CHAPTER II CURRENT AND PROPOSED SPENDING PROGRAMS AND TAX POLICIES 13 TABLE 4. FUNDING FOR INTERNATIONAL PROGRAMS DIRECTLY RELATED TO GLOBAL CHANGE (In millions of dollars of budget authority) SOURCE: 40 All Programs 206 213 287 74 24 Congressional Budget Office based on information from the Office of Management and Budget, Budget of the b. Funding for the "climate" share of the Global Environment Facility was calculated as 38 percent of the total budget authority (net of funding for payments in arrears). Bilateral Assistance. Bilateral assistance is primarily conducted through the U.S. Agency for International Development (AID). AID has made the mitigation of climate change one of two global environmental priorities. The agency supports grants focusing on this issue to nine key countries—India, Indonesia, the Philippines, Mexico, Brazil, Russia, Ukraine, Kazakstan, and Poland-and supports a broader portfolio of energy efficiency, renewable energy, and forestry activities related to climate change. Obligations for grants related to climate change were $150 million 14 CLIMATE CHANGE AND THE FEDERAL BUDGET August 1998 Global Environment Facility. The Global Environment Facility (GEF) is an international financial institution established in 1991 to provide developing countries with grants and low-interest loans for projects in four areas: global climate change, international waters, biological diversity, and depletion of the ozone layer. The GEF is run jointly by the United Nations Development Programme (UNDP), UNEP, and the World Bank. Budget authority for climate change activities was about $18 million in 1998 (38 percent of all funds appropriated for the GEF). The total request for funds for the GEF in 1999 is $300 million—38 percent of which is $114 million. The 1999 budget identifies about $41 million (of the $114 million) as "payments in arrears," leaving $73 million that may be available for new obligation. Montreal Protocol. The Montreal Protocol is an international environmental agreement with the objective of eliminating the use of substances that deplete the ozone layer in the stratosphere and are believed to contribute to climate change: chlorofluorocarbons, halons, and hydrochlorofluorocarbons. The agreement is implemented by the World Bank, UNDP, UNEP, and the United Nations Industrial Development Organization. The U.S. contribution, which is jointly paid by the Department of State and the Environmental Protection Agency, totaled $40 million in 1998. CBO includes spending for the Montreal Protocol in this memorandum because of the close link between ozone-depleting gases and greenhouse gases. The request for 1999 is $55 million-$34 million for the Department of State and $21 million for the Environmental Protection Agency. TAX PROPOSALS DIRECTLY LINKED TO CLIMATE CHANGE As part of its Climate Change Technology Initiative, the Administration has proposed several tax preferences designed to encourage the development of new technologies that offer superior energy efficiency and to induce purchases of higher-cost, energyefficient equipment. Improving energy efficiency would reduce emissions of carbon dioxide, the cost of complying with any future limits on emissions, or both. The Administration sought to tailor the incentives to technologies that either are currently available or will be when the credits go into effect and to equipment that can be precisely defined for purposes of the Internal Revenue Service. According to estimates of the Joint Committee on Taxation (JCT), the tax incentives would result in revenue losses of $3.8 billion through 2003 and $9.8 billion through 2008 (see Table 5).3 3. Joint Committee on Taxation, "Estimated Budget Effects of the Revenue Provisions Contained in the President's ESTIMATES OF REVENUE LOSSES FROM PROPOSALS FOR ENERGY AND ENVIRONMENTAL TAX INCENTIVES IN THE ADMINISTRATION'S 1999 BUDGET (In millions of dollars) SOURCE: Congressional Budget Office based on the Joint Committee on Taxation's estimates of the revenue effects of the Climate Change Technology Intiative in the President's 1999 budget. NOTE: CHP - combined heat and power, PFC = perfluorocompound; HFC = hydrofluorocarbon. d The positive revenue estimate reflects a projected slowdown in investment pending enactment of the credit, which in turn would result in lower deductions for depreciation Revenue gain of less than $500,000 16 CLIMATE CHANGE AND THE FEDERAL BUDGET Tax Credits August 1998 Most of the proposals for tax preferences are for new or expanded tax credits. Tax Credits for Highly Fuel-Efficient Vehicles. Under current law, a 10 percent credit is available for the purchase of new electric vehicles for use by the taxpayer and not for resale. In addition, a deduction is available for qualified clean-fuel vehicles. The proposed tax credits are intended to reduce carbon dioxide emissions by encouraging the manufacture and purchase of fuel-efficient vehicles. The proposal is for two temporary tax credits: a $4,000 credit for each vehicle that has three times the base fuel economy for its class, and a $3,000 tax credit for each vehicle that has twice the base fuel economy for its class. The $4,000 credit would be available in calendar years 2003 through 2006 and would subsequently be reduced by $1,000 a year, phasing out completely in 2010. The $3,000 credit would be available for calendar years 2000 through 2003 and would phase out in 2006, also at the rate of $1,000 a year. The credits would be available for cars, sport utility vehicles, minivans, light trucks as well as hybrid, electric, and other light vehicles. Taxpayers who claimed the new credits would not be able to claim the credit that is currently available for electric vehicles or the deduction for clean-fuel vehicles. The JCT estimates that enacting the proposal would reduce revenues by $931 million from 1998 through 2003 and by $5,823 million from 1998 through 2008. Tax Credit for Energy-Efficient Building Equipment. The proposal would provide a credit for the purchase of certain types of energy-efficient building equipment: fuel cells, electric heat pumps and advanced natural gas water heaters, advanced natural gas and residential-size electric heat pumps, and advanced central air conditioners. The credit, which would be nonrefundable, would be equal to 20 percent of the purchase price, subject to a cap. For businesses, it would be subject to the limits on the general business credit, and it would reduce the basis of the equipment. The credit would be in effect from January 1, 2000, to December 31, 2004, for fuel cells, and from January 1, 1999, to December 31, 2003, for other types of equipment. To be eligible for the credit, the equipment would have to meet specified criteria. The JCT estimates that the proposal would result in revenue losses of $1,385 million between 1998 and 2003 and $1,563 million between 1998 and 2008. Investment Tax Credit for Combined Heat and Power Systems. Combined heat and power (CHP) systems are used to produce electricity and process heat or mechanical power from a single primary energy source. The systems use thermal energy that is otherwise wasted in the process of producing electricity conventionally—which, in turn, results in less consumption of fossil fuels, reduced carbon emissions, and lower costs. The proposal is for a 10 percent investment tax credit for CHP systems with electrical capacity of more than 50 kilowatts. Investments in the systems with costrecovery periods of less than 15 years would be eligible for the credit only if a 15 57-716 99-39 CHAPTER II CURRENT AND PROPOSED SPENDING PROGRAMS AND TAX POLICIES 17 year recovery period and the 150 percent declining-balance method were used to calculate depreciation deductions. The systems would be required to produce at least 20 percent of their useful energy in the form of both thermal energy and electric or mechanical power. To qualify for the credit, CHP systems would have to meet specified energy-efficiency and percentage-of-energy tests, as certified by qualified engineers, pursuant to regulations issued by the Secretary of the Treasury. The credit would be subject to the limits on general business credits and would be available for equipment placed in service during calendar years 1999 through 2003. The JCT estimates that the proposal would result in revenue losses of $913 million through 2003. Wind and Biomass Tax Credit. A tax credit of 1.5 cents per kilowatt hour (indexed for inflation after 1992) is currently available for electricity produced from wind or biomass. It now applies only to facilities placed in service before June 1, 1999, for wind and before July 1, 1999, for biomass. The proposal would extend the credit for both types of facilities placed in service by July 1, 2004. Unlike the other proposed tax credits, the wind and biomass credit is based on production rather than investment. The electricity must be sold to an unrelated third party, and the credit is limited to the first 10 years of production. The JCT estimates the potential revenue losses of the proposal at $144 million through 2003 and $784 million through 2008. Tax Credit for Purchase of New Energy-Efficient Homes. The proposal would provide a tax credit of 1 percent of the purchase price up to $2,000 to buyers of new homes that use at least 50 percent less energy for heating, cooling, and hot water than the Model Energy Code standard for single-family homes. The credit would be available for calendar years 1999 through 2003. Homes purchased in 2004 and 2005 would be eligible for a maximum credit of $1,000. The JCT estimates that the proposal would result in revenue losses of $200 million between 1998 and 2003 and an additional $35 million in 2004. Tax Credit for Replacement of Circuit Breaker Equipment. The proposal would provide a 10 percent tax credit to replace circuit breakers installed before 1986 that use sulfur hexafluoride (SF), a potent greenhouse gas. The replaced circuit breakers must be destroyed to prevent further use. The credit applies to property placed in service in calendar years 1999 through 2003 and is subject to the limits of the general business credit. Also, the amount of credit claimed reduces the depreciable basis of |