You may be surprised to learn that fossil fuel subsidies in the United States are estimated to amount to between $14 billion and $52 billion on a yearly basis!1 The five major oil companies operating in the U.S. – Exxon, BP, Chevron, Shell, and AmocoPhillips – just by themselves receive $2.4 Billion US Dollars annually in tax deductions.2 A fossil fuel subsidy is defined as “any government action that lowers the cost of fossil fuel energy production, raises the price received by energy producers or lowers the price paid by energy consumers.” Such government actions could include tax breaks for oil companies, foreign tax credits, loans at favorable interest rates, price controls, infrastructure spending, failing to charge for externalities, and other miscellaneous monetary-recognizable benefits.
Evolution of U.S. Fossil Fuel Subsidies
Energy subsidies were originally intended to contain energy prices for consumers and help energy companies build the infrastructure necessary to power the country. The U.S. government has been subsidizing the production of fossil fuels for about a century. A recent study by Nancy Pfund, a managing partner at DBL Investors, and coauthor Ben Healey, a Yale University economics graduate student, focused on tax breaks for fossil fuels, which don’t go away because they are embedded in the tax code. “These subsidies have been huge, and they are the gift that keeps on giving for many energy sources,” says Pfund. As examples, the study cites several tax code outdated sources of relief that fossil fuel companies still take advantage of:3
- In 1916 the government passed a provision to speed up depreciation of drilling costs.
- In 1926 the government gave oil companies a tax break for depleting a reservoir.
- In 1950 the government allowed coal companies to avoid a tax increase to fund the Korean War.
- The Price-Anderson Act of 1957 requires that the federal government indemnify utilities in case of a nuclear disaster.
- The Foreign Tax Credit ($15.3 billion) applies to the overseas production of oil through an obscure provision of the Tax Code, which allows energy companies to claim a tax credit for payments that would normally receive less-beneficial tax treatment.
Unfortunately, the International Energy Agency found that fuel subsidies may “not [be] an effective measure against poverty” as they were intended to be. Only 8% of fossil fuel subsidies reach the bottom 20% of income earners. In fact, subsidies mostly benefit upper-income groups, which are the biggest consumers of energy.5 The richest 20% in low- and middle-income countries capture 43% of the subsidies.6 Subsidies are becoming increasingly expensive for governments, and instead of helping consumers it is possible that they might take money away from investment in infrastructure, education, and health care, all of which are essential services that would help the poor more directly.7
Subsidies for Fossil Fuels vs. Renewable Energies
Given that subsidies are meant to aid in the development of new technologies, it is interesting that subsidies for the well-developed oil and gas industries received about five times as much aid as that for renewable energies did during their first 15 years of development:
Between the years 2002 and 2008, the federal government gave approximately $72 billion in subsidies to traditional fossil fuel industries, and $29 billion to renewables. In addition, while the largest subsidies to fossil fuels were written into the U.S. Tax Code as permanent provisions, most subsidies for renewables are time-limited initiatives implemented through energy bills.9
Accounting for Externalities
In addition to direct subsidies, countries often allow corporations to extract and burn fossil fuels without fully paying for the environmental and health costs of such actions. For example, a 2009 report by the National Academy of Sciences claims that burning fossil fuels results in about $120 billion per year in health-related costs.10 Governments and ultimately taxpayers must pay this money, not fossil fuel companies. According to the International Monetary Fund, between directly lowered prices, tax breaks, and the failure to properly price the externalities of carbon production, the world subsidized fossil fuel use by over $1.9 trillion in 2011, a whopping 2.5% of global GDP.11
The study concludes that by eliminating fossil fuel subsidies and replacing them with appropriate carbon taxes, the international community could cut global greenhouse gas emissions by about 13 percent.13
Conclusion
President Obama has sought to end fossil fuel subsidies while in office, but has “been overwhelmed by the opposition from industry and its congressional allies.”14
- In 2011 and 2012 the Repeal Big Oil Subsidies Act was debated and defeated in the Senate. The Act would have stopped $2.4 billion in yearly tax deductions for the five major oil companies BP, Exxon, Chevron, Shell and ConocoPhillips.
- In 2013 Obama proposed a plan to cut $4 billion in subsidies from the annual budget. In fact, President Obama has proposed cutting fossil fuel subsidies every year he’s been in office, but Congress has never voted on any of these suggestions.15
If subsidies continue as they are, they will cost the U.S. around $50 billion per year, not to mention the accompanying environmental degradation that they encourage.
