TED Case Studies




CASE NAME: US Energy Tax

I. Identification

1. The Issue

The Clinton Administration put forth legislation that called for a general tax on all energy products. The tax would have the effect of raising revenue and would encourage conservation of resources. The tax would change the way America values the environment by internalizing the cost to society arising from the use of fossil fuels. Today environmental resources are not valued at their true price; the removal of tree from a forest is added to GDP when actually the resource is lost. Discharge into streams and air are presently not valued and thus have no cost the producer; making it cheaper to pollute than to not too. President Clinton proposed an energy tax on all fuels. The tax is based on the heat content or Btu, British Thermal Unit, of the particular fuel. The tax would be imposed on coal, natural gas, liquified petroleum gases, natural gasoline, nuclear-generated electricity, hydro- electricity, and imported electricity at a base rate of 25.7 cents per million Btus (p/MBtu). An additional 34.2 cents p/MBtu was to be levied on refined petroleum products, a total of 59.9 cents. The idea has a neutral impact on a regional basis and affects the market shares of energy sources equally. The Administrations proposal was meet with strong opposition, entrenched special interest fought hard to weaken the impact of such legislation. Ultimately, the final product that emerged from the Congress was limited in scope.

2. Description

The large fiscal deficit and U.S. budget concerns encouraged the Clinton Administration to look for new sources of revenue. An energy tax could be used to raise revenue to reduce the deficit and to put the government on a pay-as-you-go basis for public program. The tax would reduce environmental damages, promote energy conservation, while limiting dependency on foreign energy sources. The tax would encourage energy efficiency and diversify the choices of fuel better reflecting the true environmental and security costs of energy use. The tax would also move the U.S. economy from income-based to consumption-based taxing; an approach that benefits saving and investments.

The command and control regulations of the present tax code are believed to hinder positive economic activity. Taxes on income, payroll, and profit are considered negative because they discourage workers by lowering their take- home pay; encourage automation of operations (or movement overseas) to beat high costs; and induce people to seek tax shelters, to save less, or move capital abroad. These activities "divert (capital) from more productive investments."

The U.S. tax system is too concerned with "how much we tax, and not what we tax." By changing the tax structure to incorporate those costs not borne by the producer but borne by other members of society, the Clinton Administration understood that the full cost of environmental activities would be realized. In addition, new revenue would be generated.

The consumption based tax values limited resources and impacts those individuals who consume more of the good. The tax inflates the price of the good, which in theory should reduce the quantity demand. Consequently, individuals (and producers) are encouraged -if the tax is high enough - to consume less of the good and to seek cheaper alternatives. Clinton Proposal

The Administration choose an energy tax as part of its deficit reduction plan in 1993. The British Thermal Unit, or Btu, is the basis for valuating the tax because it measures the heat content of each fuel. The Administration believed that a Btu approach was a relatively neutral proposal on a regional basis and that its impact was balanced on all market shares of energy sources.

The tax would be imposed on coal, natural gas, liquified petroleum gases, natural gasoline, nuclear-generated electricity, hydro-electricity, and imported electricity at a base rate of 25.7 cents per million Btus (p/MBtu). An additional 34.2 cents p/MBtu was to be levied on refined petroleum products, a total of 59.9 cents. This encourages cleaner technologies because individual and producers consume less and seek cheaper alternatives.

Imported taxable products would be taxed at the same rate as equivalent domestic. The tax rate would be indexed for general inflation on January 1 of each year beginning in 1998. Indexing would be based on the GDP deflator for the second quarter of the preceding year.

Actual Btu content would be used to determine the tax on coal. For all other fuels, Btu content would be the national Btu average for that type of fuel. For this purpose each petroleum product (i.e. gasoline, distilled fuel oil, etc would be treated as a sperate type of fuel. Nuclear and hydro generated electricity would be measured against the national average of Btus required to produce fossil-fuel-generated electricity. Imported electricity would be averaged the same way unless the importer establishes that the electricity was not generated by hydro or nuclear and that the actual heat rate of the electricity is lower.

Certain industries were to be exempt from the tax. These included:

These exemptions are consistent with the Administrations objective of encouraging alternative fuels. Wind, Solar, Biomass and Oxygenates ( Ethanol, Methonal, ETBE, MTBE) reduce U.S. dependency on foriegn oil and produce zero emissions or burn cleaner. Hydrocarbon "feedstocks" do not involve energy production or CO2 emissions and are used in the manufacturing of other products (i.e. petrochemicals). This exemption will cause conflict with Aluminum manufacturers.

The tax would be imposed at different points in the production process, impacting different people. The points of collection:

Due to the complex nature of the tax collection point varied as a way to ensure the equity of the tax. Thre criteria where established by the Administration to maintain a regional nuetrality. The tax had to be far "downstream to ensure that fixed price contracts do not prevent passthrough of the tax to the end user." Petroleum products, for example were taxed at the refinery as output to gaurantee that domestic and imported products are taxed the same. Most importantly, tax collection points varied to minimize the number of taxpayers, reducing administrative costs. For electricity collection was upstream from end users to promote efficiency and fuel diverisifcation among utilities. Consumers cannot always choose between nuclear, hydro, or biomass power. Opposition

Stiff opposition began before the tax was introduced to Congress. The main opponents were the Oil Companies; although other activist groups also expressed opposition. Sinclair Oil said they " cannot support a measure so fraught with problems, and so harmful to our company and to consumers." Mobil Oil placed a full page add in the New York Time comparing the energy tax to the Edsel noting "both looked good on paper."

Citizen for a Sound Economy complained that the Btu tax was regressive. CSE economist, Paul Merski said "families living on $20,000 or less spend twice as large a share of their income on gasoline as families living on $50,000 or more."

Farmers objected to the tax because it would increase their operating costs. Their costs were estimated to increase between "4.9% to 10.8% of net income" argued Kansas State University professors Jeff Williams and Fred Delano. Farmers also objected to the idea that fuels used in crop production such as natural gas or propane, used for irrigation pumps were not exempted. The National Corn Growers Association weighed in with the concern the ethanol was produced domestically from renewable feedstocks, same as biomass.

The loudest opponents were the producers and their associations. The National Association of Manufactures (NAM) actively lobbied key member of both the House and Senate Finance Committees. NAMs position was that any additional taxes would seriously affect the ability of U.S. companies to compete. The Aluminum Manufacturers labored for a "feedstock" exemption. Hydrocarbons used in petrochemicals become polymers for other products and were exempt from the tax. However, hydrocarbons used in aluminum smelting are burned to raise steam to generate electricity. Large amounts of electricity are needed to causes the chemical reaction to occur. Without an exemption Aluminum Manufacturers feared an inability to compete.

Utility and Oil Companies raised new questions regarding the points of collection and the amount of Btu loss through pipelines and other forms of transport. This became a major sticking point on the Senate Floor, costing the President the support of Senator Boren, a key Democrat on the Senate Finance Committee. Final Law

Eventually the bill that emerged form the Senate was terribly different and lost the bite and breadth of the Btu tax. In general the "Transportation Fuels Tax" imposed an average tax of 13.814 cents per gallon on gasoline, diesel, and special motor fuels. The heaviest tax was on inland waterway fuel (i.e. motorboats) 17.1 cents per gallon - increasing to 20.1 in 1995. The lowest was placed on commercial aviation 0.1 cents per gallon. The law exempted several different types of fuel, such as; home heating oil; gas and diesel used on farms; fuel for off highway use (i.e. operating pumps, forklifts, bulldozers, etc; and fuel used in commercial fishing vessels. State and local governments are also exempt as are, non-profit organizations, exported fuel, international aviation and international shipping. The law became effective October 1, 1993 with the revenue collected deposited in the General Fund of the Treasury. The final law was a compromise between the newly elected President and the Congress, raising some of the revenue needed for deficit reduction. The "Transportation Fuels Tax" is a retail tax in which the consumer pays and does not meet the originally goals.

3. Related Cases

SST Case

Keyword Clusters

(1): Forum = USA

(2): Bio-geography = TEMPerate

(3): Environmental Problem = Air Pollution

4. Draft Author:

Chris Bredehoeft (July, 1995)

II. Legal Clusters

5. Discourse and Status:

DISagreement and COMPlete

The Btu tax idea was defeated by various special interest groups. These groups ranged from Aluminum Manufactures, Oil Companies, farmers and various other special interest that put pressure on Congress. In addition, within the Congress competition arose regarding the point of collection - either producer or consumer. Ultimately, it was this debate that undid the Btu proposal. Proponents of the tax could not appease Senator Boren, whose support was critical to the success of Btu. The bill sent to President Clinton emerged as the "Transportation Fuels Tax" - a somewhat watered down product.

In general the "Transport Fuels Tax" imposed an average tax of 13.814 cents per gallon on gasoline, diesel, and special motor fuels. The heaviest tax was on inland waterway fuel (i.e. motorboats) 17.1 cents per gallon - increasing to 20.1 in 1995. The lowest was placed on commercial aviation 0.1 cents per gallon. In addition, the law exempted several different types of fuel, such as; home heating oil; gas and diesel used on farms; fuel for off highway use (i.e. operating pumps, forklifts, bulldozers, etc; and fuel used in commercial fishing vessels. State and local governments are also exempt as are, non- profit organizations, exported fuel, international aviation and international shipping.

6. Forum and Scope:

USA and UNILateral

7. Decision Breadth:

All GATT members

This issue would almost certainly would have been brought before the dispute resolution arm of GATT - The World Trade Organization - as a violation of Article III of the GATT regulation. Article III requires that "each signatory to accord to imported articles treatment no less favorable than that accorded to like articles produced domestically."

Opponents of the Btu tax, such as Senator Danforth (MI), argued that GATT subsidy code only permits rebates on taxes paid by the manufacture for their inputs - if such inputs are physically incorporated into the finished product. Since energy is not a physical product of a finished product the tax would be regarded as an export subsidy "and would be a violation of GATT."

Proponents of the tax argued that the Btu tax could be defended if challenged. A challenger would have to believe that the Btu tax is a barrier to the U.S. market and a violation of Article III. However, as long as the same policy is applied to that good which is produced domestically as well as the imported good then no violation has occurred. Thus coal being imported for use at a power plant would have the same tax as the coal mined in Pennsylvania.

Which ever argument is chosen the former U.S. Trade Representative, Carla Hills, believes such legislation "would involved a lengthy proceeding."

8. Legal Standing:

LAW (with explanation)

The law passed by Congress as a result of the Btu proposal is the "Transportation Fuels Tax." The tax is imposed on certain types of fuel in the same way as a retail tax - collected at the register. The bill was changed due to political pressure in both Houses, and is stated as: The committee believes that deficit reduction is critical to the nations economic well-being....and that the revenue raised by the broad based transportation fuels excise tax will make an important contribution toward reducing the deficit.... as well as decrease U.S. reliance on imported oil.

III. Geographic Clusters

9. Geographic Locations

Geographic Domain: North America

Geographic Site: Western North America

Geographic Impact: USA

The bill was proposed by the President, passed by the Congress and would impact the North American market - mainly the U.S. The tax would have limited affect on exports of fuel and electricity. To remain competitive internationally, exports would be subject to a refund or credit equal to the amount of the tax imposed domestically. The tax is a consumption based tax, meaning that the impact is felt on consumers of that good. This has the affect of reducing consumption of that good because at the higher price, as long as a substitute is available, less of the good is demanded. The tax will affect the driving patterns of some people who will opt for alternative modes of transportation (car-pools, public transportation, etc, provided the tax is high enough. Inadvertently, this will benefit the environment though a reduction in emissions and have cross border affects into Mexico and Canada.

10. Sub-National Factors:


11. Type of Habitat:


IV. Trade Clusters

12. Type of Measure:


The original Btu proposal would have included an Import Tax [IMTAX] on foreign products. The tax would be placed on imported coal, natural gas, electricity and refined petroleum products equal in amount to domestic products. Imports of Solar, Wind and Geothermal electricity are exempt from the tax because they are consistant with the Administrations policy of alternative energy sources. The tax would be collected at the point of entry from the importer.

13. Direct v. Indirect Impacts:


14. Relation of Trade Measure to Environmental Impact

a. Directly Related to Product: NO

b. Indirectly Related to Product: YES, Automobile

c. Not Related to Product: NO

d. Related to Process: YES, Pollution Air

This legislation was to be enacted as a revenue generating proposal that would also promote a cleaner environment. The Btu proposal and the final law (Transport Fuel Tax) are both consumption based tax ideas. The premiss of consumption taxes concerns the price of a particular good being too low. The actual value is not measured correctly through the price and the market is distorted. To correct the distortion, the tax is added to the price of the good creating a new higher price. The new price has the effect of lowering the quantity demanded for the good. Consequently, some people choose to consume less of that good that is being taxed - provided a substitute is available. The new tax (and the original Btu idea) should have an effect of motivating people to look for ways to consume less fuel (car-pooling, using public transportation, buying more efficient cars, etc This reduces pollution because theoretically less of the product is being used. Unfortunately, unless the tax is high enough consumers will consume at the same levels as before choosing instead to pay the higher price.

15. Trade Product Identification:


The trade product is the Btu or thermal content of fuels used for energy production. The types of fuels considered under the Clinton proposal included; coal, natural gas, liquified petroleum gas, natural gasoline, nuclear-generated electricity, hydroelectric and imported electricity.

16. Economic Data

The Btu tax would reduced U.S. dependency on foriegn oil and generate new sources of revenue for deficit reduction. According to the Treasury Department, Oil imports would decrease by 400,000 barrels a day by the year 2000. The energy industry represents a substantial sector of the U.S economy. In 1992, North America produced the equivalent of 3 trillion metric tons of energy. Liquid petroleum lead the way, followed by coal then gas. The Treasury also estimated the Btu tax to generate $22 Billion in fiscal 1997 and $70 Billion between 1994 - 1998. The Administration position is that the U.S. maintains the cheapest energy prices of any G7 country. Table 1 indicates the energy cost of the G7 countries and the realtive cheapness of energy within the United States. After imposing the tax only Canada would have cheaper energy costs. The U.S. would be secound with relatively small increases in price levels: 8% for fuels; 34% for electricity; 28% for natural gas; and 17% for coal. The new levels for Table 1, after the tax are: 111.44, 206.37, 0.052, 111.22, and 43.25 respective. The new price levels increase manufactoring costs by 0.1 percent (2.6 to 2.7%) and add 0.4 percent to the cost of agriculture. The tax impacts consumers an average $110 per capita, roughly 0.6 percent of disposable income, estimated the Treasury Department.

Table 1: Industrial Enegry Prices
H Fuel L Fuel Elect.Nat. GasCoal
Canada103.63 191.30 .03986.73n/a
France 116.01n/a .054 151.33101.24
Germany 137.53270.72.088 201.02182.42
Italy 184.03761.29 .105170.60n/a
Japan240.45 268.92 .136424.6869.77
U.K. 122.54221.69 .071 161.1676.94
U.S.83.84184.39 .049101.0436.94
U.S.(w/tax)111.44206.37.052 111.2243.25

Heavy Fuel Oil = $ per Metric Ton
Light Fuel Oil = $ per 1,000 liters
Electric = $ per KWh
Natural Gas = $ per 107 Kcal
Steam Coal = $ per Metric Ton

Source: OECD - International Energy Association, Energy Prices and Taxes, 3rd. Quarter, 1992 (Paris, 1993).

17. Impact of Trade Restriction:


The final law has a low impact on the competitiveness of the U.S. The original Btu proposal would have effected U.S. competitiveness highly. The American Council for an Energy Efficient Economy estimated the Btu idea would create 40,000 new jobs by 2003. On the other hand the American Petroleum Institute estimated a decline in GDP of $140 billion with 384,000 jobs lost.

Similar taxes have been passed throughout Europe with the heaviest burden on the Netherlands. CO2 and or SO2 (sulfur dioxide) taxes have been enacted in Denmark, Finland, Norway, Sweden, France and other European Nations. Revenue generated from the taxes are used to finance air quality improvement or monitoring programs. This type of tax is becoming a popular way of generating new revenue.

18. Industry Sector:


491 Electric Services

492 Gas Production and Distribution

493 Combination Electric & Gas & other Utility Services

19. Exporters and Importers:


V. Environment Clusters

20. Environmental Problem Type:


The energy tax will improve the environment by providing an incentive to use clean burning fuels. The tax would contribute to the Rio Summit goal, agreed upon by the United States, of returning greenhouse gas emissions to their 1990 levels by the year 2000. Smog, acid rain, and toxic waste would have been reduced, as well as the risk of oil spills.

21. Name, Type, and Diversity of Species


22. Resource Impact and Effect:

LOW and Regulatory

23. Urgency of Problem:


24. Substitutes:


VI. Other Factors

25. Culture:


Americans enjoy cheap energy and petroleum - lowest of the G7 countries (Heavy Oil = $ 83.84 per metric ton, Light Fuel Oil = $184.39 per metric ton). America's attitudes towards their automobiles and their lifestyle will have to change before the country is ready to accept higher prices at the pumps. In addition, corporate attitude will also need to be adjusted to focus on the long term objectives. Only by incorporating external costs into the production process will true environmental costs be realized.

26. Trans-Boundary Issues:


Air pollution migrates across all boundaries. Emissions caused in the United States equally affect our neighbors. Smog, Acid Rain and Acid Snow show up in the lakes and streams of Canada. Changes to the tax structure will have the effect of reducing emissions that kill lakes and streams affecting fish and other wildlife.

27. Rights:


28. Relevant Literature

Boyde, R; Uri, N., Assessment of the Impacts of Energy Taxes, Resources and Energy, Vol. 13, December 1991, pgs 349-79.

Casler, S.; Rafiqui, A., Evaluating Fuel Tax Equity: Direct and Indirect Distributional Effects, National Tax Journal, Vol. 46 June 1993, pgs 197-205.

Reppetto, R.; Dower, R.; Gramlich, R., Pollution and Energy Taxes: Their Environmental & Economic Benefits, Challenge, Vol. 36, July- August 1993, pgs 9-14.

U.S. House of Representatives, Omnibus Budget Reconciliation Act of 1993, Report of the Committee on the Budget House of Representatives (H.R. 2264), 103rd Congress, May 25, 1993, pgs 728-747.

U.S. Senate, Fiscal Year 1994 Budget Reconciliation Recommendations of the Committee on Finance, 103rd Congress, June 1993, pgs 211-214.

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