The politics of carbon dioxide emissions reduction: the role of pluralism in shaping the Climate Change Technology Initiative.

• Jurisdiction: United States
• Author: Golden, Dylan
• Date: 22 December 1999

I.

INTRODUCTION

Slowly and surely the earth is warming. The increase in heat is due in substantial part to the increasing rate of release of greenhouse gasses - carbon dioxide primarily -- into the atmosphere by human activity.(1) Of these activities, the burning of fossil fuels is the primary contributor to carbon emissions.(2) For the United States a reduction in energy usage, or a radical change in the methods used to generate energy, is necessary to effect a reduction in global warming.

The Proposed 1999 Fiscal Budget advocated funding for a Research Fund for America designed to support a wide range of federal science and technology activities.(3) The $31 billion fund included a five-year research and technology initiative -- the Climate Change Technology Initiative (CCTI) -- to reduce the Nation's emissions of greenhouse gases.(4) The Energy Department (DOE) and the Environmental Protection Agency (EPA) were the primary recipients and leaders under the program. The budget proposed a combined $2.7 billion increase over five years for these and other agencies and the industries and research institutes with which they work, in order to work on projects that increase energy efficiency, generate cheaper and cleaner renewable energy sources, and improve on carbon reduction technologies.(5) The budget also proposed $3.6 billion in tax incentives over five years to stimulate the adoption of more efficient technologies in buildings, industrial processes, vehicles, and power generation.(6) Specific examples of these incentives include: funds, administered through federal agencies, for research and development spending -- $277 million for researching "new generation" vehicles, $100 million for research on renewable forms of energy; and tax credits, for energy efficiency -- $4,000/person purchasing highly fuel efficient cars, $2,000/person for rooftop solar electricity and hot water, and $2,000/person for home improvements which save energy.(7)

The budgetary allocations to various agencies for CCTI implementation are listed below:(8)

CLIMATE CHANGE TECHNOLOGY INITIATIVE (AGENCIES) (millions)

Selected Agencies 1997 1998 1999 Actual Estimate Proposed Discretionary Budget Authority: Energy 657 729 1,060 Environmental Protection Agency 86 90 205 Housing and Urban Development 10 Agriculture 10 Commerce 7 Subtotal, budget authority 743 819 1,292 Tax Incentives 421 Total Initiative 743 819 1,713 Dollar Dollar Change: Change: 1998 to 1999 to 1999 2003 Discretionary Budget Authority: Energy +331 +1,899 Environmental Protection Agency +115 +677 Housing and Urban Development +10 +10 Agriculture +10 +86 Commerce +7 +38 Subtotal, budget authority +473 +2,710 Tax Incentives +421 +3,635 Total Initiative +894 +6,345 While only a small step towards the Kyoto commitment to reduce United States carbon dioxide emission levels to 7% below 1990 levels by the year 2012(9), full enactment of the CCTI would be a convincing first step towards reducing emissions.(10)

The decision to split these subsidies between direct expenditures to government agencies -- and through these agencies to academia, think tanks, and research institutes -- and tax expenditures to businesses and the populous, in part reflects the fact that from the standpoint of administrative and economic efficiency different solutions require different implementation strategies. The split also reflects a political decision. A balancing of the interests of the populous, businesses, government officials, and other special interest groups is necessary in order to enact major legislation in a pluralistic republic. Public choice theory "conceives regulation as a service supplied to effective political interest groups" whereby these groups capture rents, economic or simply utility enhancing, from the government.(11) Some of these groups are best served through direct expenditure programs while other groups more easily capture tax expenditure rents. This paper seeks to enumerate the interests involved in the Climate Change Technology Initiative in order to determine what each group has at stake in return for its support of the program and to affirm the applicability of public choice theory in the case of the Climate Change Technology Initiative. The comment will conclude by taking a brief look at the state of the Climate Change Technology Initiative as of the proposed Federal Budget for fiscal year 2000.

II.

DISTINGUISHING TAX AND DIRECT EXPENDITURES ON ENERGY AND THE ENVIRONMENT

Attempts to regulate energy usage frequently employ a market-oriented approach. This generally means that tax incentives are used to correct what is seen as a negative eternality, environmental harm, of energy usage.(12) The direct expenditure approach is more commonly used where monitoring of existing behavior is required. Federal direct expenditure environmental regulations are generally administered by the Environmental Protection Agency and the Department of Energy. These two types of programs represent an ideological divide between liberals and conservatives in academia and in Washington D.C. This battle took its modern form in the early 1970's when then Assistant Secretary for Tax Policy in the Treasury Department and former Harvard Law Professor Stanley Surrey promulgated the concept of tax expenditures. Surrey spent a great deal of time trying to prove that the two types of spending were economically equivalent and that political considerations -- hiding legislation from the public eye behind the "smoke and mirrors" of the code -- were often the motive for using tax incentives rather than direct spending programs.

The analysis initiated by Surrey has evolved into two opposing modern views of the relative strengths and weaknesses of tax and direct expenditures. Two prominent participants in this controversy who hold competing perspectives are Edward Yorio and Edward A. Zelinski. As both parties agree, "the critical issue is not whether tax expenditures are occasionally inefficient, but whether in a particular case a tax expenditure would be more or less efficient than a direct subsidy in accomplishing the government's objective."(13) Inefficiency, at least as a matter of implementation, is in the eye of the beholder, as the government's wasted expenditures may provide a great deal of utility to any number of special interest groups: a business man, a bureaucrat, an American laborer, or a political fanatic to name a few. For the purposes of this paper, the; Climate Change Technology Initiative will be deemed inefficient where more expensive means to ends are taken in order to accommodate certain interest groups causing a fleecing of money from the Fisc.

The Surrey/Yorio school supports direct expenditures as the most proper means of policy implementation. This "perspective is firmly rooted in the tradition of the Progressive, New Deal, and good government reformers who placed great confidence in the processes and outcomes of professional decision making" by government specialists "inhabiting direct expenditure organizations [that] will more effectively scrutinize, and therefore eliminate, unwarranted spending within their respective jurisdictions than will less informed tax decision makers."(14) The Zelinski theory holds that tax expenditures may be less prone to political capture (and the resulting tendency to design programs inefficiently so that special interest groups can profit) than direct expenditure programs. His theory is based on a Madisonian view that pluralism created by the various interest groups lobbying the government for "rents" leads to an increase in competition for government expenditures and a decrease in political "cartelization" under which interest groups could more easily influence policy-makers without close scrutiny.(15)

CURRENT AND PROPOSED TAX AND DIRECT EXPENDITURES ON ENERGY PROGRAMS

The use of tax incentives instead of direct spending to support certain private activities has been acknowledged by the federal government as a form of government expenditure and, pursuant to the Congressional Budget Act of 1974, all federal budgets now contain a special analysis entitled "Tax Expenditures" that provide a detailed compilation of all federal income tax expenditures. Tax expenditures constitute a significant percentage of government "spending". Tax expenditures are growing as a percentage of total expenditures.(16) Many past tax expenditures have been targeted at energy markets. Examples of some of these expenditures include:

Energy Supply -- Expensing of research and development costs for oil, gas and other fuels, excess of percentage over cost depletion for oil, gas, and other fuels, capital gains treatment of royalties from coal, alternative fuel production credit, alcohol fuel credit, exclusion of interest on state and local government industrial development bonds for energy production facilities, residential and alternative conservation and new technology supply incentive credits; Energy Conservation -- Residential energy credit conservation incentives, alternative conservation and new technology credit conservation incentives, energy credit for intercity buses; Pollution Control and Abatement -- Exclusion of interest on state and local government pollution bonds,(17) exclusion of payments in aid of construction of water, sewage, gas and electric utilities.(18) Currently, federal funding in support of energy takes the form of direct expenditures, administered primarily through DOE, and tax expenditures, similar to those listed above:

FEDERAL RESOURCES IN SUPPORT OF ENERGY (In millions of dollars)

1997 Spending: Actual 1998 1999 2000 Discretionary Budget Authority 4,222 2,823 3,500 3,164 Mandatory Outlays: Existing law -3,431 -2,830 -4,569 -3,280 Credit Activity: Direct loan disbursements 1,029 1,992 1,562 1,337 Tax Expenditures: Existing law 1,960 1,965 2,070 2,045 Proposed legislation -10 563 556 Estimate 2001 2002 2003 Spending: Discretionary Budget...