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Friday, August 12, 2011

Energy Tax Incentives: Measuring Value Across Different Types of Energy Resources

Molly F. Sherlock
Analyst in Economics

The majority of energy produced in the United States is derived from fossil fuels. In recent years, however, revenue losses associated with tax incentives that benefit renewables have exceeded revenue losses associated with tax incentives benefitting fossil fuels. As Congress evaluates the tax code and various energy tax incentives, there has been interest in understanding how energy tax benefits under the current tax system are distributed across different domestic energy resources.

In 2009, fossil fuels accounted for 77.9% of U.S. primary energy production. The remaining primary energy production is attributable to nuclear electric and renewable energy resources, with shares of 11.4% and 10.6%, respectively. Primary energy production using renewable energy resources includes both electricity generated using renewable resources, including hydropower, as well as renewable fuels (e.g., biofuels).

The value of federal tax support for the energy sector was estimated to be $20 billion in 2009. Of this, more than half ($12.5 billion) was for tax incentives that support renewable fuels. Another $2.9 billion can be attributed to tax incentives supporting various renewable energy technologies (e.g., wind and solar). Targeted tax incentives supporting fossil energy resources totaled $2.5 billion.

This report provides an analysis of the value of energy tax incentives relative to primary energy production levels. Relative to their share in overall energy production, renewables receive more federal financial support through the tax code than energy produced using fossil energy resources. Within the renewable energy sector, relative to the level of energy produced, biofuels receive the most tax-related financial support.

The report also summarizes the results of recently published studies by the Energy Information Administration (EIA) evaluating energy subsidies across various technologies. According to data presented in the EIA reports, the share of direct federal financial support for electricity produced using coal, natural gas and petroleum, and nuclear energy resources was similar in 2007 and 2010. Between 2007 and 2010, however, the share of federal financial support for electricity produced by renewables increased substantially, and federal financial support for refined coal disappeared.

An alternative method for evaluating the relative value of tax incentives available across various energy resources is to use an effective tax rate approach. Effective tax rates can be used to measure how the tax system affects incentives for capital investment. In 2007, the tax code produced strong incentives for investment in wind and solar electric energy resources. The effective tax rate approach also highlights the difference in impact of oil and gas tax incentives depending on the type of oil and gas company. The tax code creates stronger capital investment incentives for non-integrated oil and gas producers, relative to their integrated counterparts. This difference can be explained through the ability of non-integrated petroleum producers to take percentage depletion and fully expense intangible drilling costs (IDCs).

Date of Report: August 10, 2011
Number of Pages: 21
Order Number: R41953
Price: $29.95

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