Fossil Fuel Subsidies:
A Taxpayer Perspective

Cut fossil fuel subsidies...
As a first step toward action on climate change, the U.S. should cut over $5 billion in annual subsidies to the fossil fuel industry. Eliminating subsidies for oil, gas, and coal can attract broad political support because it will save taxpayer money, reduce greenhouse gas emissions, and eliminate obsolete government programs. Cutting government support for fossil fuels is a common sense idea supported by economists, climate scientists, international organizations, and free-market activists. Taxpayers don’t need to wait for international negotiations.
Congress and the Administration should act immediately to cut fossil fuel subsidies

Save taxpayers $5 billion a year…
The fossil fuel industry is no longer an infant enterprise that can argue for government nurturing, but a mature industry that does not deserve government handouts. The sixteen subsidies highlighted in this fact sheet give coal, oil, and natural gas over $5 billion per year. The industry has already received more than its fair share, collecting $150 billion in subsidies from the federal government between 1918 and 1978, according to the U.S. Department of Energy. Finally, many of the existing subsidies, such as funds for a rural electrification agency, continue to drain tax dollars even though their original purpose has long been fulfilled or forgotten.

…Reduce greenhouse gas emissions.
Cutting subsidies can play a part in reducing greenhouse gas emissions. Eliminating all federal energy subsidies would reduce U.S. carbon emissions by 4% annually, or 65-70 million metric tons, according to a study prepared for the U.S. Environmental Protection Agency. This is 30% of the reduction the U.S. will need to reach 1990 emission levels, a current benchmark for reductions acknowledged by President Clinton and other global leaders.

Eliminating $5 billion in annual subsidies will reduce U.S. greenhouse gas output 30% toward the goal of freezing emissions at 1990 levels.

The 16 Worst Subsidies – $5 Billion Every Year

1. Immediate Expensing of Exploration and Development Costs – $200 million/year Oil, gas, and coal producers can immediately expense (write off) most or all of their development costs. Other businesses must deduct these expenses over a longer period of time.
2. Percentage Depletion Allowance for Oil and Gas – $600 million/year
   Independent oil and gas companies can deduct 15 percent of their sales revenue using the special percentage depletion allowance – instead of the standard cost depreciation – regardless of the actual loss in value over time.
3. Requiring Full Coal Firm Support for the Black Lung Fund – $350 million/year
   Designed to internalize the health-related costs of coal mining, this fund requires government support to pay for work-related disabilities of coal miners.
4. Intangible Drilling Costs – $500 million/year
   Integrated oil and gas companies can immediately deduct 70 percent of "intangible" drilling costs. Most other businesses deduct such expenses over time and therefore receive less of a tax benefit.
5. Passive Loss for Oil and Gas – $100 million/year
   This tax shelter for investors in oil and gas allows certain owners to offset "passive losses" against income to pay lower taxes.
6. Non-Conventional Fuel Production Credit – $1.3 billion/year
   This tax credit for certain types of fuel extracted from "non-conventional" sources was intended to provide incentives for petroleum alternatives, but most of the credit has gone for oil and gas production.
7. Tax Breaks for Enhanced Oil Recovery – $100 million/year
   Expensing (writing off) tertiary injectant costs and the tax credit for enhanced oil recovery encourage extraction of difficult to reach and expensive oil deposit remnants.
8. Clean Coal Technology Program – $250 million/ year
   This program helps finance private companies to develop cleaner burning coal technologies by providing up to 50 percent in federal matching funds.
9. Coal R&D – $100 million/year
   The Department of Energy supports research in technology programs for producing, refining, and burning coal products.
10. Other Fossil Energy R&D – $100 million/year
    The federal government provides subsidies for oil and natural gas research and development.
11. Multilateral Development Bank Loans for Fossil Fuel – $80 million/year
    The U.S. federal government supports several multilateral development banks, which provide loans for fossil fuel development in other countries.
12. Export Import Bank Guarantees for Fossil Fuel – $300 million/year
    The Export Import Bank provides federal loan guarantees for investments in unstable countries. A portion of these loans are used for fossil fuel development.
13. Capital Gains Treatment of Royalties on Coal – $15 million/year
    Individual owners (as opposed to corporations) who lease out their coal mining rights are able to pay capital gains taxes on these royalties, rather than the higher top individual income tax rate.
14. Income Tax Exemption for Publicly Owned Utilities – $200 million/year
    Publicly owned utilities and cooperatives are not subject to federal income tax on their profits or retained earnings. Some of these utilities use fossil fuels.
15. Rural Utilities Service Loans – $900 million/year
    The federal government provides low-interest loans to rural-electrification cooperatives. These cooperatives have invested heavily in energy plants using fossil fuels.
16. Tax Exemption for Publicly Owned Utility Bonds – $550 million/year
    Publicly owned utilities (POUs) can issue tax-exempt bonds. A significant portion of POUs have invested in energy sources using fossil fuels.

Cutting $5 billion in annual U.S. subsidies to use fossil fuel makes economic sense…

"The most efficient approach to slowing climate change is through market-based policies."
– statement signed by over 1,000 economists

"Without the right incentives there will be very little practical action on global climate change], just words. But with the right incentives in place there is a lot that could be done."
– John Browne, Group Chief Executive, British Petroleum

"Elimination of [energy] subsidies would . . . provide long-term benefits for the nation as a whole." –The President's Council on Sustainable Development

…and is important to addressing climate change.

"A number of studies . . . indicate that global emission reductions of 4 ­ 18%, together with increases in real incomes, are possible from phasing out fuel subsidies."
– Intergovernmental Panel on Climate Change

"After 2015, the elimination of subsidies [now] prevents the growth of total [U.S.] carbon emissions."
– Decision Focus Incorporated for the U.S. EPA

"The elimination of federal [fossil fuel] energy subsidies secures reductions in carbon emissions that average between 4.0 and 4.4 percent annually. . . . In absolute terms, carbon emissions are lower by between 65 and 70 million metric tons annually as these subsidies are removed."
– Dale W. Jorgenson Associates for the U.S. EPA

So let’s take action.

"The most expensive subsidies that raise emissions are ‘leftovers’ from
history in the sense that their original justification has long since disappeared."
– Decision Focus Incorporated for the U.S. EPA

"The removal of fossil fuel subsidies has been advocated as the first order of priority in instituting economic policies to protect local and global environments." – World Bank

Regardless of the outcome of the Kyoto Treaty, it violates common sense for federal taxpayers to continue subsidizing the consumption of fossil fuels.