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Energy Taxation: Principles and Interests

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Document date: November 27, 2006
Released online: May 08, 2007
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The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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Abstract

Energy policy is an important subject these days, as Americans become increasingly aware of the costs of what President Bush has called “our addiction to oil” and the environmental costs of growing world consumption of fossil fuels. Although some foreign oil comes from friendly and politically stable countries, the world price of oil depends heavily on output in potentially hostile, war-torn, and politically unstable regions. Policy changes can help us adjust over time to an economy that uses less oil and generates less greenhouse gas emissions. This article discusses some tax policies, including energy taxes and energy tax incentives, that can be crucial components of an energy policy that addresses global warming and energy security concerns.

Introduction

Energy policy is an important subject these days, as Americans become increasingly aware of the costs of what President Bush has called “our addiction to oil” and the environmental costs of growing world consumption of fossil fuels. The president’s comment addressed the growing risks to the U.S. economy from dependence on oil imported from insecure foreign regions. U.S. domestic oil production has been gradually declining for decades, and in 2005 the United States imported about 60 percent of the oil it consumed. Although some foreign oil comes from friendly and politically stable countries, the world price of oil depends heavily on output in potentially hostile, war-torn, and politically unstable regions. The United States, although still a large producer, accounted for 25 percent of world oil consumption and only 10 percent of crude oil production in 2005.

Beyond that, there is increasing scientific consensus that the earth will warm significantly in the next century, due in large part to carbon dioxide released from the burning of fossil fuels. Concern about global warming and interest in policies to address it by reducing greenhouse gas emissions is much greater in Europe than in the United States. On October 30, 2006, the British government released a report that spelled out the risks of continued growth in greenhouse gas emissions (The Washington Post, Oct. 30, 2006, p. A18). The report estimates that failing to curb climate change could lead to a cut in world gross domestic product from 5 percent to 20 percent and urges that to forestall that, we need to “act now and act internationally.” Although some will challenge the report’s estimates, there is a growing consensus that climate change is an issue that major energy-using countries can no longer ignore.

Burning fossil fuels to produce energy to operate our automobiles, transport goods, heat our homes, grow and ship our food, power industrial machinery, and generate electricity for homes, office buildings, and factories is essential to maintaining our living standards. We are not about to return to a preindustrial economy, nor should we. But policy changes can help us adjust over time to an economy that uses less oil and generates less greenhouse gas emissions. Tax policies can be a crucial component of an energy policy that relies on decentralized markets instead of detailed “command and control” regulations to address global warming and energy security concerns.

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Topics/Tags: | Economy/Taxes


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