Fossil Fuel and Renewable Energy Subsidies

Introduction: Fossil fuels have a rich and diverse history, and their influence on the production of energy in the United States have been immense. Fossil fuels such as coal, oil and gas have helped the United States grow and further develop our energy innovations for the past 200 years. In order for fossil fuels to be economically viable in the beginning of the industries, the federal government provided subsidies to the coal, oil and gas businesses. These subsidies ranged from land grants from the timber and coal industries in the 1800’s, to tax expenditures for oil and gas in the 20th century. However, the burning of these prehistoric fuels for energy have a vast range of negative effects on the environments across the globe. These include the release of air pollutants such as Nitrogen Oxides, Sulfur Dioxide, Volatile Organic Compounds (VOC’s), and Heavy Metals—including the release of greenhouse gases such as Carbon Dioxide, one of the major gases that is currently contributing to climate change. It is becoming increasingly important that we take the transition from fossil fuels to cleaner renewable energies more seriously. The following report will look at how fossil fuels have been subsidized and how these subsidies have helped the industry; as well as renewable energy subsidies, how subsidies have helped renewables grow, and why subsidies are important for economies of scale for cleaner fuels.

What is a subsidy? A subsidy is monetary assistance that is granted by a government to a person or group in support of an enterprise regarded as being in the public interest. Subsidies can be direct such as cash grants, interest-free loans—or indirect—being tax breaks, insurance, low-interest loans, depreciation write-offs, or rent rebates. Providing subsidies for fossil fuels in the 1800’s and 1900’s was truly in the interest of the public. Fossil fuels helped grow our country into what it is today by providing us the fuel necessary for the industrial revolution, and the fuels needed to transport and expand our population all over the continental United States.  When we look at the first 15 years of oil and gas subsidies, these industries received half a percent of the total federal budget in subsidies. Today, renewable energy subsidies make up only about a tenth of a percent of the federal budget (inflation-adjusted). Thus, the federal commitment to the oil and gas industries was five times greater than the federal commitment to renewables during the first 15 years of each subsidy’s life.  

Coal: Coal in the United States did not begin as a developed, inexpensive and competitive fuel source. Instead, support from the government over many years helped it turn into the abundantly used fuel that it is today. In the late 1700’s, congress enacted a protective tariff at the federal level that would prove to be very valuable to the coal industry. Beginning in 1789, imported coal into the United States placed a tariff (a tax on imported or exported goods) of around ten percent on the price of foreign coal. This ten percent provided domestic coal producers a significant cost advantage for the United States industry. As imperative as this federal tariff was for coal in the earlier years, the main assistance came at the state level.

When coal was first discovered in Pennsylvania, state officials exempted coal from taxation. The state provided incentives for smelting, and publicized the advantages of coal inside and outside of Pennsylvania.  As important as tax exemptions were for the coal industry, the states use of corporate charters to encourage new production proved to be tremendous. In order to promote mining in the state of Pennsylvania, these corporate charters permitted incorporation only in coalfields in which the industry had yet to become entrenched. The state also designated the amount of capital they could raise and the territory in which they could operate.

This early support for coal only grew as technological advances further increased demand for the fuel. After the Civil War, trains switched from wood to coal for their fuels. Since this time, copious amounts of subsidies have continued to flow to the coal industry. The EIA estimates that in 2007 alone, the federal government provided $3.17 billion in subsidies to the coal industry, while the Environmental Law Institute estimates $5.37 billion provided. When we consider the rich history of subsidies and advantages that the coal industry has received in the past, it is no wonder that coal has become a successful and economically viable commodity.

Coal contains the radioactive materials Uranium and Thorium, which are burned and released into the atmosphere. During 1982, the burning of US coal released 155 times as much radioactivity into the atmosphere as the Three Mile Island nuclear accident. Furthermore, the Annals of the New York Academy of the Sciences estimates that the negative externalities from coal cost the U.S. public a third to over one-half of a trillion dollars annually. Taking the known environmental and economical consequences from burning coal into consideration, it is no longer in the public’s interest to continue to provide economic incentives to this industry. It is time for subsidies to the coal industry to end, and for these resources to be allocated to renewable energies to further the increasingly necessary movement to clean energy.

Oil and Gas: For more than 50 years, United States federal energy tax policies intently focused on increasing domestic oil and gas (O & G) reserves. During this time, subsidies helped the oil and gas industry become one of the most profitable in the world. Today, this industry continues to receive billions of dollars in subsidies from the government in spite of acquiring record returns. In 2007, O & G earned more than $150 billion dollars in profits. Despite these massive profits, our federal tax laws handed out more than $2 billion in subsidies that same year. More recently, federal subsidies in 2011 for oil and gas were $7 billion. The following year, Exxon Mobile U.S. operations alone earned $7.5 billion after taxes—while the top independent oil driller in Texas had revenues of $7.1 billion. In a time of government cutbacks, and tremendous national debt we cannot afford to continue supplying billions to an industry that has had more than a century to establish itself.

In 1916, the United States provided its first federal tax break to the oil and gas industry with the establishment of the intangible drilling costs (IDC) tax credit. This subsidy permits independent oil companies (and major oil companies to a lesser, but still significant extent) to write off particular costs that are associated with drilling oil wells. Normally, tax code for other types of deductions are spread out over the useful life of the investments. Instead, oil companies can take deductions immediately for the costs of drilling rather than spreading them over the life of the wells. By taking these deductions right away, companies are able to lower their tax bills in the first year of operation, essentially gaining an interest-free loan from the government. When the intangible drilling costs tax credit was first created, drilling for oil meant taking a large risk on an investment. Today, high-tech geological tools and software advances in seismic analysis have cut the risk down significantly. According to the Congressional Research Service, the IDC’s will provide $13.9 billion to the oil industry from 2013-2022.

Another important subsidy for the O & G industry began in 1926, with the creation of the percentage depletion tax break. Companies are allowed to deduct costs of an investment over the term of the investments life, but oil companies are able to use a specific method for calculating deductions called “percentage depletion”. Rather than deducting the costs of a gas or oil well as its value declines, companies are allowed to deduct a flat percentage of the income they derive from it. Since the deductions are based on revenues and not costs, the subsidy actually increases when prices are high—at times when oil companies receive their greatest profits. Since 1975, percentage depletion has only been available to “independent oil producers” and not the large oil companies, such as Exxon and BP. That being said, many of these smaller companies are not actually small. According to Oil Change International, independent oil producers made up 86 of the top 100 oil companies by reserves.Additionally, these 86 had a median market cap of more than $2 billion. The Congressional Research Service states that the percentage depletion subsidy will provide $11.5 billion from 2013-2022.

The most recent subsidy that was given to the oil and gas industry took place in 2004, with the formation of the domestic manufacturing deduction for oil production. In order to discourage the outsourcing of jobs, oil producers successfully lobbied to encourage companies to keep factories operating in the United States—thus creating the tax break for manufacturing domestically. Available to almost every type of company, this deduction allows for up to 9 percent of profits from domestic manufacturing to be deducted, even though the oil and gas industry is limited to a 6 percent deduction. The issue with this subsidy is that there are many differences between the oil and gas industry, and traditional United States manufacturing. These differences include the relative mobility of investments, level of profitability, and capital-intensive nature of oil production. Today, jobs are no longer being threatened to leave the domestic market for oil and gas, yet this industry continues to receive this benefit. Furthermore, the justification for this industry to claim the manufacturing deduction has dissipated since 2004 as oil prices have nearly tripled. The Congressional Research service states that the domestic manufacturing deduction for oil production will provide $11.6 billion from 2013-2022.  

Renewables: Concerns about energy security, rising fossil fuel prices, and climate change are increasingly relevant in the United States. Renewable energy (Wind, Solar, Biomass, Geothermal, Hydro) is able to play a fundamental role in producing clean and unlimited energy for our country, while also significantly lowering pollution and greenhouse gas emissions. Domestic renewable resources could also enhance national security and the balance of trade, while simultaneously creating job opportunities in our country.

From 2002-2008, fossil fuels received $72.5 billion in federal subsidies while renewable energy received $29 billion. Of this $29 billion, $16.8 billion were given to corn ethanol fuels and only $12.2 billion were given to traditional renewable energies—a representative graphic can be seen here. Since most of the subsidies that fossil fuels receive have been written permanently into United States tax code, they are able to take full advantage of these subsidies. However, subsidies for renewable energies are time-limited with expiration dates that limit their usefulness to the industry. For example, the Production Tax Credit (PTC) that provides a kilowatt-hour credit for the wind energy industry lasts for only one year, making it necessary for it to be renewed annually. In order for this subsidy to be renewed, congress must vote for or against the PTC. By requiring a vote for the Production Tax Credit, uncertainty is created within the wind energy industry about whether or not they will continue to receive this vital subsidy. In response to this time-limited subsidy, wind energy experiences a boom and bust cycle of development that negatively affects the entire industry. The PTC is a great example of a subsidy for the renewable energy industry that is not living up to its potential. If the PTC did not have to be renewed annually, it would be an even bigger success for the wind industry than it already has been. The United States is currently giving billions to wind through the Production Tax Credit, but we are not putting these billions to their greatest potential by having a subsidy that requires renewal every single year. If the PTC were to be expanded to last longer than one or two years, these subsidies would make a much larger impact for the wind energy industry.

In 2004, Colorado became the first U.S. state to create a Renewable Portfolio Standard (RPS) through a voter-approved referendum when the state successfully passed Amendment 37. Originally, the Colorado RPS required Investor Owned Utilities (such as Xcel) to generate or purchase at least 10% of their electricity from renewable sources by 2015. The requirement was then raised to 20% in 2007, and then 30% by 2020 three years later. Currently, only California has a higher Renewable Portfolio Standard at 33% by 2020. Additionally, Xcel is close to achieving its requirement of 30% seven years ahead of the deadline. Renewable energy resources that are eligible include wind energy, geothermal-electric energy, solar-electric energy, biomass facilities that burn nontoxic plants, animal waste, landfill gas, hydropower, and fuel cells using hydrogen derived from eligible renewables. The RPS has been greatly beneficial to the state of Colorado, which now hosts 1600 clean energy companies that employ more than 19,000 people, ranking #4 in the country for jobs in the renewable energy. Increasing the use of renewable energy in the state has lowered utility bills—rather than raise them as many thought it would. The RPS is an exceptional example of how increased energy from renewable sources can bring positive effects upon a state, country, or the entire world.

Economies of Scale: Reduction in cost per unit resulting from increased production, obtained through operational efficiencies. As production increases, the cost of producing each additional unit falls. Subsidies have been essential in growing the young renewable energy industry. As the industry has matured, economies of scale have increased. The cost of renewable energy has dropped dramatically since the 1970’s, with the greatest improvements occurring in the past 5-10 years. The average price of solar panels have declined by 47% since the beginning of 2011. Additionally, wind energy prices have fallen over 90% since the incentives began to increase in the 1980s—while also attracting an annual average private investment of 15$ billion in the past five years alone. Subsidies have helped this industry grow substantially, but there is still a need for increased funding to continue to develop a clean energy future for the United States.

 Sources:

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