By Noah Fisher
In the recent State of the Union Address, President Obama called for an end to oil and gas subsidies, the third time he has done so since taking office in 2009. The President’s FY 2012 budget, submitted today, includes the elimination of nearly $4 billion of incentives annually for the oil, gas and coal industries. Unfortunately, all previous attempts to reduce or eliminate these incentives have met the same fate: bipartisan opposition and heavy lobbying from fossil fuel groups. In spite of the uphill nature of the battle, the President hopes that current demand for reduced spending will result in a different outcome.
In addition to competing with the large dollar discrepancy between industry incentives, most renewable energy subsidies face annual reauthorization debates in Congress, whereas fossil fuels have for years been expressly written into law. For example, the extremely successful1603 Cash Grant faced serious opposition during the lame duck session of the 111th Congress, and only finally garnered inclusion as a compromise among politicians. On the other hand, fossil fuel subsidies face no annual scrutiny, flying under the rader of the public. The short-term authorization of renewable energy subsidies leads to market and price instability, making fossil fuels a more sure bet for investors.
Unsurprisingly, the oil and gas industry contends that the subsidies actually go in the other direction: from fossil fuel companies to the federal government, in the form of taxes and royalties. Other industry members claim the elimination of subsidies will reduce investmentand slow down vital domestic exploration. Secretary of the Interior Ken Salazar, however, disagrees with the industry’s assertion:
“All you have to do is look at record profits in the oil and gas world over the last several years and, in my view, you’re going to continue to see a great interest in oil and gas because it’s an essential part of our economy today…I think the oil and gas industry will do just fine.”
The constant debate surrounding renewable energy subsidies and their reauthorization makes them well known to the masses. However, fossil fuel subsidies, due to their location in permanent law, remain a mystery to many outside of the industry. On top of this, fossil fuel subsidies are spread across the tax code as well as in direct provisions. Attempts to accurately quantify the dollar value of subsidies have varied, as assumptions must be made on the intention of various provisions in the tax code.
In September 2009, the Environmental Law Institute published “Estimating U.S. Government Subsidies to Energy Sources: 2002-2008”, which to date it represents the most comprehensive compilation and analysis of federal energy subsidies. ELI measured both tax expenditures and direct expenditures for fossil fuels and renewable energy from 2002-2008, and their results are represented in the above graphic. Fossil fuels (i.e. petroleum, natural gas, and coal) subsidies totaled roughly $72 billion over the six-year window, compared to $29 billion for renewable energy (i.e. wind, solar, biofuels, biomass, hydro, and geothermal.)
Regardless of the assumptions and calculations made in the analysis, certain provisions clearly benefit the fossil fuel industry unduly:
Foreign Tax Credit (IRC Section 901) – Generally applicable credit available to tax payers earning income abroad to avoid “double taxation.”
Credit for Production of Nonconventional Fuels (IRC Section 45K) – Tax credit for production of oil from shale, tar sands; gas from geopressurized brine; Devonian shale, coal seams, tight formations, biomass, and coal-based synthetic fuels.
Oil and Gas Exploration & Development Expensing (IRC Section 617) – Permits Intangible Drilling Costs (IDC) to be deducted as business expenses rather than amortized.
Oil and Gas Excess Percentage over Cost Depletion (IRC Section 613) – Permits owners to deduct 15% of gross income earned from qualifying oil, gas, and oil shale deposits.
Credit for Enhanced Oil Recovery Cost (IRC Section 43) – Credit for hydrocarbon-based tertiary injectant methods.
According to ELI, these five tax credits alone accounted for $43.5 billion from 2002-2008. The report identifies an additional 18 provisions in the tax code that benefit the fossil fuel industry, and avoid the arduous process of reauthorization faced by the renewable industry. In no way is this an exhaustive list of fossil fuel subsidies, but it clearly demonstrates the continuous support from the federal government for what President Obama has called “yesterday’s energy.”
The imbalance between subsidies for fossil fuels and those for renewables is an issue faced by countries around the world. In a recent report, Bloomberg New Energy Finance calculated global fossil fuel subsidies at $557 billion, compared to $46 billion for renewable energy. In 2009, the G-20 nations pledged a reduction in their domestic fossil fuel subsidies, but little action has followed.
Eliminating fossil fuel subsidies will not remove all of the barriers facing renewable energy, but leveling the playing field will certainly represent a positive step in the right direction while also moving to reduce our deficit. Eliminating these subsidies will not be easy due to their permanent location in the tax code.
Any politician who attempts to eliminate such subsidies will be charged with ‘raising taxes’, when in fact they are lowering subsidies. President Obama understands this, but in a time when politicians and citizens alike are calling for reduced government spending and new forms of energy, he’s hoping the third time is the charm.