United States of America: Selected Issues
Author: International Monetary Fund
Publication Date:
05 Aug 2003
eISBN:
9781451839623
Language:
English
Keywords:
ISCR; CR; price; NAFTA; GDP; fuel tax; cause world price; tax proposal; energy taxation; emission intensity; Electricity tax; Energy pricing; Excises; Fuel tax; Western Europe; Global
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This Selected Issues paper analyzes the United State’s (U.S.) household savings role in supporting the U.S. recovery; and focuses on the market for single-family housing, and the importance for household balance sheets. It discusses the underfunding of corporate pension plans, macroeconomic, and policy implications; the U.S. fiscal position, and reviews the causes of the fiscal crisis. It examines the impact of energy shocks, energy policy, and the taxation role. It analyzes the growth in linkages between the United States and other G-7 countries, and the regional and bilateral trade links issues.

Abstract

This Selected Issues paper analyzes the United State’s (U.S.) household savings role in supporting the U.S. recovery; and focuses on the market for single-family housing, and the importance for household balance sheets. It discusses the underfunding of corporate pension plans, macroeconomic, and policy implications; the U.S. fiscal position, and reviews the causes of the fiscal crisis. It examines the impact of energy shocks, energy policy, and the taxation role. It analyzes the growth in linkages between the United States and other G-7 countries, and the regional and bilateral trade links issues.

VII. Energy Policy in the United States: The Role of Taxation1

1. Following the release of the Administration’s National Energy Policy in 2001, far-reaching energy legislation is being debated in Congress. The current debate seems to be mainly driven by two issues: the geopolitical and economic consequences of the United States’ dependence on oil imports; and a recognition of the environmental consequences, including with regard to greenhouse gas emissions, of the energy intensity of the U.S. economy.

2. None of the initiatives have laid an emphasis on taxes as a means of discouraging energy consumption. The focus, instead, has been on measures geared toward boosting domestic energy supply and developing new technologies to increase the efficiency of energy use. Tax proposals have been limited to providing tax subsidies for domestic energy production as well as the development of energy-efficient production processes, at a substantial fiscal cost. This chapter suggests that there may be a case for considering consumption-based energy taxes in order to meet both energy and fiscal policy objectives.

A. Energy Use in the United States

3. Although declining, the energy intensity of GDP in the United States remains well above that in most other industrial countries (Figure 1). As in many other industrialized countries, the energy intensity of GDP in the United States has fallen steadily during the last half-century. The drop in energy intensity, measured in British thermal units (Btu) per real dollar of GDP, was particularly rapid from the 1970s through the mid-1980s, when real energy prices were above their historical average (Figure 2). More recently, the decline has accelerated again, partly reflecting a structural shift toward a more information-intensive economy (EIA, 2003). Nevertheless, U.S. consumption remains 30–50 percent higher than in Europe.2

Figure 1.
Figure 1.

Energy Intensity of GDP

International Comparison, 1991–2001

Citation: IMF Staff Country Reports 2003, 245; 10.5089/9781451839623.002.A007

Source: EIA, International Energy Annual, 2001
Figure 2.
Figure 2.

United States: Energy Intensity of GDP and Real Motor Gasoline Price, 1970–2001

Citation: IMF Staff Country Reports 2003, 245; 10.5089/9781451839623.002.A007

Source: EIA, State Energy Price and Expenditure Report, 1999

4. The higher energy intensity of the United States partly reflects geographic and tax-related factors. Both the United States and Canada have a relatively high energy intensity, reflecting low population densities and relatively severe and variable climate conditions compared to Europe.3 However, energy prices in the United States are also significantly lower. For example, average U.S. gasoline prices in 1996 were more than 50 percent below European prices and 10–15 percent lower than Canadian prices (Figure 3), with the difference mostly accounted for by taxation (Figure 4). The prices of most other energy products—e.g., electricity and natural gas—display similar cross-country variation.4 Canadian prices for natural gas and electricity have in the past tended to be lower than in the United States, reflecting their relatively abundant supply, including from hydroelectric generation.

Figure 3.
Figure 3.

Real Prices of Premium Unleaded Gasoline

Citation: IMF Staff Country Reports 2003, 245; 10.5089/9781451839623.002.A007

Sources: International Energy Agency, Energy Prices and Taxes; and IMF, World Economic Outlook; and Western Hemisphere Department database.
Figure 4.
Figure 4.

Prices and Taxes of Premium Unleaded Gasoline

Citation: IMF Staff Country Reports 2003, 245; 10.5089/9781451839623.002.A007

Source: International Energy Agency, Energy Prices and Taxes.

5. Higher U.S. energy intensity has been associated with larger levels of emissions of pollutants. U.S. greenhouse gas (GHG) emissions per unit of GDP are among the highest of major industrialized countries (Figure 5). International rankings of CO2 emissions (the most important GHG) are broadly consistent with the energy intensity of GDP, suggesting that higher levels of energy intensity are associated with increased levels of emissions of pollutants, with coal typically associated with the highest level of carbon-based emissions.

6. Hydrocarbons represent the principal source of U.S. energy (Figure 6). The share of energy consumption from petroleum fell from a peak of nearly 50 percent in the mid-1970s to around 40 percent by the end of the 1990s. The share of natural gas peaked at 32 percent in 1970 and now stands at around 25 percent—roughly the same share as coal, which remains the main source of fuel for electricity generation. Although the share of electricity produced from nuclear, hydroelectric, and other non-fossil fuel sources has increased since 1973, it remains at just under 15 percent of total energy use.

Figure 6.
Figure 6.

United States: Shares of Energy Consumption by Type of Fuel, 1949–2001

Citation: IMF Staff Country Reports 2003, 245; 10.5089/9781451839623.002.A007

Source: http://www.eia.doe.gov/emeu/aer/txt/ptb0103.html

7. Petroleum imports have been rising steadily since the mid-1980s (Figure 7). Net imports of petroleum are projected by the U.S. Department of Energy to continue to grow strongly for the next quarter century, and the share of net imports in total U.S. petroleum consumption is expected to increase from 55 percent in 2001 to 68 percent in 2025.

Figure 7.
Figure 7.

United States: Net Petroleum Imports

Citation: IMF Staff Country Reports 2003, 245; 10.5089/9781451839623.002.A007

Source: EIA, Monthly Energy Review, May 2003.

B. Energy Policy

8. The Administration’s National Energy Policy (NEP) was released in May 2001. The NEP’s principal focus is on addressing the “fundamental imbalance between supply and demand” and the projected increase in U.S. dependence on energy imports. Specific policy measures focused on promoting “dependable, affordable, and environmentally sound production and distribution of energy.” Proposals included:

  • subsidies to promote conservation by households;

  • funding for research and development into alternative energy sources;

  • the establishment of a new regulatory structure for the electricity sector, including the extension of the tradable emissions permit system on sulphur dioxide and the introduction of similar systems for emissions of nitrogen oxides and mercury;

  • revisions to emissions standards for autos and household appliances;

  • tax credits to encourage the use of fuel efficient vehicles, new landfill methane projects, electricity produced from wind and biomass, residential solar energy property, and the purchase of new hybrid or fuel-cell vehicles; and

  • opening the Arctic National Wildlife Reserve (ANWR) for oil exploration and pipelines, and the earmarking of associated royalties for conservation.

9. Key provisions of the NEP have been incorporated in different energy bills currently under discussion in Congress. Although the House and Senate versions differ in important respects, they would both provide loan guarantees and tax credits for pipeline development; tax incentives for natural gas production; increased funding for research and development; incentives for development of nuclear energy; and tax credits for renewable energy sources, including biomass and waste (see Appendix for details). The House version would also open ANWR to exploration and mandate increased use of ethanol in gasoline.

10. The Administration’s environmental policy proposals have potentially important implications for the energy sector. In 2001, the Administration rejected the Kyoto protocol, which would bind countries to targets for reducing GHG emissions. The decision to reject the Protocol reflected the Administration’s view that its goals were unrealistic and had potentially harmful implications for U.S. economic growth.5 Instead, the Administration proposed its Clear Skies Initiative in 2002. The centerpiece of the Initiative is a commitment to reducing the United States’ emission intensity—defined as GHG emissions as a share of real GDP—by 18 percent by 2012.6 This objective is to be met primarily through the combined effect of measures proposed by the Administration, including through an extension of existing cap-and-trade programs.

11. Significant cap-and-trade programs are already in place in the United States to reduce air pollutants. For example, under the Clean Air Act, electric utilities were allocated SO2 emissions allowances beginning in 1995 and were allowed to buy and sell unused portions of these allowances as they saw fit. A tradable permits program also exists for nitrous oxide (NOx) emissions in the Eastern United States.

C. Reducing Energy Consumption: Energy Taxation and Other Instruments

12. Many analysts have argued that energy taxes can play an important role in achieving conservation and environmental goals. Taxes are widely viewed as an effective instrument for restraining demand and encouraging efficient resource use, as well as for aligning private and social costs in the presence of externalities (Sandmo, 1976). Simulations reported by Goulder and Schneider (1999) illustrate that achieving a 10 percent reduction in carbon dioxide emissions would be ten times more costly if technology subsidies were employed as a stand-alone measure, relative to a broader approach combining technology subsidies with policies to raise the cost of carbon, such as tradable carbon permits or carbon taxes. Moreover, the scope for using such instruments to address environmental, conservation, and fiscal objectives is illustrated by the wide range of energy-related excise taxes that already are in place in the United States (Box 1).

13. Although it is difficult to define the optimal level of energy taxation, some studies suggest that U.S. energy taxes are too low. As emphasized by Bovenberg and Goulder (2002), economic theory suggests that optimal tax rates would be expected to vary across countries, based on the different costs that countries face regarding environmental degradation and remediation of environmental harm, the opportunity cost of public funds, and political and administrative considerations. Two recent studies based on a representative agent model calibrated to the U.S. and U.K. economies (Parry, 2002; Parry and Small, 2002) identify the key factors determining the optimal fuel tax. These include, in decreasing order of importance, the social cost of automotive congestion, the capacity of the tax to raise revenue, and the extent to which fuel consumption imposes environmental externalities. This framework suggests that the United States and Canada would be expected to impose relatively low taxes on diesel and gasoline, given their low population densities and congestion externalities relative to Western European countries. Nonetheless, even adjusting for these considerations, the studies conclude that gasoline taxes in the United States may be only half their optimal level.

14. Alternative approaches—including regulation and tax incentives—have important drawbacks. For example, a study by the Congressional Budget Office—which compared the relative merits of Corporate Average Fuel Economy (CAFE) standards and similar regulatory approaches with gasoline taxes—found that taxes were considerably less costly from an economic efficiency point-of-view (CBO, 2002). Since CAFE standards did not directly target fuel-saving activities by the consumer, any given decrease in targeted gasoline consumption could be made at a lower cost through a gasoline tax (CBO, 2002). Further, questions have been raised regarding the efficiency of subsidizing new, fuel efficient technologies, given the uncertainty inherent in choosing which technology will yield significant payoffs (Sutherland, 1999).

Energy Excise Taxes in the United States

Federal government

A large number of federal excises are levied on energy by the federal government. Fuel taxes average $0.184 per gallon, and estimates by the Joint Committee on Taxation and Internal Revenue Service indicate that federal fuel taxes yielded $29.6 billion (0.3 percent of GDP) in FY 2003. The yield on other excises is smaller: e.g., the excise tax on coal yielded $550 million, and the excise tax on the sale of automobiles with low fuel economy ratings yielded $78 million. The specific excises include:

Energy excise taxes for general revenue include:

  • Tax of $0.43 per gallon rail diesel fuel and inland waterways fuel; $0.068 per gallon motorboat fuel, small engine gasoline, and special fuels.

Excise taxes dedicated to environmental trust funds or designated funds include:

  • Abandoned Mine Reclamation Fund: Tax of $0.35 per ton of surface coal, $0.15 per ton of coal mined underground, $0.10 per ton of lignite (average tax estimated about $0.26 per ton in 1999).

  • Aquatic Resources Trust Fund: Tax levied on motorboat gasoline and other fuel.

  • Highway Trust Fund: Tax of $0.043 per gallon motor fuel.

  • Leaking Underground Storage Tank Trust Funds: Tax of $0.001 per gallon motor fuel.

  • Nuclear Waste Fund: Tax estimated to impose a 1.45 percent cost increment for power provided from nuclear energy in 1999.

  • Pipeline Safety Fund: User fees collected from pipeline operators.

  • Uranium Enrichment Decontamination and Decommissioning Fund: Contributions from commercial utilities based on historical enrichment services.

Excise taxes dedicated to health-related trust funds include:

  • Black Lung Disability Trust Fund: Minimum of $0.55 per ton of coal or 4.4 percent of sales revenue if selling price is less than $25 per ton from surface mines or $12.50 per ton for surface coal.

Excise tax on the sale of automobiles with relatively low fuel economy ratings include:

  • Tax ranging from $1,000 for an automobile rated between 21.5 and 22.5 miles per gallon (mpg) to $7,700 for an automobile rated at less than 12.5 mpg.

State governments

All state and many local governments levy specific excise and sales taxes on fuel and other energy commodities. In 2002, excise taxes on motor fuel represented 6 percent of total taxes collected by states. Total state and local taxes on fuel varied from $0.08 per gallon in Alaska to $0.35 per gallon in New York. Many states also levy severance taxes—a tax on a portion of the value of natural resource extracted—on oil, gas and coal production. State energy severance taxes accounted for less than 0.8 percent of total state tax revenue in 2002.

Sources: EIA (1999), Lazzari (2003), U.S. Census Bureau (2003), and CBO (2002).

15. However, there also remains a role for market-oriented regulatory approaches. For example, the cap-and-trade emissions permit system already in effect for SO2 emissions has generally been viewed as a success (CBO, 2000). By limiting the quantity of permits, these systems can directly affect the level of emissions. However, a drawback of these approaches is that there is no upper limit to the costs that polluters may be obliged to incur to achieve given quantitative targets. Approaches to deal with this problem include the facility to issue additional permits if permit prices exceed some ceiling, and to grant a percentage of free permits instead of auctioning them (Goulder, 2002).

D. Macroeconomic Effects of Energy Taxation

16. The impact of energy taxation on demand and fiscal revenue depends importantly on the price elasticity of demand. Most studies suggest that energy demand is considerably more price elastic in the long run than in the short run. For example, short-run elasticities for energy and fuel demand are estimated in the range of -0.13 to -0.26, compared to long-run elasticities in the range of -0.37 to -0.46 (OECD, 2001a). A detailed survey of 97 econometric studies of the elasticity of demand for gasoline found that the short-run elasticity averaged -0.26, compared to an average long-run elasticity of -0.86 (Dahl and Sterner, 1991).

17. These findings suggest that taxes could have a substantial impact on consumption, while at the same time raising significant government revenues. For example, the CBO estimates that a 15-cent hike in gasoline taxes could have raised $16 billion in additional budget revenue in 2003, more than doubling existing revenues (CBO, 2002). The OECD suggests that an increase in fuel taxes of 40 cents per gallon could be justified given the range of externalities associated with road use, but also notes that roughly three quarters of U.S. carbon emissions are not taxed at all. A carbon tax of $100 per ton would have yielded $110 billion in 1999 (OECD, 2001b).

18. The impact of energy taxes on the price level, real wages, and income distribution depends on the use that is made of the additional tax revenue. For example, the adverse effects on output can be alleviated if the revenue is used to lower taxes on labor or investment (Nordhaus, 1993; Bovenberg and Goulder, 1996). Similarly, there is scope for addressing the impact on income distribution if revenues are used to compensate those population segments most vulnerable to tax increases (e.g., rural versus urban households; CBO, 2002).

19. Staff simulations suggest that the output effects of higher energy taxes, which are redistributed to consumers, may be modest. A version of the staff’s Global Economy Model (GEM), calibrated to the U.S. economy, suggests that a 10 percentage point increase in taxes on petroleum products used as intermediate production inputs would reduce long-run U.S. GDP by 0.03 percent (Table 1). A larger loss of output—0.11 percent—would occur if the tax was also levied on the final consumption of petroleum products, reflecting the broader scope of the tax and the lower elasticity of substitution that applies to energy consumption.

Table 1.

Simulated Impact on the U.S. Economy of Energy Taxes

(Percent deviation from baseline)

article image
Source: Fund staff calculations.

20. These simulations also illustrate that the large size of the U.S. market influences the output effects of energy taxes. Because U.S. petroleum imports represent almost 20 percent of the world market, part of the burden of higher U.S. taxes is shifted to the rest of the world through lower prices and an appreciated U.S. dollar. Indeed, the simulations suggest that the short-run effects of a U.S. tax on energy used in production could even be positive, due to the different speeds of adjustment for producer and consumer prices.7 The simulations also illustrate the importance of the elasticity of substitution—the higher the degree of substitutability between petroleum products and other goods and services, the more likely will the domestic tax cause world prices to fall and mitigate U.S. output declines. This exercise, however, does not take into account possible responses by world energy producers to the change in market conditions.

References

  • Bovenberg, A.L., and L.H. Goulder, 1996, “Optimal Environmental Taxation in the Presence of Other Taxes: General-Equilibrium Analysis”, American Economic Review, Vol. 86, No. 4, pp. 985–1000.

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  • Bovenberg, A.L., and L.H. Goulder, 2002, “Environmental Taxation and Regulation”, in: A. Auerbach and M. Feldstein (eds.), Handbook of Public Economics (Vol. 3), New York: Elsevier.

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  • CBO (Congressional Budget Office), 2000, “Who Gains and Who Pays Under Carbon Allowance Trading? The Distributional Effects of Alternative Policy Designs” (June).

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  • CBO (Congressional Budget Office), 2002, “Reducing Gasoline Consumption: Three Policy Options” (November 2002).

  • Dahl, C., and T. Sterner, 1991, “Analyzing Gasoline Demand Elasticities: A Survey”, Energy Economics, Vol. 13, No. 3, pp. 203–10.

  • EIA (Energy Information Administration), 1999, “Federal Energy Market Interventions 1999: Primary Energy,” Washington, D.C.

  • EIA (Energy Information Administration), 2003, “Annual Energy Outlook 2003 with Projections to 2025”, Washington, D.C.

  • EPA (Environmental Protection Agency), 2003, “Clear Skies Act” (February, 27).

  • Goldreich, S., 2003, “Energy Supply and Demand,” Congressional Quarterly Weekly, p. 1391 (June 7).

  • Goulder, L.H., 2002, “U.S. Climate-Change Policy: The Bush Administration’s Plan and Beyond,” Stanford Institute for Economic Policy Research Policy Brief.

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  • Goulder, L.H., and S.L. Schneider (1999), “Induced Technological Change and the Attractiveness of CO2 Emissions Abatement Policies,” Resource and Energy Economics, Vol. 21, No. 3–4, pp. 211–53.

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  • Lazzari, S., 2003, “Energy Tax Policy”, Issue Brief for Congress, Congressional Research Service, The Library of Congress.

  • NEPDG (National Energy Policy Development Group), 2001, “National Energy Policy.”

  • Nordhaus, W.D., 1993, “Optimal Greenhouse-Gas Reductions and Tax Policy in the ‘DICE’ Model,” American Economic Review, Vol. 83, No. 2, pp. 313–17.

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  • OECD (Organization for Economic Cooperation and Development), 2001a, Environmentally Related Taxes in OECD Countries: Issues and Strategies, Paris.

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  • OECD (Organization for Economic Cooperation and Development), 2001b, Economic Survey: United States, Paris

  • Parry, I., 2002, “Is Gasoline Undertaxed in the United States?,” Resources, no. 148, pp. 28–33.

  • Parry, I., and K. Small, 2002, “Does Britain or the United States Have the Right Gasoline Tax?,” Resources for the Future Discussion Paper No. 02–12.

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  • Sandmo, A., 1976, “Optimal Taxation: An Introduction to the Literature,” Journal of Public Economics, Vol. 6, pp. 37–54.

  • Sutherland, R.J., 1999, “The Feasibility of ‘No Cost’ Efforts to Reduce Carbon Emissions in the U.S.,” American Petroleum Institute Issue Analysis No. 106.

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  • U.S. Census Bureau, 2003, “State Government Tax Collections: 2002” (April 22).

APPENDIX: Recent Energy Policy Initiatives

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Based on the Administration’s National Energy Policy (NEP) plan released in May 2001.

Based on H.R. 6, Energy Tax Policy Act of 2003, passed by the House on April 11, 2003.

Based on S. 517, Energy Tax Policy Act of 2002, passed by the Senate on April 25, 2002.

1

Prepared by Jim Prust and Dominique Simard, with the research assistance of Asegedech WoldeMariam. Ben Hunt prepared the simulations presented in the final section.

2

Japan was omitted from the group of comparable countries due to its vastly different geography and land use patterns.

3

The main user of energy in the United States in 2001 was the industrial sector (33 percent of total Btu consumption); followed by the transportation sector (28 percent), the residential sector (21 percent) and the commercial sector (18 percent). Canada’s high level of energy intensity reflects also the preponderance of energy-intensive industry.

4

According to International Energy Agency statistics, this observation is robust across different years. Products with homogeneous net-of-tax prices across countries, such as gasoline and diesel, display a wide cross-country variation of end-user prices due to different tax policy choices. Other products, which are less easily traded internationally, such as electricity and natural gas, display a wider international variation in their net-of tax prices. However, taxes on these products also differ across countries.

5

The United States, for example, would have to cut its emissions of greenhouse gases by 7 percent by 2008–2012, compared with 1990 levels. Estimates have placed the cost of achieving this reduction as high as 2 percent of GDP.

6

Goulder (2002) suggests that the Administration’s target would leave emissions roughly 10 percent higher than at the beginning of the decade and nearly 30 percent above the Kyoto Protocol target.

7

See Chapter VI for further details of the GEM.

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Cover IMF Staff Country Reports
United States: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2003: Issue 245
Publisher:
International Monetary Fund
ISBN:
9781451839623
ISSN:
1934-7685
Pages:
101
DOI:
https://doi.org/10.5089/9781451839623.002

Energy Intensity of GDP

International Comparison, 1991–2001

United States: Energy Intensity of GDP and Real Motor Gasoline Price, 1970–2001

Real Prices of Premium Unleaded Gasoline

Prices and Taxes of Premium Unleaded Gasoline

CO2 Emissions per GDP

United States: Shares of Energy Consumption by Type of Fuel, 1949–2001

United States: Net Petroleum Imports