34 CLIMATE CHANGE AND THE FEDERAL BUDGET TABLE 10. August 1998 ESTIMATES OF TAX EXPENDITURES FROM PREFERENCES TO SOURCE: Congressional Budget Office based on estimates of the Joint Committee on Taxation. NOTE. Tax expenditures are revenues that the federal government forgoes as a result of provisions in the income tax code that give selective relief to particular groups of taxpayers or special incentives for particular types of economic activity. a. Positive tax expenditure of less than $50 million. hauling, supplies, and site preparation. For vertically integrated producers, expensing is limited to 70 percent of IDCs. That limit was set in the Tax Reform Act of 1986, which also repealed expensing on foreign properties. Additionally, IDCs are subject to the alternative minimum tax (AMT). The amount subject to the AMT is limited to 70 percent. Excess of Percentage over Cost Depletion for Oil, Gas, and Other Fuels. Firms that extract oil, gas, or other minerals are permitted a deduction to recover their capital investment in the mineral reserve, which depreciates as the minerals are depleted. Cost depletion allows for the recovery of the actual capital investment over the period that the reserve produces income. Percentage depletion allows for the deduction of a fixed percentage of revenue from sales of the mineral. The percentage depletion method of deduction may and typically does exceed the amount of capital CHAPTER III OTHER FEDERAL SPENDING PROGRAMS AND TAX POLICIES 35 owners entitled to royalties and only for up to 1,000 barrels of oil or its equivalent in gas per day. At present, about one-fourth of oil and gas production benefits from the subsidy. Percentage depletion for the major integrated oil companies was repealed in 1975. The percentage depletion rate for oil and gas is 15 percent; a higher rate is permitted for marginal wells. The percentage depletion rate for other fuels ranges from 10 percent to 22 percent. Tax Credit for Enhanced Oil Recovery Costs. The tax code provides a 15 percent credit for the costs of recovering domestic oil by a qualified "enhanced oil recovery" method. Qualifying methods are those that make possible the extraction of oil that is too viscous to be extracted by conventional methods. The costs of labor, repair of equipment, and injectants as well as the intangible costs of drilling and development, qualify for the credit, which is subject to the limits of the general business credit. The credit phases out over a $6 range for oil prices above $28 per barrel (adjusted for inflation after 1991). Current oil prices are well below the phaseout threshold. Expensing of Tertiary Injectants. Tertiary recovery projects inject fluids, gases, and other chemicals into oil or gas reservoirs to enhance the recovery process. The tax code permits a deduction for the costs of the chemical injectants used in oil and gas production in the year in which the costs are incurred. Without incentives, tertiary recovery methods are generally uneconomic. Tax Credit for Production of Nonconventional Fuels. The tax code provides a production tax credit of $3 per barrel (in 1979 dollars) for certain types of liquid and gaseous fuels that are equivalent to oil and are produced from alternative energy sources. The credit is phased out as oil prices rise from $23.50 to $29.50 (in 1979 dollars). Both the credit and the phaseout range are adjusted for inflation. Qualifying fuels include oil produced from shale or tar sands and synthetic fuels produced from coal. The credit is available through 2002 for facilities placed in service before 1993. For gas produced from biomass and synthetic fuels produced from coal or lignite, it is available through 2007 for facilities placed in service by July 1, 1998, pursuant to a binding contract entered into before 1997. The credit is offset by benefits from government grants, tax-exempt financing, and credits for energy, investment, and enhanced oil recovery. Apart from coal-bed methane, production of nonconventional fuels has hardly increased since 1980.2 2. The use of coal-bed methane as a source of energy results in emissions of carbon dioxide instead of methane. 36 CLIMATE CHANGE AND THE FEDERAL BUDGET OTHER FEDERAL ACTIVITIES August 1998 Many other federal activities that appear in the budget may indirectly affect emissions of carbon dioxide and other greenhouse gases by altering the supply of energy or the demand for energy. The federal government contributes to the supply of energy by: Producing power (Tennessee Valley Authority, Bonneville Power Providing loans to rural electric cooperatives; Contributing to efforts to develop a nuclear waste disposal facility; Enriching uranium for use in nuclear power; Operating the naval petroleum reserves and protecting the oil shale reserves; and Leasing oil, gas, and other minerals onshore and offshore. Although the government spends money on those supply activities, it also benefits from the substantial receipts they generate in the form of user fees, payments, and royalties. The Low Income Home Energy Assistance Program (LIHEAP) provides assistance to low-income households in meeting the costs of heating and cooling their homes by making payments to eligible households and energy suppliers. States may target assistance to households with high energy needs and may assist households in reducing their need for energy. Budget authority for LIHEAP was about $1 billion in 1997 and 1998. Transportation programs, in addition to those specifically cited above, may alter fuel use and carbon emissions. Over time, such programs may affect the total amount of travel (and, therefore, fuel used and emissions produced) as well as the type of travel chosen (substituting the amount of one type of travel for another can affect total emissions). For example, the Federal Transit Administration provides grants to transit operators and conducts transit planning and research activities. Emissions could either increase if spending raises the total demand for travel by boosting ridership or decrease (or stay constant) if rising ridership displaces automobile travel. Finally, the federal government is itself a major user of energy. Gross energy CHAPTER III OTHER FEDERAL SPENDING PROGRAMS AND TAX POLICIES 37 United States, with the government's energy bill totaling roughly $8 billion annually. The Federal Energy Management Program, described previously, aims to cut energy usage. Even if goals are met, however, the government would remain a major energy consumer and would be affected significantly by future policies to reduce carbon emissions. The Kyoto Protocol on Climate Change BACKGROUND At a conference held December 1 11, 1997, in Kyoto, Japan, the Parties to the UN Framework Convention on Climate Change agreed to an historic Protocol to reduce greenhouse gas emissions by harnessing the forces of the global marketplace to protect the environment. The Kyoto Protocol in key respects including emissions targets and timetables for industrialized nations and market-based measures for meeting those targets — reflects proposals advanced by the United States. The Protocol makes a down payment on the meaningful participation of developing countries, but more needs to be done in this area. Securing meaningful developing country participation remains a core U.S. goal. EMISSIONS TARGETS A central feature of the Kyoto Protocol is a set of binding emissions targets for developed nations. The specific limits vary from country to country, though those for the key industrial powers of the European Union, Japan, and the United States are similar 8% below 1990 emissions levels for the EU, 7% for the U.S., 6% for Japan. The framework for these emissions targets is based largely on U.S. proposals: Emissions targets are to be reached over a five-year budget period as proposed by the U.S., rather than by a single year. Allowing emissions to be averaged across a budget period increases flexibility by helping to smooth out short-term fluctuations in economic performance or weather, either of which could spike emissions in a particular year. • The first budget period will be the U.S. proposal of 2008-2012. The Parties rejected proposals favored by others, including budget periods beginning as early as 2003, that were neither realistic nor achievable. Having a full decade before the start of the binding period will allow more time for U. S. companies to make the transition to greater energy efficiency and/or lower carbon technologies. • The emissions targets include all six major greenhouse gases. The EU and Japan initially favored counting only three gases carbon dioxide, methane, and nitrous oxide. Ensuring the inclusion of the additional gases (synthetic substitutes for ozone-depleting CFCs) that are highly potent and long-lasting in the atmosphere provides more comprehensive environmental protection and lends more certainty concerning the |