Attacking Energy Subsidies Is Big Sport Now

President Obama's rhetoric in recent days has focused on his desire to strip the U.S. energy business of its financial subsidies while giving more government funds to alternative energy sources.  A new study by the Environmental Law Institute and the Woodrow Wilson International Center for Scholars titled "Estimating U.S. Government Subsidies to Energy Sources: 2002-2008" examines the subject.  The study looked at both direct spending by the government and indirect subsidies through tax breaks.  It found that fossil fuels received total subsidies of $72.5 billion over the seven years, 2002-2008, while renewable fuels only were granted $29.0 billion.  If we average the subsidies, fossil fuel gets $10.4 billion a year compared to $4.1 billion for renewable fuels, a 2 ½ to 1 ratio.

It found that fossil fuels received total subsidies of $72.5 billion over the seven years, 2002-2008, while renewable fuels only were granted $29.0 billion

A blogger, David Roberts, writing on was all over this report and why the government needs to end fossil fuel subsidies.  We thought it interesting that fossil fuels were only receiving 71.4% of all the government subsidies for energy.  If you look at the distribution of energy consumption in this country by fuel type, traditional fossil fuels -- oil, gas and coal -- accounted for 85.6% of the nation's energy supply in 2007.  If we include nuclear in the fossil fuel category, since it is not a renewable fuel, then the fossil fuel component of total energy consumption rises to 93.9%.  So on a contribution basis, fossil fuels are being discriminated against, not favored.


An even more telling analysis is to examine the table of U.S. taxes other than income taxes paid by oil and gas companies prepared by the Energy Information Agency (EIA) from data it routinely collects from the energy companies in its Financial Reporting System.  Over the period 2001-2007, a similar seven-year period and almost a direct overlap with the period of the subsidy study, the oil and gas industry paid $64.3 billion in taxes other than excise taxes.  During that period, the industry also paid $346.2 billion in excise taxes, for a total tax bill of $410.5 billion.  And this doesn't include any income taxes the oil and gas industry paid or the value of lease rentals and bonuses paid in offshore lease sales. 

In 2007, taxes other than income and excise amounted to $60.3 billion, nearly as much as the seven-year tax subsidies

If we only look at the industry's tax bill in 2007, taxes other than income and excise amounted to $60.3 billion, nearly as much as the seven-year tax subsidies.  The problem is that the contribution of the "old" energy sources -- oil, gas, coal and nuclear -- is not recognized by the public because its view of these industries is so negative.  Trying to change that image is a worthwhile endeavor, but an effort gaining little traction. 

G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.


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Jim Lewis | Oct. 14, 2009
One thing is certain. As Congress grapples with Cap and trade and the Administration is determined to supplant traditional energy sources (no matter what it does to the economy and the people of this country), a cohesive, consistent, and sensible energy policy is never going to happen.

The US government is never interested in playing the hand it is dealt. It just keeps reshuffling the deck, hoping to get the cards it wants.

Kevin Malone | Oct. 1, 2009
This is a very fundamental issue and, unfortunately, the Democratic administration and Congress are running this process now. As with personal income taxes, they look at tax breaks and subsidies as gifts from the government. In fact, these funds constitute money that oil and gas companies have earned. The money is then taken by the government (in the form of income and excise taxes) and simply given back in a manner akin to a rebate.

What government needs to learn is this is not their money in the first place. Why not eliminate all subsidies/tax breaks, lower corporate and excise taxes and let the market grow by itself. The government is simply an inefficient conduit in this equation.

Jerry Nichols | Oct. 1, 2009
I was a little puzzled by this ELI study. First of all, the itemized subsidies only added up to $68 bn, not $72. Maybe they were just listing the largest items - I didn't read the fine print (but the smallest item listed was $1 mm). I thought it would be useful to see just what was being subsidized and looked at 10 categories of these fossil fuel subsidies.

1) 22%, or $15 billion of the $68 billion listed, was allocated to Foreign Tax Credit.

2) 23% went to subsidize production in high cost environments, areas that may have otherwise been commercially marginal (although that of course depends on price). This seems like a legitimate use of subsidy to me, to the extent that it spurred more development than would have otherwise been undertaken.

3) 11% went to various accounting conventions, particularly treatment of intangible costs.

4) 10% went to assumed loss stemming from lower than expected offshore lease government take. This seems very arbitrary to me. As I understand it, the ELI is assuming some globally fair government take, and calculates that the feds could get more. Maybe. But there's no free lunch. A higher take might mean lower bids or less development. Also, this is not actual cash out the door. This was opportunity cost. We could also therefore say that all industries are subsidized in this way, because the government could tax all industries more than they are at present.

5) 9% went to a low income housing energy assistance program. This is money paid to states to insure low income families get access to fuels. Hardly a Big Oil subsidy.

6) Another 9% went to government storage programs, the SPR and two other minor programs. This is a government initiative, not a handout to the oil industry.

7) 8% went to an accounting rule benefiting independent producers, not Big Oil.

8) 5% went to the coal industry.

9) 1% went to incentives for clean fuels.

10) 1% went to a variety of small miscellaneous programs.

So, of these

- Numbers 1 and 3 may have room for revenue take ($22 bn);

- Number 4 possibly but would have the side effect of lower US production (how could it not?) $7 bn;

- Number 2 would clearly have a negative impact on US production ($16 bn);

- Number 7 would hurt smaller companies but may be minor source of revenue ($5 bn)

- The rest are not really benefiting the oil industry very much.

I view this as $22 bn in possibly vulnerable oil industry subsidies, another $23 bn in at least partly defensible subsidies, and $27 billion (getting back to $72 bn) in subsidies that dont benefit the large mutlinationals much at all.


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