Fact Sheet: Fossil Fuel Subsidies: A Closer Look at Tax Breaks and Societal Costs

August 02, 2019

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by Clayton Coleman and Emma Dietz (Environmental and Energy Study Institute) A recent analysis published in Nature Energy found that continuing current fossil fuel subsidies would make it profitable to extract half of all domestic oil reserves. This 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.

Table Of Contents

There is a long history of government intervention in energy markets. Numerous energy subsidies exist in the U.S. tax code to promote or subsidize the production of cheap and abundant fossil energy. Some of these subsidies have been around for a century, and while the United States has enjoyed unparalleled economic growth over the past 100 years—thanks in no small part to cheap energy—in many cases, the circumstances relevant at the time subsidies were implemented no longer exist. Today, the domestic fossil fuel industries (namely, coal, oil and natural gas) are mature and generally highly profitable. Additionally, numerous clean and renewable alternatives exist, which have become increasingly price-competitive with traditional fossil fuels.

The 116th Congress is weighing potential policy mechanisms to reduce the impact of climate change and cap global warming to an internationally agreed upon target of no more than 2 degrees Celsius (3.6 degrees Fahrenheit). As a result, fossil fuel tax subsidies, as well as other mechanisms of support, have received additional scrutiny from lawmakers and the public regarding their current suitability, scale and effectiveness. Indeed, the subsidies undermine policy goals of reducing greenhouse gas emissions from fossil fuels.

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Several international institutions, including the G20, the International Energy Agency, and the Organization of Economic Cooperation and Development (OECD), have called for the phase-out of fossil fuel subsidies. The European Union has also called for such a phase-out but has not yet taken concrete actions.

But rather than being phased out, fossil fuel subsidies are actually increasing.

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U.S. Tax Subsidies to the Fossil Fuel Industry

The federal government provides numerous subsidies, both direct and indirect, to the fossil fuel industry. Special provisions in the U.S. tax code designed to specifically support and reward domestic fossil fuel‐related production are direct subsidies. Other provisions in the tax code aimed at businesses in general create indirect subsidies that are not exclusive to the fossil fuels industry. In certain cases, quantifying these subsidies is fairly simple. In the case of indirect subsidies, establishing an amount associated with these subsidies is more challenging. While not covered in this fact sheet, another source of federal aid to the fossil fuel industry is the discounted cost of leasing federal lands for fossil fuel extraction. Some fossil fuel subsidies provide public assistance, such as the Low Income Home Energy Assistance Program (LIHEAP), which assists low-income households with heating costs.

In May 2019, the UN Environment Programme (UNEP) published a report detailing an internationally accepted methodology that will help countries make their fossil fuel subsidies more transparent.

Direct Subsidies

Intangible Drilling Costs Deduction (26 U.S. Code § 263. Active). ...

Percentage Depletion (26 U.S. Code § 613. Active). ...

Credit for Clean Coal Investment Internal Revenue Code § 48A (Active) and 48B (Inactive). ...

Nonconventional Fuels Tax Credit (Internal Revenue Code § 45. Inactive). ...

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Indirect Subsidies

Last In, First Out Accounting (26 U.S. Code § 472. Active). ...

Foreign Tax Credit (26 U.S. Code § 901. Active). ...

Master Limited Partnerships (Internal Revenue Code § 7704. Indirect. Active). ...

Domestic Manufacturing Deduction (IRC §199. Indirect. Inactive). ...

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Recent Efforts to Reform and Repeal Fossil Fuel Subsidies in Congress

“Let’s look at the oil and gas subsidies, let’s take them away. Let’s let them compete just like everyone else at the same level. We can do that with the tax code to take those special provisions away.” — Rep. Fred Upton (R-MI)

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Clean Energy for America Act (S. 1288): Introduced in May 2019 and sponsored by Senator Wyden (D-OR), S.1288 amends the Internal Revenue Code to replace the 44 existing energy tax credits with three technology neutral tax provisions that would incentivize the use of low and zero-emissions technologies, including clean electricity, clean transportation and energy efficiency. The bill is cosponsored by 25 Democrats.

Financing Our Energy Future Act (S. 1841): Formerly the MLP Parity Act, S.1841 has been reintroduced in the 116th Congress and allows renewable energy firms to benefit from the MLP structure by expanding the types of energy generation that qualify. The bill, sponsored by Sen. Christopher Coons (D-DE) and cosponsored by six Republicans, four Democrats and an Independent, has broad appeal and does not prevent fossil fuel companies from continuing to structure as MLPs.

Off Fossil Fuels for a Better Future Act (H.R. 3671): Introduced by Rep. Tulsi Gabbard (D-HI) in the 115th Congress, H.R. 3671 amends several sections of the Internal Revenue Code of 1986 to eliminate subsidies aimed specifically at the fossil fuel industry. The bill had 45 Democratic cosponsors.

Fossil Fuel Research, Development, and Deployment

The fossil fuel industry receives substantial government funding for research and development. Federal funding for fossil fuels is largely administered by the Department of Energy (DOE) through three initiatives: the Office of Advanced Fossil Energy R&D, the Loan Guarantee Program, and the National Energy Technology Lab. Annual appropriations and grants directed toward the fossil fuel industry can also be considered direct subsidies, as they are directly related to maintaining the competitiveness of the industry. Efforts to make coal more economical and cleaner—despite declining natural gas and renewable energy prices—have been a particular focus of the federal government’s funding, as has Carbon Capture and Storage (CCS). CCS technologies capture carbon dioxide from power and industrial sectors and store it deep underground in geological formations, or turn it into useable products, such as fuels or chemicals.

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Financing Fossil Fuel Projects Abroad

In addition to research and development projects funded through Department of Energy programs, the fossil fuel industry receives federal funding in the form of project loans, grants, and guarantees from the Overseas Private Investment Corporation (OPIC) and the United States Export-Import Bank (EXIM). These sources of funding are meant to provide capital and fiscal security for investments in emerging markets overseas, but in many cases serve to subsidize the expansion of the mature and highly profitable fossil fuel industry. This can result in increased greenhouse gas emissions from projects in countries with weaker environmental regulations.

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Externalities and Social Costs of Fossil Fuels

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. Below is an outline of some major costs to consider.

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Conclusion

In seeking fiscal reforms that have the potential to save taxpayer dollars while simultaneously addressing greenhouse gas emissions, phasing out subsidies for the fossil fuel industry should be a priority for federal policymakers. These subsidies aid an industry that is mature, well-established, and with an abundant private financing stream. Reducing the subsidies fossil fuel stakeholders receive can help correct inefficient economic interventions into energy markets, save billions of taxpayer dollars, and reduce negative social and environmental impacts. READ MORE

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Fact Sheet: Fossil Fuel Subsidies: A Closer Look at Tax Breaks and Societal Costs (Environmental and Energy Study Institute)