Picking Winners and Losers: A Structural Examination of Tax Subsidies to the Energy Industry
75 Pages Posted: 8 Sep 2015 Last revised: 19 May 2016
Date Written: October 3, 2015
The shibboleth that “government should not be picking winners and losers” has dominated the public discourse over renewable energy subsidies. This way of framing the debate ignores the nation’s long history of support for fossil fuels and obscures the economic theory behind the subsidies. This article contributes to the discussion in four ways. First, the article examines economic justifications for government intervention in markets and evaluates the tax subsidies to both fossil fuels and renewable energy resources in that light. Second, the article contrasts the different market trajectories for those investments and explores possible reasons for their divergence, including their budgetary history. Third, the article examines the investment incentives that arise from the subsidy structures in terms of marketability, liquidity, information costs, transaction costs, risk, and uncertainty. Fourth, it examines the political economy associated with the development and continuation of the subsidies. A subsidy’s age, diversity, type, and beneficiaries affect its stability and longevity. These factors also determine whether taxpayers report having claimed the benefits and whether administrative agencies evaluate them. Finally, the article argues that the way Congress structures its subsidies can determine whether new energy technology is a winner or loser. The article develops a generalized framework for structuring tax incentives and examines recent proposals for reform.
Keywords: tax, tax subsidies, renewable energy, fossil fuels, legislation
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