As noted in a Tax Foundation blog post last week, the Inflation Reduction Act (IRA) primarily uses carrots, not sticks, to incentivize reductions in carbon emissions. The Inflation Reduction Act creates or expands tax credits for various low- or no-emission technologies, rather than imposing a generalized penalty for emissions, such as a carbon tax.
However, there are three small energy-related tax increases in the bill. One tax increase is a true emissions reduction policy while the others focus on ameliorating localized pollution issues, rather than global climate change.
While the Inflation Reduction Act avoided any carbon pricing mechanism, the law includes a fee on a different greenhouse gas: methane. Methane emissions are small relative to carbon emissions, but methane is much more potent—responsible for about 11 percent of climate changes related to greenhouse gas emissions.
Starting in 2026, the Inflation Reduction Act introduces a fee on methane emissions. The fee would begin at $900 per ton and rise to $1,500 per ton after two years. According to the Congressional Budget Office’s (CBO) analysis, this would raise $6.35 billion over the next decade.
In some ways, this policy is an encouraging step away from the tax subsidies and top-down regulations that defined environmental policy for decades, but it falls short of an optimal Pigouvian tax approach in significant ways. The fee is targeted solely at methane emissions from the oil and gas industry, even though the agricultural sector is the largest source of methane emissions in the United States.
Additionally, the fee potentially duplicates, not substitutes, methane regulations coming from the Environmental Protection Agency (EPA). As the Congressional Research Service noted, the bill contains an exemption from the tax if future EPA regulations equivalent to or stronger than the set of methane regulations proposed in 2021 are adopted. This uncertainty undermines a main advantage of emissions pricing over regulation.
The Inflation Reduction Act also reinstates the “Superfund” tax on domestic and imported petroleum and raises the tax rate from the original 9.7 cents per barrel last imposed in 1995. There is some confusion on this front, as the Infrastructure Investment and Jobs Act of 2021 already reinstated the Superfund tax on the transport of 42 hazardous chemicals but did not reinstate the tax on petroleum.
The Superfund tax is focused on addressing localized pollution issues, rather than global climate change. Companies that transport potentially hazardous chemicals pay a relatively low tax that pays for Superfund, the program responsible for addressing various kinds of chemical leaks. Think of Superfund as a hazardous spill insurance policy that oil producers must purchase.
The rate is set at 16.4 cents per barrel of petroleum—which may sound high but, in the context of gas prices, is near a rounding error. There are 42 gallons of oil in a barrel, meaning the tax equals 0.39 cents per gallon of petroleum. Then, crude oil is only around half of the cost of retail gasoline (the rest is refining, marketing, distribution, and existing federal and state taxes). The 0.39 cents per gallon of petroleum tax translates to a roughly 0.2 cents per gallon increase in retail gas prices—clearly swamped in either direction by the major fluctuations of the past year.
There are reasonable trade-offs to consider with Superfund taxes. Superfund taxes ensure companies that risk significant industrial pollution pay for cleanup efforts. However, the total revenue amount is quite small relative to the administrative costs. When Tax Foundation analyzed the reintroduction of the Superfund tax on petroleum, we found small economic costs and a small amount of revenue raised.
|Change in GDP||Less than -0.05%|
|Change in GNP||Less than -0.05%|
|Capital Stock||Less than -0.05%|
|Wage Rate||Less than -0.05%|
|Full-Time Equivalent Jobs||-2,000|
|10-Year Conventional Revenue (2022-2031)||$12.1 billion|
|Source: Alex Durante, Cody Kallen, Huaqun Li, William McBride, and Garrett Watson, “Details and Analysis of the Inflation Reduction Act Tax Provisions,” Tax Foundation, Aug. 12, 2022, https://taxfoundation.org/inflation-reduction-act.|
Permanent Increase in Coal Excise Tax for Black Lung Disability Fund
The last notable Inflation Reduction Act energy tax increase is a permanent increase in the excise tax rate on coal. This higher excise tax funds benefits for former coal miners with black lung disease in cases where mine operators are unable to pay.
Before the Inflation Reduction Act, the tax was either $0.50 per ton of coal from underground mines and $0.25 per ton of coal from surface mines, or 2 percent of the sale price of coal—whichever was lesser. The IRA raised those rates to the lesser of $1.10 per ton of underground coal and $0.55 per ton of surface mine coal, or 4.4 percent of the sale price of coal. While technically a tax increase, this change is more a reversion to the norm: for most years since 1986, coal has been taxed under the “new” rates. It is also a small provision, an order of magnitude smaller than the Superfund tax—raising only $1.16 billion over 10 years, according to the CBO.
This policy poses a conundrum. On the one hand, a tax on coal production to cover harms from coal production makes sense, and the fiscal outlook for the Black Lung Disability Trust Fund looks to get worse over the next several years, justifying a tax increase. But on the other, the program’s poor outlook is driven by the projected decline of coal production and the projected growth in former miners owed benefits, meaning the government may need to consider using general revenue to provide benefits in the future as the tax base of coal production shrinks.
All told, the Inflation Reduction Act’s energy-related taxes are relatively small-scale. And though they have policy justifications, they also feature some design issues.
Note: This the second part of our blog series on the green energy tax provisions in the Inflation Reduction Act