. The government would auction permits and producers would have to buy permits to cover their emissions, either from the government or from permit owners. Firms could pass the costs on to consumers.
The newly-enacted stimulus bill included many of the alternative energy tax subsidies Obama proposed in the campaign. The 2010 budget would reduce incentives for domestic production of fossil fuels by eliminating about $30 billion of tax benefits for the production of oil and gas over the next 10 years and imposing an excise tax that effectively increases royalties on oil and gas extraction from the Gulf of Mexico.
At the same time, the budget assumes “climate revenues” of about $80 billion a year beginning in 2012. The president proposes to implement a cap-and-trade system through a 100 percent auction. Limits on the use of carbon-based fuels would raise prices of electricity generated from fossil fuels, gasoline, home heating oil, and other energy-intensive goods (including goods that use energy in transportation). The government would capture the additional revenues by auctioning permits for carbon use. The plan would devote $15 billion annually from the program’s revenues to subsidize clean energy technologies and would allocate the remaining $65 billion to low- and moderate-income families by using it to finance permanent extension of the Making Work Pay tax credit.
Stimulus Act Report Card: Renewable Energy Incentives
Tax Topics: Quick Facts on Cap-and-Trade Policies to Reduce Carbon Emissions