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Fossil fuel subsidies choking out renewables

Posted by kyle at Aug 13, 2010 01:25 PM |

Fossil fuel subsidies cost American taxpayers billions of dollars, and delay the production of clean energy. To make matters worse, the subsidies do not decrease our dependence on foreign oil; they do not save jobs; they do not lower the cost of gas.

Even as it has taken eighty eight days to stop the oil from gushing into the Gulf of Mexico, the federal government has been unable to put an end to gushing federal oil subsidies. Just last month, the US Senate rejected a measure that would have ended $35 billion worth of tax breaks for oil and gas producers over the next decade. And before their August break, they decided not to even vote on comprehensive energy and climate legislation that might begin to cure our addiction to fossil fuels.

It’s hard not to link these decisions to the vast sums that the oil, coal and natural gas industries have lavished on the political system: fossil fuel producers have spent more than $340 million on lobbyists just since 2008.  A $35 billion return on $340 million invested is a return any business would envy.  And this doesn’t begin to count the subsidies that they get from using our atmosphere and oceans as free dumping grounds. It’s a vicious, self-fulfilling cycle.

According to a new report from Bloomberg New Energy Finance, approximately $557 billion was spent worldwide on subsidizing fossil fuels in 2008. Those fossil fuel subsidies dwarf the $43-46 billion spent subsidizing renewables. The Obama Administration is continuing to support legislation to end these tax subsidies, but as these tax breaks remain our federal deficit continues to grow, and our dependence on fossil fuel remains constant.

Most people think that clean energy needs subsidies and that fossil fuels like coal and oil operate in the “free market."  The truth is very different.  From 2002-2008, fossil fuel producers received over $72 billion dollars

in direct government subsidies. By contrast, renewable energies like wind and solar received less than a fifth of that amount.   In 2006 alone, Exxon Mobile - the most profitable company in the history of companies - posted an annual profit of $39.5 billion dollars. But that’s just the tip of the (melting) iceberg.

There are at least five main ways that we are subsidizing fossil fuel production:

  1. Direct provisions in our federal tax code that provide deductions and exclusions tailored for the fossil fuel industry. The $72 billion estimate above only covers this category.
  2. Fossil fuel producers also receive tax benefits from state income taxes. Some states have specific provisions benefiting fossil fuel producers, but state income taxes are also based on federal income tax reporting. Thus when fossil fuel producers get to underreport their federal income tax because of the specific deductions and exclusions, they also underreport their income for state income taxes.
  3. Fossil fuel producers and users are able to externalize many of their costs for free. An externality is a cost that is not paid by the person that is causing the harm and benefiting from the product. The main way in which fossil fuel producers externalize their costs is through pollution. They pollute – we pay to clean it up. Global warming and acidifying oceans are direct outcomes when we allow companies free use of our air and water as dumping grounds for pollution.
  4. They evade US taxes.  Companies like Transocean (now infamous for operating the gushing Gulf well) are allowed to switch their domicile from US cities, where their office headquarters are, to foreign locations to avoid paying some federal taxes altogether. Transocean has about 1,300 employees in Houston but they are domiciled in Switzerland – where they have 12 employees.  It is estimated that Transocean has saved $1.8 billion in taxes since 1999 just by switching domiciles.
  5. They rely on us for free military services to patrol their supply lanes.  It is not an accident that a huge amount of the US military has been concentrated in the Middle East for the past decades.  Oil companies don’t pay for these costs.  Some estimates put the costs of defending oil fields, pipelines and shipping lanes in hostile parts of the world as high as $5.00/gallon over the price posted on the gas station sign.

We should all be troubled by the excessive benefits we award producers of fossil fuels. These benefits create two enormous problems, and the justifications for the subsidies are baseless.

The tax subsidies are a major impediment to clean-energy investment.

There are only so many public dollars we can invest in energy; when $72 billion dollars are put into fossil fuels, not much is left for clean energy. Moreover, the tax provisions hide the true cost of a gallon of gas. Tax payers collectively pay billions of dollars to oil companies before we ever fill up. With the true costs of gasoline buried in subsidies, consumers are less likely to seek out clean alternatives.Not only do subsidies prevent investment in clean alternatives, but more generally, they are a drain on our entire economy. The subsidies amount to billions in raised taxes that we could otherwise leave to working Americans. Small business owners, farmers, teachers, firefighters, policemen – they all pay more taxes to make up for the billions awarded to the fossil fuel industry. If the fossil fuel industry paid their fair share of taxes, the rest of the taxpayers would either have billions less to pay in taxes or they would receive billions more in government services. In fact, the subsidies are so extensive that their elimination could result in both billions less owed in taxes and billions more in beneficial government programs.

The only people to benefit from these subsidies are those in the fossil fuel industry. Their profits are headed increasingly skyward while the rest of us are forced to pay extra taxes to compensate for their subsidies.

The justifications for oil subsidies are meritless.

Oil subsidies do not decrease our dependence on foreign oil. The Department of Treasury estimates that ending subsidies would only limit domestic oil production by less than one half of one percent. The United States currently imports 60% of its oil; a domestic shortage of less than one half of one percent will not affect our dependence on foreign oil. However, if we reinvested the fossil fuel subsidies in clean energy, we would decrease our dependence on foreign oil.

Oil subsidies do not save jobs. Since eliminating the subsidies will have a de minimis effect on domestic production, it follows that the domestic work force will remain relatively constant. Barring technological changes, fossil fuel producers will need the same number of employees to harvest the same amount of energy. From a common sense perspective, the industry is so lucrative that corporations won’t have to cut employees to maintain a healthy profit. When companies are making billions annually, they generally aren’t going to cut productive employees.

Oil subsidies do not help consumers at the pump. Given the enormous profits posted by companies like Exxon, it is clear that oil is priced not at the point where the oil companies will barely turn a profit. The oil is priced as high as possible without having a significant adverse affect on consumer demand. The price of production isn’t a factor in the price at the pump. A Joint Economic Committee report confirms this: “the removal or modification of [these subsidies] is unlikely to have any effect on consumer prices for oil and gas.”

To summarize, fossil fuel subsidies cost American taxpayers billions of dollars, and delay the production of clean energy. To make matters worse, the subsidies do not decrease our dependence on foreign oil; they do not save jobs; they do not lower the cost of gas.

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