Energy Taxes: Their Impacts on Energy Markets

The Clinton Administration recently proposed a modified Btu tax on energy. Before the announcement, a variety of taxes was being considered, both broad-based (e.g., Btu, carbon, ad valorem and VAT) and fuel-specific (motor fuels and the oil import fee). Some of these are still being considered by Congress and others.

An analysis of these tax alternatives, including Clinton’s proposal, was conducted by DRI/McGraw-Hill using its energy and macroeconomic models. All of the taxes were modelled to collect approximately $30 billion in gross revenues in 1997. The analysis found that:

  • The Administration’s proposed Btu tax would have the smallest effect on natural gas demand of any of the taxes studied, with the exception of an increase in federal gasoline and diesel taxes; by 1997, gas demand would be approximately one percent lower than the 1997 baseline. Oil demand would bear the brunt, falling a little over two percent, and coal demand would fall approximately one percent.
  • Of the taxes examined, a level Btu tax would have the most negative effect on gas demand. DRI estimates that a $0.35 per million Btu tax would lower gas demand a little over two percent in 1997.
  • Natural gas demand would be unaffected by an increase in the federal gasoline and diesel tax. The tax would cause energy demand to fall just under one percent with a one percent decline in carbon emissions.
  • Either version of the ad valorem tax would lower natural gas demand 1.4% in 1997, less than the approximately two percent decline in oil demand but twice as much as the 0.7% decrease expected in coal consumption.
  • Direct household expenditures on energy would rise the most under an oil import fee and rise the least under an at-source ad valorem tax. The Administration’s Btu tax with an oil supplement would fall in the middle of the range; a carbon and level Btu tax would have a smaller effect while a retail ad valorem tax and an increase in the motor fuels taxes would have a larger effect.
  • The oil import fee would have the largest impact on carbon emissions, with a 2.4% decline expected in 1997; the next largest impact would come from the level Btu and carbon taxes, with a nearly two percent decline. The Administration’s Btu tax with an oil supplement, the at-source ad valorem, and tho retail ad valorem taxes would cause 1.7%, 1.6%, and 1.5% declines in carbon emissions, respectively. An increase in federal motor fuels taxes would only reduce carbon emissions one percent below the baseline in 1997.