Power move.

• Author: Taylor, Jeff A.

When he unveiled his energy tax in February, President Bill Clinton described it as "the best way to provide us with revenue to lower the deficit because it also combats pollution, promotes energy efficiency ... and because it does not discriminate against any area." Though Clinton may have believed what he told Congress, his tax on British thermal units (BTUs) does not meet any of those criteria very well. In some cases, it could thwart the administration's goals.

Taxing BTUs rather than, say, gasoline is an attempt to treat all energy sources equally. A BTU is the amount of energy needed to raise the temperature of a pound of water from 39.2 degrees to 40.2 degrees; it's equivalent to 252 calories. Diverse energy sources can be put on the same tax scale by measuring them in terms of how many BTUs they produce. For example, a barrel of crude oil contains about 6 million BTUs. The average ton of coal contains about 20 million BTUs. So an average ton of coal is equivalent to about 3 1/3 barrels of oil. In theory, taxing BTUs is the purest way to tax energy.

But a BTU tax is a lot simpler in theory than in execution. For starters, you need to decide whether the BTU tax will be imposed on the fuel itself or on the energy that is actually produced for use. (In the case of hydroelectric power, taxing the "fuel" itself, prior to energy production, presents a serious conceptual problem.) Will coal headed for a power plant be taxed at the mine? At the plant? Or will the electricity produced by burning the coal be taxed instead?

More importantly from a political standpoint, a nice, pure, flat-rate BTU tax--unlike, for instance, a dollar-based sales tax--would raise the prices of some energy sources more sharply than the prices of others. One hundred dollars' worth of coal, for instance, contains more BTUs than $100 worth of oil, so coal would be hit harder than oil. Similarly, homes connected to a nuclear power plant would see their electric bills increase more than homes hooked up to a coal-fired plant.

To compensate for some of these disparities--and to appease powerful members of Congress--the Clinton BTU tax is not flat. In a tilt toward coal and natural gas (and toward West Virginia Sen. Robert Byrd and White House Chief of Staff Thomas McLarty, a former natural-gas executive), oil would be taxed at 60 cents per million BTUs, while coal, gas, nuclear, and hydroelectric power would be taxed at 26 cents per million BTUs. So much for treating all...