Federal Budget Issue: Do We Need an Energy Tax?

Policy Backgrounders | Taxes

No. 127
Friday, June 04, 1993
by Stephen Moore

Are There Environmental Benefits from an Energy Tax?

"Although thousands of jobs would be lost, the reduction in energy use would be very small."

Major environmental groups have launched an intense lobbying campaign in favor of the Clinton energy tax. The Sierra Club, the National Audubon Society, the Natural Resources Defense Council and others have pledged to fight for the BTU tax. In large part, they support it because they believe it would reduce U.S. energy consumption. Because the tax raises the price of energy, it certainly would reduce its use. Unfortunately, this decline in energy consumption would at least in part be a result of the United States' producing fewer goods and services. Moreover, the amount of energy conserved has been largely exaggerated.36

The Impact on Consumption Would Be Small. After its full implementation, the Clinton energy tax would have little impact on overall energy use. Total energy consumption is expected to fall by less than 2 percent from the tax.37 This reduction in energy use is minuscule compared to the economizing that naturally takes place in a market economy:38

  • In 1950, 27 percent of U.S. Gross National Product was spent on energy.
  • Today the figure is less than 20 percent.
  • Today it takes 25 percent less energy to produce a dollar of real output than it did 20 years ago.

The Impact on Pollution Would Be Even Smaller. The other environmental benefits would also be few:39

  • An analysis by the Environmental Protection Agency (EPA) found that not a single pollutant would be reduced by even 1 percent as a result of Clinton's energy tax.
  • Vehicle emissions of hydrocarbons and carbon monoxide would fall by 0.25 percent.
  • Industrial emissions of nitrogen oxides, which are a major cause of smog, would decline by just 0.8 percent.

"The tax might increase pollution and cause oil imports to go up."

The Tax Might Increase Rather than Reduce Pollution. Energy expert Philip Verlenger of the Institute for International Economics testified before Congress that because of concessions made to northeastern states, "The effect of the tax is to make the nation's cleanest coal (western coal) less competitive with dirtier eastern coal." He continued that this "would push electric utilities and industrial firms to use more eastern coal."40

The Tax Might Cause Oil Imports to Go Up, Not Down. The energy tax has been touted as a way to reduce overreliance on imported oil. In truth, its impact on energy imports would be negligible. According to the Affordable Energy Alliance, "Even the small promised savings of 350,000 barrels per day (a 3 percent reduction) may not occur. That is because, by raising costs for U.S. oil producers and refiners, the tax would encourage the closing of marginal U.S. oil wells and boost costs of domestically produced oil products. This would encourage imports to grow faster than projected."41

Read Article as PDF