NEED TO KNOW
ENERGY TAX SUBSIDIES:
PICKING WINNERS AND LOSERS
For years the federal government has tried to control America’s energy
choices, using a litany of subsidies and tax credits to “pick winners and
losers” and provide favorable treatment for politically connected industries.
In addition to expanding government control beyond its proper limitations,
these interventions cause market distortions and unintended consequences.
Below are a few examples.

CLIMATE TAXES
Perhaps the best-known intervention was the cap-and-trade energy tax that
nearly passed in 2009 under then-Speaker Nancy Pelosi, Senate Leader
Harry Reid, and President Barrack Obama. The Plan would have required
businesses and manufacturers to purchase allowances from a limited supply
of tradable carbon permits, effectively a tax on emitting carbon. After House
passage, the proposal was rejected in the Senate primarily because word
got out about the high economic costs it would impose. One study showed
that cap-and-trade would destroy up to 2.4 million American jobs and cause
gasoline and electricity prices to rise rapidly (3).
There is already one cap-and-trade program for carbon in operation. Ten
Northeastern states participate in the Regional Greenhouse Gas Initiative
(RGGI), a cap-and-trade plan that aims to reduce carbon dioxide emissions
in the power sector. Arguing that the initiative has merely increased taxes
with no corresponding environmental benefits, Governor Chris Christie
announced in May 2011 that New Jersey would leave the initiative (4).

ETHANOL TAX CREDITS AND SUBSIDIES

QUICK FACTS
The U.S. Energy Information
Administration reported that
the federal government spent
$29.3 billion on tax credits
and direct subsidies to energy
markets in fiscal year 2013,
more than double what was
spent in 1999, even after
adjusting for inflation (1).

NOTABLE & QUOTABLE
“Haven’t federal investments
in energy technology proven
successful in the past? No.
While anecdotes abound here,
systematic evaluations of
federal programs find no
evidence that 60 years of
federal energy tech spending
have produced more benefits
than costs.”
- Jerry Taylor and Peter Van
Doren, Senior Fellows, The
Cato Institute (2).
The tax code should be used
for one thing: to generate
revenue for the government’s
legitimate functions. What we
see today instead is policy
makers using the tax code to
pick winners and losers in the
market.

The ethanol industry receives what some call a “triple-crown” of government
support: a $1.00 per gallon production tax credit in 2016, protectionist tariffs
blocking competition from foreign imports, and a Renewable Fuel Standard
that mandates Americans use 35 billion gallons of ethanol annually by 2022.
The Agriculture Department has also provided funds to investors installing
blender pumps at refueling stations that dispense ethanol. This doesn’t even count the many state subsidies and
mandates (5). Minnesota, for example, requires all gasoline sold in the state to contain a blend of at least 20
percent ethanol (“E20”) as of 2015.

 The first ethanol tax credit was introduced in 1978, but despite over 30 years of favorable treatment the
ethanol industry has achieved little. Americans still rely on traditional sources of fuel and prices at the
pump have recently skyrocketed. At the same time, the unintended consequences of government’s
heavy-handed support have taken a toll on the economy. Diverting corn from food to fuel has increased
food prices for everything from cereal to dairy to meat and poultry. Ethanol’s supposed environmental
benefits have also been called into question, prompting environmental groups to actively oppose the
subsidies (6). The Environmental Working Group, for example, has argued that “the intensification of
corn production – spurred in large part by exploding ethanol production – threatens to exacerbate
global warming, and harm water quality, water supply, and wildlife" (7).

NATURAL GAS-POWERED VEHICLES
Recently, some have suggested adding even more special handouts to the tax code – creating tax
credits to support the manufacture and purchase of natural-gas-powered vehicles. Proponents argue
that natural gas is a cheap energy source with plenty of domestic supply, and if government could just
give it a little boost with targeted tax preferences, it could lower prices at the pump and reduce oil
consumption.
Natural gas might be the wave of the future for affordable, American energy, but if our experience with
ethanol has taught us anything, it’s that propping up any energy source with ill-conceived government
handouts almost certainly will impose harmful, unintended consequences. For example, these subsidies
will cause demand, and therefore the price, of natural gas to rise. This is good for natural gas producers
as it will drive up their sales and profits, but it’s bad for businesses that use natural gas in their
production processes, and bad for their customers who will face higher prices.

LET CONSUMERS AND THE FREE MARKET DECIDE
America has recently seen tremendous energy innovation. However, energy sources and technologies
should sink or swim on their merits and their ability to deliver value to customers, not because of
political favors. American businesses, consumers, and the economy would be better served if
Washington got out of the way and allowed free-market competition and innovation to drive American
energy choices.
The tax code should be used for one thing: to generate revenue for the government’s legitimate
functions. It should have low rates, a proper neutral base, and few special provisions. Today we see
policymakers using the tax code to pick winners and losers in the market.

Endnotes
1.
Federal Financial Interventions and Subsidies in Energy Markets, 2007 (April 2008) (online at http://www.eia.gov/oiaf/servicerpt/subsidy2/pdf/subsidy08.pdf).
2.
Jerry Taylor and Peter Van Doren, A Teachable Moment Courtesy of Solyndra, (September 13, 2011) (online at http://www.cato.org/pub_display.php?pub_id=13676).
3.
Economic Impact of Waxman-Markey Bill, H.R. 2454 (August 12, 2009) (online at http://www.accf.org/publications/126/accf-nam-study).
4.
Chris Christie: New Jersey’s Future is Green (May 26, 2011) (online at http://www.nj.gov/governor/news/news/552011/approved/20110526a.html).
5.
Biofuels: Incentives and Mandates at the State Level (August 10, 2011) (online at http://www.pewclimate.org/what_s_being_done/in_the_states/map_ethanol.cfm).
6.
Coalition Applauds Bipartisan Bill to Eliminate Ethanol Subsidy (May 3, 2011) (online at http://www.foe.org/coalition-applauds-bipartisan-bill-eliminate-ethanol-subsidy).
7.
ENVIRONMENTAL WORKING GROUP, Time to Change Direction in Biofuel Policy (August 2008) (online at http://www.ewg.org/factsheets/The-united-environmental-impacts-of-the-renewable-fuels-standard).

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