President Biden this week did something CleanTechnica has been advocating for over the course of many years — ending government subsidies for fossil fuels. If humanity is to find a rational and reasonable answer to the challenge of a warming planet, we must stop making the burning of oil, natural gas, and coal the basis of our economy. Giving fossil fuel companies government incentives to extract more oil, gas, and coal is inconsistent with that goal.
According to the White House, this latest executive order “directs federal agencies to eliminate fossil fuel subsidies as consistent with applicable law and identify new opportunities to spur innovation, commercialization, and deployment of clean energy technologies and infrastructure.”
What Is A Fossil Fuel Subsidy?
That’s great. The federal government really shouldn’t be paying fossil fuel companies to put even more carbon dioxide and methane emissions into the atmosphere, should it? But what exactly is a fossil fuel subsidy anyway and how much power does the President have to eliminate them? According to the Environmental and Energy Study Institute,
The United States provides a number of tax subsidies to the fossil fuel industry as a means of encouraging domestic energy production. These include both direct subsidies to corporations, as well as other tax benefits to the fossil fuel industry. Conservative estimates put U.S. direct subsidies to the fossil fuel industry at roughly $20 billion per year; with 20 percent currently allocated to coal and 80 percent to natural gas and crude oil. European Union subsidies are estimated to total 55 billion euros annually.
Historically, subsidies granted to the fossil fuel industry were designed to lower the cost of fossil fuel production and incentivize new domestic energy sources. Today, U.S. taxpayer dollars continue to fund many fossil fuel subsidies that are outdated, but remain embedded within the tax code. At a time when renewable energy technology is increasingly cost-competitive with fossil power generation, and a coordinated strategy must be developed to mitigate climate change, the broader utility of fossil fuel subsidies is being questioned.
What effect do those subsidies have? According to a recent analysis published in Nature Energy, continuing current fossil fuel subsidies would make it profitable to extract half of all domestic oil reserves. That could increase U.S. oil production by 17 billion barrels over the next few decades and emit an additional 6 billion tons of carbon dioxide into the atmosphere. Since lowering the amount of carbon dioxide in the atmosphere is critical to limiting global heating, use tax dollars to encourage more emissions seems like a wrong headed policy.
The EESI list 4 direct subsidies for fossil fuels that are part of the Internal Revenue Code.
- Intangible Drilling Costs Deduction (26 U.S. Code § 263. Active). This provision allows companies to deduct a majority of the costs incurred from drilling new wells domestically. In its analysis of President Trump’s Fiscal Year 2017 Budget Proposal, the Joint Committee on Taxation (JCT) estimated that eliminating tax breaks for intangible drilling costs would generate $1.59 billion in revenue in 2017, or $13 billion in the next ten years.
- Percentage Depletion (26 U.S. Code § 613. Active). Depletion is an accounting method that works much like depreciation, allowing businesses to deduct a certain amount from their taxable income as a reflection of declining production from a reserve over time. However, with standard cost depletion, if a firm were to extract 10 percent of recoverable oil from a property, the depletion expense would be ten percent of capital costs. In contrast, percentage depletion allows firms to deduct a set percentage from their taxable income. Because percentage depletion is not based on capital costs, total deductions can exceed capital costs. This provision is limited to independent producers and royalty owners. In its analysis of the President’s Fiscal Year 2017 Budget Proposal, the JCT estimated that eliminating percentage depletion for coal, oil and natural gas would generate $12.9 billion in the next ten years.
- Credit for Clean Coal Investment — Internal Revenue Code § 48A (Active) and 48B (Inactive). These subsidies create a series of tax credits for energy investments, particularly for coal. In 2005, Congress authorized $1.5 billion in credits for integrated gasification combined cycle properties, with $800 million of this amount reserved specifically for coal projects. In 2008, additional incentives for carbon sequestration were added to IRC § 48B and 48A. These included 30 percent investment credits, which were made available for gasification projects that sequester 75 percent of carbon emissions, as well as advanced coal projects that sequester 65 percent of carbon emissions. Eliminating credits for investment in these projects would save $1 billion between 2017 and 2026.
In addition to direct subsidies, there are other economic benefits fossil fuel companies enjoy. EESI lists three that are significant, most of which ordinary citizens are completely unaware of.
- Last In, First Out Accounting (26 U.S. Code § 472. Active). The Last In, First Out accounting method (LIFO) allows oil and gas companies to sell the fuel most recently added to their reserves first, as opposed to selling older reserves first under the traditional First In, First Out (FIFO) method. This allows the most expensive reserves to be sold first, reducing the value of their inventory for taxation purposes.
- Foreign Tax Credit (26 U.S. Code § 901. Active). Typically, when firms operating in foreign countries pay royalties abroad they can deduct these expenses from their taxable income. Instead of claiming royalty payments as deductions, oil and gas companies are able to treat them as fully deductible foreign income tax. In 2016, the JCT estimated that closing this loophole for all American businesses operating in countries that do not tax corporate income would generate $12.7 billion in tax revenue over the course of the following decade.
- Master Limited Partnerships (Internal Revenue Code § 7704. Indirect. Active). Many oil and gas companies are structured as Master Limited Partnerships (MLPs). This structure combines the investment advantages of publicly traded corporations with the tax benefits of partnerships. While shareholders still pay personal income tax, the MLP itself is exempt from corporate income taxes. More than three-quarters of MLPs are fossil fuel companies. This provision is not available to renewable energy companies (emphasis added).
- The US government also facilitates invests by US companies in fossil fuel companies for projects in other countries through OPIC, the Overseas Private Investment Corporation and EXIM, the Export-Import Bank.
OPIC provides “investors with financing, political risk insurance, and support for private equity funds.” It has supported the revitalization of the Palagua oil field in Colombia that produces 4,000 barrels of oil per day and a natural gas project in Jordan which is expected to emit the equivalent of 617,000 tons of carbon dioxide per year.
EXIM provides credit to facilitate the export of American goods and services including fossil energy development overseas. Over the past 15 years, EXIM has lent or issued billions in grants to fossil fuel projects, including an LNG project in Mozambique that is expected to produce 5.2 million tons of carbon dioxide a year.
Environmental And Social Justice
In addition to direct and indirect economic subsidies, there are what economist call “untaxed externalities” associated with the fossil fuel industry. Basically, these are distortions in the economic calculus that benefit the industry but burden society. EESI explains it this way.
Ultimately, the true price of carbon and other pollutants are not reflected in the actual cost of fossil fuels and fossil-derived products. Economists refer to such discrepancies as externalities. Fossil fuel externalities, including societal costs, environmental costs, and health costs, are largely overlooked in the process of incentivizing fossil fuel production through policy mechanisms. The undervaluation of fossil fuel externalities disproportionately affects communities that are the most vulnerable to the health and environmental impacts of fossil fuel combustion and extraction, namely minority and low-income populations that are more likely to live near facilities that produce high amounts of pollutants, such as ports, airports, highways, and petrochemical refineries. Addressing fossil fuel externalities could save taxpayers billions of dollars in societal costs and improve the health and quality of life for many people.
The Biden administration takes direct aim at those untaxed externalities and their impact on underserved communities. The White House fact sheet accompanying the Executive Order says, “The order formalizes President Biden’s commitment to make environmental justice a part of the mission of every agency by directing federal agencies to develop programs, policies, and activities to address the disproportionate health, environmental, economic, and climate impacts on disadvantaged communities.”
The Industry Strikes Back
Fossil fuel industry leaders are predictably furious at the President. Already the Western Energy Alliance has filed a lawsuit challenging Biden’s executive order that pauses oil and gas leasing on federal lands according to a report by Reuters. Other fossil fuel advoceates argue Biden’s moves could cost the United States millions of jobs and billions of dollars in revenue at a time when the country’s economy is ailing because of the pandemic. “With a stroke of a pen, the administration is shifting America’s bright energy future into reverse and setting us on a path toward greater reliance on foreign energy produced with lower environmental standards,” said Mike Sommers, president of the American Petroleum Institute, in a statement.
But where the fossil fuel industry sees economic disaster, others see opportunity. Heather Zichal, CEO of the American Clean Power Association, tells the Washington Post no one should be surprised by Biden’s approach, given the mounting scientific evidence of the Earth’s continued warming and advances in recent years that have helped make renewable energy cheaper. “If we’re going to remove 51 billion tons of greenhouse gas emissions annually and get to zero [emissions] in 30 years, this is going to require drastic action,” she said, then added that the members of her organization are prepared to invest $1 trillion in the coming years on clean energy projects. “We see nothing but opportunity.”
John Kerry, Biden’s Special Envoy On Climate, said this week, “It is now cheaper to deal with the crisis of climate than it is to ignore it.” He made particular mention of the massive sums taxpayers have spent recovering from increasingly devastating hurricanes in recent years. “We’re spending more money, folks. We’re just not doing it smart. We’re not doing it in a way that would actually sustain us for the long term.”
The Take Away
No matter which side of the debate you are on, no one can argue that Biden’s climate initiatives aren’t bold. Angela Anderson, director of the Climate and Energy Program at the Union of Concerned Scientists, said in a statement this week, “President Biden used his executive order authority to affirm what scientists have been saying for decades: climate change is not a distant crisis but rather one that has already reached our doorstep and can no longer be ignored. Its fingerprints are everywhere in the form of more intense hurricanes; a longer wildfire season; and worsening heat, floods and drought.
“Black, brown, Indigenous and low-income communities are among the most devastated by the climate crisis. The executive order takes steps to remedy this unfair burden by incorporating equity and justice throughout the climate agenda. New, high level staff and interagency bodies have been created to elevate environmental justice issues across the federal government. These are hopeful signs that frontline communities will now have a seat at the decision-making table as equal stakeholders as the Biden administration endeavors to reduce global warming emissions and help communities prepare for unavoidable climate impacts.” Greta Thunberg couldn’t have said it any better.
The President cannot amend the Internal Revenue Code. Only Congress can do that and in a Congress dominated by donations from the fossil fuel industry, that is a daunting prospect. But Biden can affect the decisions of OPIC and EXEM. He can also bring science to bear on government policy making at all levels and encourage cooperation between and among government agencies.
We can expect opponents to unleash a blizzard of legal challenges, some of which will end up in front of a Supreme Court that appears favorably disposed to such arguments. The midterm elections in 2022 will be a referendum on Biden’s policies. If Democrats retain control of the House and Senate, that will be a sign from the people of the United States that they believe his climate goals are worth pursuing. If not, Biden’s ability to move his agenda forward will be severely compromised.
Will America choose to remain in the forefront of the climate battle or recede once again into the background? The answer will be vital to the success of the global initiative to rein in anthropogenic climate change. Are Americans prepared to be leaders rather than followers? “We’ll see,” said the Zen master.