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Fossil Fuel Subsidies: The Big Picture

Fossil fuels are just that: Products that fuel 96 percent of daily life by means of gasoline, natural gas, deodorant, clothes, dishwashers, etc (IAGC, 2019). Whether indirectly or through public funds, around the world, people are paying an immense amount for the use of these products. 

Internationally, governments actively ensure the availability and viability of fossil fuels by lowering the cost of fossil fuel energy production, gauging prices received by energy producers or paid by consumers. As the climate change debate continues, fossil fuels are constantly scrutinized for the wear on the environment, and the governments are equally critiqued for making a pathway for these resources to be produced and available to consumers at a reasonable price. However, these products are so entwined with everyday life that calculating the cost to consumers is complex and attempts to measure intangible factors, such as the loss of life due to pollution, the impact on traffic, and the implications of environmental damages. 

A study on the cost of global fossil fuels by the International Monetary Fund (IMF) reports that in 2017, industry subsidies accounted for up to 6.5 percent of the global Gross Domestic Product (GDP), or $5.2 trillion (Coady, 2019). That number reflects the non-monetary cost to human life and the environment. The actual global cost to maintain the industry is $296 billion in 2017 (Coady, 2019). The IMF calls these two numbers the pre-tax ($296 billion) and post-tax ($5.2 trillion) fossil fuel subsidies. 

Politics aside, there is an abundance of subsidies and different interpretations of “cost” regarding these subsidies from international governments. 

ian-simmonds-xWgfjk0aecY-unsplashIan Simmonds on Unsplash

Types of subsidies 

Pre-tax subsidies are the difference between the amount consumers pay and the opportunity cost of supplying that fuel (Coady, 2019). These are found in indirect and direct fund transfers for coal, oil, and gas and are the most commonly considered in international discussions. In 2015, the United States spent $649 billion in these subsidies (bypassing the Pentagon spending budget by $50 billion). Fossil fuels cost U.S. citizens $2,028 per person that year (Dickinson, 2019).  

Post-tax subsidies reflect differences between consumer fuel prices and how much consumers would pay if prices fully reflected supply costs plus the taxes needed to reflect environmental costs and revenue requirements (Coady, 2019). These — called the “far more important statistic” in the IMF report — are 15 to 20 times larger than pre-tax subsidies and account for the price of air pollution and climate change, as well as road fuels and undercharging for general consumer taxes (Coady, 2019). 

The IMF report was primarily focused on price distortions, but producer subsidies are prevalent in the form of direct and indirect funding. For example, prices above supply costs, preferential tax treatment, direct government budget transfers, or paying input prices below supply costs (Coady, 2019). 

 

juan-fernandez-ZdzO5PgYObA-unsplashJuan Fernandez | Unsplash

Indirect and direct subsidies

Some non-governmental organizations, such as the Council on Foreign Relations and Oil Change International, have reported varied numbers for what tax breaks are dependant on the public in the United States (Meyer, 2018). In 2016, one report by OCI estimated that taxpayers were responsible for $20.5 billion in subsidies for the energy sector. This number was calculated using numbers from any federal and state programs that at all affect the fossil fuel industry. Even still, the OCI admits, some funding may have been overlooked. 

Below lists several, but not all, of the direct and indirect subsidies within the United States tax code compiled by the Environmental and Energy Study Institute in 2019: 

Direct 

Intangible Drilling Cost Deduction – This provision in the tax code allows companies to deduct a majority of the cost of drilling new domestic wells. 

Percentage Depletion – Limited to independent producers and royalty owners, this allows firms to deduct a set percentage of their taxable income to reflect the inevitable declining production from an oil reserve. 

Indirect

Last In, First Out Accounting – This allows oil and gas companies to sell the newest extracted fuel first, rather than last, in order to sell the most expensive reserves first. This reduces the value of the inventory and is beneficial for company taxes. 

Foreign Tax Credit – This allows companies to treat royalty payments abroad as a fully deductible foreign income tax. 

Master Limited Partnerships – This is a business structure that combines the investment opportunities of public corporations with the tax benefits of partnerships. MLPs are exempt from corporate income tax. More than 75 percent of U.S. MLPs are fossil fuel companies; these partnerships are not available to renewable energy groups. 

 

U.S. Energy Information Administration 

 

 What this means for taxpayers and consumers 

The United States consumes, on average, 20.5 million barrels of petroleum — refined crude oil — per day (EIA, 2019). This number represents gasoline, diesel fuel, heating oil, jet fuel, and biofuel, products that are used in everyday life in the U.S. And taxpayers are paying for it; as stated above, more than $2,000 from an individual’s federal taxes will end up supporting the fossil fuel industry. 

Because these products are sold under fair market value to both individual consumers and companies, taxpayers end up fronting the bill in order to keep fossil fuel producers up and running. In 30 years, the Natural Resource Defence Council reported that taxpayers were short-changed at least $30 billion in order to keep corporation oil prices low (Spencer, 2017). 

 

Sources

International Association of Geophysical Contractors.” Importance of Fossil Fuels.”

David Coady, Ian Parry, Nghia-Piotr Le, and Baoping Shang (2019). “Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates.” International Monetary Fund.

Oil Change International. “Fossil Fuel Subsidies Overview.” 

Tim Dickinson (2019). “Study: U.S. Fossil Fuel Subsidies Exceed Pentagon Spending” Rolling Stone. 

Robinson Meyer (2018). “The World Spends $400 Billion Propping Up Oil Companies. Is That Bad?” The Atlantic. 

U.S. Energy Information Administration (EIA). “How much oil is consumed in the United States” 

Theo Spencer (2017). “Feds Release Long-Awaited Roadmap for Coal Program Overhaul” Natural Resource Defense Council

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