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Climate Change and the Federal Budget August 1998

For over a decade, scientists and policymakers worldwide have debated how human activity affects the global climate and whether anything can or should be done about it. Some people believe that climate change poses a great risk to future generations and call for immediate action that could impose high costs on the economy and society at large. Other people believe that it is not a serious problem and can be dealt with if and when it occurs. Still others believe that the warmer temperatures that coincide with climate change might benefit the economy. Opinions about climate change reflect the uncertainties that surround it: about the science of the phenomenon itself; about the implications for people, economies, and ecosystems; and about the best policy for dealing with it. Further research can help inform policymakers but, as with other highly charged issues, decisions will have to be made before all the facts are in.

Since the mid-1980s, the United States has funded scientific research and monitoring efforts and participated in international negotiations and agreements, all centered around the global climate issue. In 1993, the government developed a set of voluntary programs to cut emissions of carbon dioxide and other greenhouse gases that scientists believe to be at the core of the problem.

But stronger measures would be needed to cut emissions significantly. In December 1997, representatives from the United States and other industrialized countries agreed to the Kyoto Protocol--a treaty with binding targets and timetables for reducing emissions of carbon dioxide and other greenhouse gases.⁽¹⁾ The reductions that the participants agreed to are a modest first step toward a goal of eventually stabilizing atmospheric concentrations of those gases, but some analysts believe that even those preliminary measures will be excessively costly to the U.S. economy.

The Kyoto Protocol requires ratification by the Senate. The Administration is postponing presentation of the Kyoto Protocol to the Senate to get "meaningful participation" from developing countries in the effort to limit emissions--something lacking in the treaty. Climate change is a global problem, and the United States and other industrialized countries will not succeed without global cooperation. Talks with developing countries are ongoing.

Even if some level of global cooperation is achieved and the treaty is presented to the Senate, the debate on climate change will have just begun. Policymakers face questions for which there are no certain answers: Should current sacrifices be made for uncertain future benefits? Who should pay for reductions in emissions? and What actions could lessen adjustment costs? If the treaty is ratified, future Congresses will have to consider authorizations and appropriations for particular programs to meet the treaty's targets and timetables.

This memorandum reviews current and proposed federal spending programs and tax policies that relate to climate change, their effects on the federal budget, and the Administration's proposals for funding them. Included in that inventory are activities that directly address climate change and those that are associated with climate change through their effects on emissions of carbon dioxide.

Federal regulatory activities could also affect climate change but are not included in this memorandum. The private sector bears most of the cost of regulation, so those figures do not show up in the federal budget; even the expenses of federal agencies to administer and enforce regulations are often offset by collections from the regulated industry and, hence, have little or no net budgetary impact. Although some regulations may affect energy use and emissions of carbon dioxide, none directly address climate change. That could change as policies evolve.

Sooner or later, policymakers will face major decisions on climate policy--particularly whether to limit carbon emissions and how to go about it. Those policy decisions will inevitably affect the budget. Sharply limiting emissions would have large near-term effects on the economy with ensuing consequences for federal revenues and outlays. The choice of a policy instrument could also have a large budgetary effect. Taxes to curtail use of fossil fuels, for example, could generate substantial revenues. The budgetary effects of tradable emissions allowances--a policy option in the Kyoto treaty--would depend on whether permits were distributed or auctioned. Ultimately, policy decisions that may be influenced by budgetary effects will be dominated by the larger question of the effects of policy actions, or of taking no actions, on the U.S. and world economies.
 

"DIRECT" AND "ASSOCIATED" SPENDING PROGRAMS AND TAX POLICIES

Programs and tax policies reported in this memorandum are divided into two categories, based on whether they are directly related to climate change or just associated with it. The first category includes spending programs and tax policies that are specifically designated by the Administration as climate change programs. The second category comprises programs that may affect climate change even though that may not be their primary purpose. Some of those programs may be intended to cut the use of fossil fuels--a goal shared with activities that are identified as climate change programs. Others--particularly certain tax policies--may lead to an increase in the use of fossil fuels and thus contribute to carbon emissions, although, again, that is not their purpose.

The direct category comprises spending programs in the U.S. Global Change Research Program (USGCRP), the Climate Change Technology Initiative, and several international programs related to climate change. Budget authority for those programs in 1998 totals $2.9 billion (see Table 1). The USGCRP, which consists mainly of programs to discern the science and consequences of global change, was funded at about $1.9 billion in 1998--roughly 65 percent of funding for programs directly related to climate change. The President requested a substantial increase in 1999, to $3.4 billion, for all climate change programs, mostly for research and development in energy technology.
 

The Climate Change Technology Initiative also contains proposed changes in tax law. Those changes include several tax credits to encourage the development and adoption of new energy-efficient technologies in transportation, industry, buildings, and electricity. Estimated revenue losses associated with those tax proposals are $478 million in 1999, rising to nearly $1.3 billion by 2003. Those policy proposals and tax policies are discussed in more detail in Chapter 2.

The second category of programs are those associated with climate change primarily through their effects on the use of fossil fuels. Table 1 shows spending for a number of such programs, mostly in the areas of transportation, energy conservation, and nuclear energy research and development. Budget authority totals nearly $1.8 billion in 1998, and the request for 1999 is roughly the same. Those programs are discussed in more detail in Chapter 3.

Various taxes and tax preferences also influence the use of fossil fuels and, consequently, emissions of carbon dioxide. Tax preferences that may discourage the use of fossil fuel include credits, exclusions, and exemptions to encourage energy conservation, the development of alternative fuel supplies or energy-producing technologies, or both. Excise taxes on fossil fuels and activities related to transportation and travel exert a direct effect on energy use by applying upward pressure on prices, which, in turn, reduces demand. The estimated effects on revenues of tax preferences and excise taxes is quite large. But since the effects on climate change are largely incidental to the purposes of the programs and vary greatly by program, the total is not particularly meaningful.
 

CURRENT PROGRAMS AND TAX POLICIES AND THE EMISSION OF GREENHOUSE GASES

The federal government is now spending nearly $5 billion annually on programs that are either directly related to climate change or associated with climate change through their effects on the use of fossil fuels. In addition, taxes and tax policies that affect the prices, production, or use of fossil fuels can also affect carbon emissions. The directly related programs are helping U.S. researchers and policymakers learn more about climate change, conduct applied technology research and development to improve energy efficiency, promote international actions, and, to a modest extent, cut emissions of greenhouse gases.

Other programs and tax policies that affect the use of fossil fuels may also indirectly affect emissions of carbon dioxide. A Congressional Budget Office (CBO) study prepared in 1990 looked specifically at carbon dioxide emissions and concluded that whether programs and tax policies then in place had a net positive or negative effect on total emissions was unclear. The studies predicted that, whatever the direction of the effect, it would probably be small.⁽²⁾ That conclusion still holds. More programs are now designated as climate change programs than in the past. Since most of the funds are spent to learn more about the phenomenon and to improve energy efficiency in the future, the short-term effect is minimal.

1. Kyoto Protocol to the United Nations Framework Convention on Climate Change, FCCC/CP/1997/L.7/Add.1, Conference of Parties, Third Session, Kyoto, December 1-10, 1997 (available at http://www.unfccc.de/fccc/docs/cop3/07a01.pdf).

2. Congressional Budget Office, Energy Use and Emissions of Carbon Dioxide: Federal Spending and Credit Programs and Tax Policies (December 1990).

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