Carbon audit: Can we turn this threat into an opportunity?

Section 117 of the just-passed bailout bill requires a “carbon audit” of the tax code. The provision requires the Secretary of the Treasury, working with the National Academy of Science, to undertake a comprehensive review of the 1986 Internal Revenue Code to “identify the types of and specific tax provisions that have the largest effects on carbon and other greenhouse gas emissions and to estimate the magnitude of those effects.” The study is authorized at $1.5 million and is due in two years.

Presumably, the sponsors of this provision hope to use the study to lobby for carbon taxes and repeal of what they are pleased to call “special tax breaks” for “polluting” industries.

But free market energy advocates could have some fun with this. For example, several studies (see here, here, and here) indicate that corn ethanol–the beneficiary of billions in tax breaks–potentially emits more greenhouse gases than the gasoline it replaces. We should advise the Secretary and the NAS to address those studies, and kick up a fuss if they don’t.

We should also make noise if they ignore provisions of the tax code that impede capital investment, hence capital stock turnover, hence declines in energy and emissions intensity.

A 2007 study commissioned by the American Council on Capital Formation found that “The United States generally has less favorable tax depreciation rules for electric generation, electric transmission and distribution, and petroleum refining than many other countries, including a number of the U.S.’s major trading partners.”

For example, after five years, U.S. firms can recover only 29.5 percent of their investment in combined heat and power systems, compared to 57.7 percent for Korean, 63.1 percent for Canadian, and 100 percent Malaysian firms. Similarly with smart meters. After five years, U.S. firms recover 29.5 percent of their investment, compared to 63.1 percent for German, and 100 percent for Indian firms.

Reducing the tax penalty on capital investment fosters wealth creation while accelerating deployment and diffusion of new technologies, which are more energy efficient and less carbon intensive than older capital stock. Thus, replacing today’s plodding depreciation schedules with accelerated depreciation or even full expensing is a true “no regrets” policy–a reform desirable for its economic merits regardless of one’s views about global warming.

The Secretary and the NAS would be well advised to read the ACCF study as well as scientific studies questioning the low-carbon bona fides of corn ethanol.