Tax Incentives vs. Carbon Tax

When Mark Strama spoke during lecture this past Thursday, the issue about incentivizing renewable energy versus taxing carbon came up.  Mark Strama said he believed that taxing carbon would result in a faster transition to renewable fuels, but that having tax incentives would be a better way to go about doing it. 

First off, tax incentives make renewable energy or other energy efficient devices cheaper to the consumer by providing tax credits to the companies that produce the products.  Without the tax incentives, the clean products would be far more expensive than other carbon intensive products.  Many of the tax incentives are actually tax credits, which differ from tax deductions because tax credits reduce the amount of income tax you have to pay, while tax deductions reduce the amount of income subject to tax.  According to The Emergency Economic Stabilization Act of 2008, there are currently many tax incentives in place for energy including renewable energy, transportation and domestic fuel security, and energy conservation and efficiency.  The renewable energy tax incentives include facilities that generate electricity from wind, solar, biomass, geothermal, hydropower, landfill gas, and trash combustion facilities.  For the transportation sector, there are tax incentives for hybrids, diesels, alternative fuel vehicles (compressed natural gas, liquefied natural gas, hydrogen, etc.), and there are incentives for electrical vehicles and plug-in hybrids coming soon.  The Renewable Fuel Standard is another way the federal government can provide incentives for renewable energy companies, which is a program that will increase the volume of required renewable fuel to 36 billion gallons by 2022. 

Similar to tax incentives above, the carbon tax is a way for the government to try and make renewable energy more cost competitive against cheaper fossil fuels.  According to an article on carbon tax, the carbon tax places a fee on the production, distribution or use of fossil fuels.  The government would determine the price per ton on carbon, which would result in a higher cost for fossil fuels and make renewable energy a more feasible option.  Although the carbon tax could work faster to make renewable energy more cost competitive, it is not necessarily good for the United States energy companies and economy in general.  An article regarding France’s recent abandonment of the carbon tax discusses that a carbon tax would put French companies at a disadvantage to other countries that do not have a similar tax.

In conclusion, I feel that the government providing tax incentives is a better way for renewable energy companies to enter the marketplace because it is fairer to all the companies involved.  While the fossil fuel companies are being hurt either way, having a carbon tax would penalize the companies much more severely, and possibly lead to economic difficulties in the US if other countries did not implement a tax.  Also, tax incentives give renewable energy companies more time to improve technology and lower costs so that in the future the companies can compete on their own.



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2 responses to “Tax Incentives vs. Carbon Tax

  1. dhjohnston

    Your blog post is interesting, but it seems to me that the two Senators from Maine, Maria Cantwell and Olympia Snowe, have suggested a carbon legislation that charges utilities and power generators for the emissions they produce, and provide dividends to consumers who use less energy, ergo less carbon emissions. As the “Cap and Dividend” website suggests, Cantwell and Snowe’s suggestion addresses the Cap of Carbon more equitably than both the Carbon Tax, and Cap and Trade schemes:

    “When fuel companies buy permits, they’ll pass that cost along to their customers. This is as it should be: the cost of emitting CO2 needs to be paid by energy users. By adding this currently ignored cost, we’ll shift private investment away from fossil fuels and toward efficiency and clean energy.” (available:

  2. lts79

    Excellent posting. Excellent discussion.

    I wish I could just write “what a challenge we have in front of us” or “what a challenge our politicians have in front of them,” be done with this response and get a good grade. Of course, I would be relying on those sentences to be able to convey how overwhelming it is to address the issues of incentivizing the use of renewable energy sources (RES) or punishing the emission of carbon. It is overwhelming and we, and our politicians, act overwhelmed.

    This is a fantastic topic because its roots touch the barebones of economic discussion. In economic terms, the problem of pollution is the result of a market failure. “Market failure occurs where resources are not allocated to their most efficient use.”[1] Polluters produce what is called negative externalities because their actions, which result in pollution, negatively affect people outside of the economic decision that leads to polluting. The market fails to efficiently allocate resources because there are parties who economically benefit at the expense of others. That is, the losses of some parties outweigh their gains, and vice versa.

    The integral missing piece of the equation which answers the question, for example, “What is the cost of energy produced by coal?” is the negative cost to society.

    And that is what we are afraid of facing. It is a paramount task to change more than 100 year old market dynamics. However, if it doesn’t work, it needs to be fixed. Or even better, supported and then fixed.

    To contribute to the original blog posting, I will add a bit of language and a conclusion drawn from a reading, but one that I strongly share.

    The article I recommend reading categorizes RES supporting mechanisms as direct and indirect.
    Direct mechanisms encourage the development of renewable technologies while indirect mechanisms attempt to “improve long-term framework conditions.”[2] Indirect mechanisms attempt to modify the structure of the system which indirectly may encourage the need to develop renewable technologies. A tax incentive in the form of credit would be direct while a carbon tax would be indirect.

    Furthermore, the direct incentives can be divided into two categories, investment-focused or generation-based.

    Investment-focused attempt to support the development of a young technology and get it off the ground, while generation-based mechanisms are directed to integrate the technology in the market and help it compete with conventional technologies. A tax credit or grant would be an example of investment-focused mechanism and a feed-in-tariff (FIT) an example of generation-based.

    The article concludes by showing large doses of common sense. “[…] A single instrument is not usually enough to stimulate the long-term growth of renewable energy sources.”

    Let the tax incentives pull new technologies off the ground. Let policies such as FIT help these technologies compete in the market. And of course, let core-shaking policies such as carbon taxing change the way we value energy.




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