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Climate Change and the Federal Budget August 1998

Current U.S. policy toward climate change focuses on three areas: scientific research and monitoring to better understand climate change, its implications, and what to do about it; applied technology research and development to reduce energy use or to make future limits on carbon emissions less costly to the economy; and activities to promote international agreements and actions.

Two other categories of climate change activities receive less attention now but could dominate federal action in the future. First are efforts to reduce the emissions of greenhouse gases. Several voluntary federal programs to cut emissions exist, but they fall short of meeting any significant reduction goals such as those in the Kyoto Protocol. Second are activities to adapt to the effects of climate change. Adapting to change, instead of trying to prevent it, requires little current action.
 

SPENDING PROGRAMS DIRECTLY LINKED TO CLIMATE CHANGE

The U.S. Global Change Research Program, the Climate Change Technology Initiative (CCTI), and a group of international activities are the major federal efforts directly linked to climate change. The USGCRP has been in place since 1989. The CCTI, a new umbrella designation, includes programs formerly in the Climate Change Action Plan and the research and development programs of the Department of Energy (DOE).

The U.S. Global Change Research Program

The U.S. Global Change Research Program is a comprehensive effort to understand the science and consequences of a full range of natural and human-induced changes in the Earth's environment. The four main areas of study are seasonal to interannual climate variability; climatic changes over time; changes in ozone, ultraviolet radiation, and atmospheric chemistry; and changes in land cover and ecosystems. Ten executive departments or agencies conduct or fund that research. Funding for 1998 is almost $1.9 billion, and the request for 1999 is nearly the same (see Table 2).⁽¹⁾
 

About 40 percent of USGCRP funds go to research scientists studying a broad range of questions. The USGCRP publishes an annual report on research objectives and projects, including information on budgetary resources allocated to projects within agencies or departments.⁽²⁾

The remaining 60 percent of funding supports development of a space-based observation system--a series of satellites and data systems to monitor the Earth's natural systems. The National Aeronautics and Space Administration controls that activity, which accounts for about 80 percent of NASA's funding within the USGCRP--the remainder being scientific research. Most of those hardware development funds are for the Earth Observing System (EOS) program. The first satellite in that program, the EOS AM-1, is scheduled for launch this year to gather various data on land surface, atmosphere, and oceans.

The Climate Change Technology Initiative

The Climate Change Technology Initiative is a group of programs that would receive increased funding for research, development, and deployment of technologies to improve energy efficiency and reduce carbon emissions. The 1999 budget request totals $1,292 million, an increase of $471 million over the 1998 level (see Table 3). About $100 million of the $471 million would be for new activities. The remainder represents increased funding for existing programs, with some of those being major expansions. The increase over five years from current levels would total $2.7 billion. The CCTI also includes tax incentives, described below.
 

The CCTI is led by the Department of Energy and the Environmental Protection Agency (EPA). Those two agencies would receive 98 percent of the requested funding for 1999. The remaining 2 percent would fund activities at the Department of Housing and Urban Development, the Department of Commerce's National Institute of Standards and Technology (NIST), and the Department of Agriculture.

Most CCTI programs also serve other policy goals--for example, enhancing energy security, promoting energy efficiency, and improving air quality. The CCTI consists of the following activities within the Department of Energy:

• Energy efficiency and conservation activities, including research and development programs, the Federal Energy Management Program, DOE's contribution to the Partnership for a New Generation of Vehicles (a multiagency program to promote high-efficiency vehicles), municipal energy management, and DOE's contribution to the Advanced Transportation Technologies Consortium, which promotes research on electric and hybrid vehicles. The 1999 request is $617 million, exceeding 1998 funding by $161 million.
  
  
• Solar and renewable energy R&D. The 1999 request is $372 million, an increase of $100 million over 1998 levels.
  
  
• New activities within the fossil energy research and development program. The President requested $10 million to investigate the sequestration of carbon and $20 million for a new effort to improve the efficiency of the combustion of coal.
  
  
• Other research and development. New programs include $10 million to investigate ways to increase the useful life of existing nuclear plants and $27 million in the basic science account for research, principally on carbon sequestration. The research on carbon sequestration in the basic science program and the fossil fuel R&D programs is the only example of newly proposed research that would not also serve other energy policy goals.

CCTI activities within the Environmental Protection Agency would include the bulk of programs that were formerly part of the Climate Change Action Plan (CCAP). Many of the CCAP programs administered by EPA would be expanded under the proposal, including the Energy Star Programs for buildings, appliance labeling, and homes. The 1999 request for the former CCAP activities other than the Partnership for a New Generation of Vehicles (PNGV) is about $115 million, up from $73 million in 1998. The PNGV, formerly part of CCAP, is now part of the Climate Change Technology Initiative. EPA's contribution to PNGV would roughly double, from $17 million to $35 million, in the 1999 request.

The Partnership for a New Generation of Vehicles, launched in 1993, is a cooperative effort between the federal government and industry to foster breakthrough technology in personal vehicles. In addition to DOE and EPA, the Department of Commerce, the National Science Foundation, and the Department of Transportation receive funding for PNGV activities. One goal of the program is to develop a production prototype vehicle capable of 80 miles per gallon by 2004. Funding was about $234 million in 1997 and $227 million in 1998. The President's request for PNGV funding for all agencies, whether included in CCTI or not, is $50 million above 1998 levels.

The CCTI program in the Department of Housing and Urban Development is the Partnership for Advancing Technologies in Housing (PATH). The purpose of PATH is to develop, demonstrate, and help to commercialize safe, energy-efficient housing technologies. The PATH program received about $1 million in seed money from a HUD R&D account in 1998. The program would be funded at $10 million in 1999 under the President's proposal.

CCTI programs at the Department of Agriculture (USDA) would fund research on biomass and carbon sequestration. CCTI would allot $10 million to USDA to support research on the conversion of wood, crop wastes, and energy crops to fuels and electricity and on enhancing the carbon-sequestering capabilities of agricultural species.

The CCTI also includes funding for new research at the National Institute of Standards and Technology in the Department of Commerce. Research efforts at NIST would work to improve measurements of greenhouse gases and would support biotechnology work on plant metabolism and carbon sequestration. The proposed level of funding for NIST programs in 1999 is $7 million.

International Activities That Target Climate Change

The United States contributes to various international efforts to assess the problem of climate change and to reduce emissions of carbon dioxide and other greenhouse gases. Contributions to the Intergovernmental Panel on Climate Change, the Global Environment Facility, the Montreal Protocol, and bilateral assistance programs totaled more than $200 million in 1998 (see Table 4).
 

Intergovernmental Panel on Climate Change and the Climate Change Secretariat. The Intergovernmental Panel on Climate Change (IPCC) was established in 1988 by the World Meteorological Organization and the United Nations Environment Programme (UNEP) to assess the available scientific, technical, and socioeconomic information in the field of climate change. The IPCC released its Second Assessment Report in 1995 and periodically produces technical papers and develops methodologies (for example, inventories of greenhouse gases) for use by the parties to the Climate Change Convention. The Climate Change Secretariat was organized under the U.N. Framework Convention on Climate Change to handle coordination and administrative responsibilities under the Convention. The United States contributed $5 million to the IPCC and the Climate Change Secretariat in 1998. The 1999 request is $8 million.

Bilateral Assistance. Bilateral assistance is primarily conducted through the U.S. Agency for International Development (AID). AID has made the mitigation of climate change one of two global environmental priorities. The agency supports grants focusing on this issue to nine key countries--India, Indonesia, the Philippines, Mexico, Brazil, Russia, Ukraine, Kazakstan, and Poland--and supports a broader portfolio of energy efficiency, renewable energy, and forestry activities related to climate change. Obligations for grants related to climate change were $150 million in 1998, the same as the request for 1999.

Global Environment Facility. The Global Environment Facility (GEF) is an international financial institution established in 1991 to provide developing countries with grants and low-interest loans for projects in four areas: global climate change, international waters, biological diversity, and depletion of the ozone layer. The GEF is run jointly by the United Nations Development Programme (UNDP), UNEP, and the World Bank. Budget authority for climate change activities was about $18 million in 1998 (38 percent of all funds appropriated for the GEF). The total request for funds for the GEF in 1999 is $300 million--38 percent of which is $114 million. The 1999 budget identifies about $41 million (of the $114 million) as "payments in arrears," leaving $73 million that may be available for new obligation.

Montreal Protocol. The Montreal Protocol is an international environmental agreement with the objective of eliminating the use of substances that deplete the ozone layer in the stratosphere and are believed to contribute to climate change: chlorofluorocarbons, halons, and hydrochlorofluorocarbons. The agreement is implemented by the World Bank, UNDP, UNEP, and the United Nations Industrial Development Organization. The U.S. contribution, which is jointly paid by the Department of State and the Environmental Protection Agency, totaled $40 million in 1998. CBO includes spending for the Montreal Protocol in this memorandum because of the close link between ozone-depleting gases and greenhouse gases.

The request for 1999 is $55 million--$34 million for the Department of State and $21 million for the Environmental Protection Agency.
 

TAX PROPOSALS DIRECTLY LINKED TO CLIMATE CHANGE

As part of its Climate Change Technology Initiative, the Administration has proposed several tax preferences designed to encourage the development of new technologies that offer superior energy efficiency and to induce purchases of higher-cost, energy-efficient equipment. Improving energy efficiency would reduce emissions of carbon dioxide, the cost of complying with any future limits on emissions, or both.

The Administration sought to tailor the incentives to technologies that either are currently available or will be when the credits go into effect and to equipment that can be precisely defined for purposes of the Internal Revenue Service. According to estimates of the Joint Committee on Taxation (JCT), the tax incentives would result in revenue losses of $3.8 billion through 2003 and $9.8 billion through 2008 (see Table 5).⁽³⁾
 

Tax Credits

Most of the proposals for tax preferences are for new or expanded tax credits.

Tax Credits for Highly Fuel-Efficient Vehicles. Under current law, a 10 percent credit is available for the purchase of new electric vehicles for use by the taxpayer and not for resale. In addition, a deduction is available for qualified clean-fuel vehicles. The proposed tax credits are intended to reduce carbon dioxide emissions by encouraging the manufacture and purchase of fuel-efficient vehicles. The proposal is for two temporary tax credits: a $4,000 credit for each vehicle that has three times the base fuel economy for its class, and a $3,000 tax credit for each vehicle that has twice the base fuel economy for its class. The $4,000 credit would be available in calendar years 2003 through 2006 and would subsequently be reduced by $1,000 a year, phasing out completely in 2010. The $3,000 credit would be available for calendar years 2000 through 2003 and would phase out in 2006, also at the rate of $1,000 a year. The credits would be available for cars, sport utility vehicles, minivans, light trucks as well as hybrid, electric, and other light vehicles. Taxpayers who claimed the new credits would not be able to claim the credit that is currently available for electric vehicles or the deduction for clean-fuel vehicles.

The JCT estimates that enacting the proposal would reduce revenues by $931 million from 1998 through 2003 and by $5,823 million from 1998 through 2008.

Tax Credit for Energy-Efficient Building Equipment. The proposal would provide a credit for the purchase of certain types of energy-efficient building equipment: fuel cells, electric heat pumps and advanced natural gas water heaters, advanced natural gas and residential-size electric heat pumps, and advanced central air conditioners. The credit, which would be nonrefundable, would be equal to 20 percent of the purchase price, subject to a cap. For businesses, it would be subject to the limits on the general business credit, and it would reduce the basis of the equipment. The credit would be in effect from January 1, 2000, to December 31, 2004, for fuel cells, and from January 1, 1999, to December 31, 2003, for other types of equipment. To be eligible for the credit, the equipment would have to meet specified criteria.

The JCT estimates that the proposal would result in revenue losses of $1,385 million between 1998 and 2003 and $1,563 million between 1998 and 2008.

Investment Tax Credit for Combined Heat and Power Systems. Combined heat and power (CHP) systems are used to produce electricity and process heat or mechanical power from a single primary energy source. The systems use thermal energy that is otherwise wasted in the process of producing electricity conventionally--which, in turn, results in less consumption of fossil fuels, reduced carbon emissions, and lower costs. The proposal is for a 10 percent investment tax credit for CHP systems with electrical capacity of more than 50 kilowatts. Investments in the systems with cost-recovery periods of less than 15 years would be eligible for the credit only if a 15-year recovery period and the 150 percent declining-balance method were used to calculate depreciation deductions.

The systems would be required to produce at least 20 percent of their useful energy in the form of both thermal energy and electric or mechanical power. To qualify for the credit, CHP systems would have to meet specified energy-efficiency and percentage-of-energy tests, as certified by qualified engineers, pursuant to regulations issued by the Secretary of the Treasury. The credit would be subject to the limits on general business credits and would be available for equipment placed in service during calendar years 1999 through 2003.

The JCT estimates that the proposal would result in revenue losses of $913 million through 2003.

Wind and Biomass Tax Credit. A tax credit of 1.5 cents per kilowatt hour (indexed for inflation after 1992) is currently available for electricity produced from wind or biomass. It now applies only to facilities placed in service before June 1, 1999, for wind and before July 1, 1999, for biomass. The proposal would extend the credit for both types of facilities placed in service by July 1, 2004. Unlike the other proposed tax credits, the wind and biomass credit is based on production rather than investment. The electricity must be sold to an unrelated third party, and the credit is limited to the first 10 years of production.

The JCT estimates the potential revenue losses of the proposal at $144 million through 2003 and $784 million through 2008.

Tax Credit for Purchase of New Energy-Efficient Homes. The proposal would provide a tax credit of 1 percent of the purchase price up to $2,000 to buyers of new homes that use at least 50 percent less energy for heating, cooling, and hot water than the Model Energy Code standard for single-family homes. The credit would be available for calendar years 1999 through 2003. Homes purchased in 2004 and 2005 would be eligible for a maximum credit of $1,000.

The JCT estimates that the proposal would result in revenue losses of $200 million between 1998 and 2003 and an additional $35 million in 2004.

Tax Credit for Replacement of Circuit Breaker Equipment. The proposal would provide a 10 percent tax credit to replace circuit breakers installed before 1986 that use sulfur hexafluoride (SF₆), a potent greenhouse gas. The replaced circuit breakers must be destroyed to prevent further use. The credit applies to property placed in service in calendar years 1999 through 2003 and is subject to the limits of the general business credit. Also, the amount of credit claimed reduces the depreciable basis of qualified property for which the credit is taken.

The JCT estimates that the proposal would result in revenue losses of $45 million between 1998 and 2003.

Tax Credit for Rooftop Solar Equipment. The proposed tax credit would be available for two types of solar equipment--photovoltaic heating systems and water heating systems located on or adjacent to buildings. The credit would be equal to 15 percent of the total investment in either system up to a maximum credit of $2,000 for rooftop photovoltaic heating systems and $1,000 for solar water heating systems. It would be nonrefundable and would not be available for systems to heat swimming pools. For businesses, the credit would reduce the depreciable basis of the property by the amount claimed and would be subject to the limits of the general business credit. It would apply to equipment placed in service during calendar years 1999 through 2003 for solar water heating systems and through 2005 for rooftop photovoltaic systems.

Under current law, a 10 percent energy investment tax credit for businesses is available for equipment that uses solar energy to generate electricity, to heat or cool or provide hot water for use in a structure, or to provide solar-process heat. The equivalent credit for residential solar systems expired in 1985. Under the proposals, businesses would have to choose between the present and the proposed tax credits.

The JCT estimates that enacting the proposal would reduce revenues by $43 million through 2003 and $100 million through 2008.

Tax Credit for Perfluorocompound and Hydrofluorocarbon Recycling Equipment. Perfluorocompounds (PFCs) and certain hydrofluorocarbons (HFCs) are extremely potent greenhouse gases because of their stability in the atmosphere and their capacity to absorb radiation. Under current law, manufacturers who install equipment to recover or recycle PFC and HFC gases used in producing semiconductors may depreciate the cost of that equipment over six years. The proposal would make available a 10 percent tax credit for installing PFC and HFC recovery or recycling equipment. The credit would be subject to the limits of the general business tax credit and would reduce the depreciable basis of the equipment by the amount claimed. To qualify, the equipment must recover at least 99 percent of the PFCs and HFCs used and must be placed in service between January 1, 1999, and December 31, 2003.

The JCT estimates that enacting the proposal would reduce revenues by about $33 million between 1998 and 2003.

Parking and Transit Benefits

The Administration has also proposed an increase in benefits to encourage the use of mass transit and van pools. Current law provides for the exclusion of parking benefits from gross income, regardless of whether the benefits are in addition to or in lieu of other employee compensation. However, for transit and van-pool benefits, the exclusion applies only if those benefits are in addition to other compensation. The current limits on the income exclusion (in 1993 dollars) are $155 per month for parking and $60 for transit passes and van-pool benefits. The proposal calls for eliminating the relative tax advantage of parking benefits. It would treat parking, transit passes, and van-pool benefits in the same way, subject to the same limits that currently apply to parking.

The JCT estimates that the proposal would reduce revenues by $114 million through 2003 and $318 million through 2008.

1. Several Department of Defense (DoD) research activities, totaling $6.5 million in 1998 (the request for 1999 is $6.7 million), also support the programs, but funding for DoD programs is not included in the official totals of the USGCRP.

2. National Science and Technology Council, Committee on Environment and Natural Resources, Subcommittee on Global Change Research, Our Changing Planet, The FY 1999 U.S. Global Change Research Program (March 1998).

3. Joint Committee on Taxation, "Estimated Budget Effects of the Revenue Provisions Contained in the President's Fiscal Year 1999 Budget Proposal," February 24, 1998.

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