Pro-Growth Tax Code, Regulatory Certainty Best Tools for Businesses to Implement Climate Change Adaptations

(Washington, August 1, 2012) – Businesses seeking to adapt to changing climate and weather models are best served by a tax code that retains robust capital cost recovery, coupled with reductions in regulatory and permitting barriers.  At a hearing of the Senate Environment and Public Works Committee today, ACCF Senior Vice President and Chief Economist Dr. Margo Thorning testified that business investments are judged on the basis of their costs and benefits and until there is more convergence on the wide range of climate modeling, businesses are unlikely to make any adaptations beyond “no regrets” steps (or changes that would be undertaken in the normal course of business).

Thorning also noted that many mainstream climate models do not predict significant global warming for at least 50 to 100 years, while most businesses plan investments over a 3 to 15 year horizon. The rapid change in business conditions, technology and global competition in recent years make businesses cautious about making assumptions about the future profitability of investments. Thus, they are unlikely to undertake substantial investments in anticipation of changes in climate that may only occur in 50 to 100 years, again following a “no regrets” policy.

While not yet widespread, some U.S. companies are moving beyond “no regrets” policies by planning for climate change as well as investing in “hard adaptation” measures.  Thorning cited several examples of companies from the utility, agriculture and insurance sectors that have made investments following extreme weather events like hurricanes or forecasting warmer, drier weather or future extreme events.

To facilitate private sector climate adaptation, Thorning underscored the need to foster a better climate for savings and investment.  One way is to reduce the conflicting regulations, regulatory uncertainty and permitting delays that are often factors hindering U.S. companies from making investments to improve or expand their facilities in order to adapt to extreme weather events or climate variability. For example, in addition to permits to meet federal regulations there are often additional state and local permit requirements, which add time and cost to a project getting underway.

Thorning also stressed the importance pro-growth tax policy and maintaining cash flow for investment by preserving tax provisions including accelerated and bonus depreciation, Last In First Out (LIFO) and Section 199, which are all on the table as potential eliminations as a trade-off for reductions in lowering corporate tax rates.

Ideally, lawmakers should consider a consumed income tax in which all saving is deducted and all investment is expensed. Dr. Allen Sinai, president and chief global economist of Decision Economics conducted a macroeconomic model and found that if a consumed income tax system had been in place starting in 1991, GDP would have been 5.2 percent higher, consumption and investment would have been greater, and employment higher by over 140,000 jobs per year by 2001. In addition, federal tax receipts would have been $428.5 billion larger in 2001 compared to the baseline forecast.

“Adapting to climate variations will be easier for countries with growing economies and prospering businesses and consumers,” Thorning told committee members.  “In order to finance new technology innovations, businesses will need strong portfolios and growing assets. Provisions that are friendly to savings and investment should be a key part of tax reform discussions.   Additionally, reducing regulatory and permitting barriers to new investment will also promote a stronger economy and facilitate these adaptations.”

Founded in 1973, The American Council for Capital Formation (www.accf.org) is a nonprofit, nonpartisan organization advocating tax, energy, regulatory and environmental policies that facilitate saving and investment, economic growth and job creation.

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