‘Perverse Effects’: How green subsidies often increase carbon emissions

August 19, 2013, 7:22 p.m. ET

‘Perverse Effects’

How green subsidies often increase carbon emissions.

Anticarbon central planning was bound to distort markets, but it turns out that the planners often increase emissions as they try to engineer President Obama’s “new energy economy.” So concludes the National Academies, whose major report on energy subsidies deserves more attention than it has received since its June release.

By some miracle, Congress in 2008 created a National Research Council special committee to comb the tax code to figure out how specific provisions increase or decrease greenhouse gases. As chairman William Nordhaus of Yale and his colleagues note, there is very little empirical literature on these programs. What they did learn is that “several existing provisions have perverse effects, while others yield little reduction in greenhouse gas emissions per dollar of revenue loss.”Take ethanol and other biofuel subsidies, which the committee calls a “most striking” example. The 45-cents-a-gallon ethanol tax credit expired in 2012, but before it died it was increasing carbon emissions by five million tons every year, at a cost of $5.26 billion. As they say, it’s not easy being green.

The ethanol credit grew over decades into the single largest U.S. energy tax expenditure, yet five million tons is nothing on a world scale, roughly 0.1% of U.S. emissions. The committee shows that the subsidy was economically equivalent to a taxpayer-funded coupon at the pump, slightly lowering the price of blended fuels. As gas became artificially cheaper, consumers naturally used more of it. While the ethanol credit expired, the ethanol purchase mandate still survives.

Other tax provisions are more useless than harmful by the green lobby’s anticarbon standards. The renewable electricity tax credit for wind and solar will reduce emissions by roughly all of 0.3% by 2035, which is still minuscule globally.

The panel also tried to study tax credits for home energy efficiency improvements, but these programs “resisted analysis” because they are so complicated, which is a running theme in the report. One of the committee’s main conclusions is that “the best existing analytical tools are unable to determine in a reliable fashion the impact of some important subsidies.”

Ponder that one: The roughly $24 billion that the U.S. spends annually on energy subsidies is so complex that its impact can’t be understood by America’s top scientists and economists.

The committee recommends that Congress abandon the “poor tool” of subsidies and instead create a market price for carbon though a direct tax or cap and trade. Yet those would raise prices for consumers and hurt economic growth—and considering how Congress has designed its existing subsidy programs, both would likely have other “perverse effects” on carbon as well. Better simply to end the subsidies.