New research examining 16 U.S. fossil fuel subsidies has revealed how the funding influences both the profitability and the emissions of the country’s oil and gas production.
“Fossil fuel subsidies are a vexed and peculiar topic,” writes veteran climate journalist David Roberts in Volts, his biweekly newsletter. “On one hand, everyone seems to agree they’re bad and should be eliminated… On the other hand, they never go anywhere.”
Roberts attributes the lack of progress to an unclear understanding of subsidies’ impacts. The research, undertaken by the Stockholm Environment Institute and Earth Track and recently published in the journal Environmental Research Letters, aimed to fill in some of the key details.
The study looked at subsidies that fell into three categories: “forgone government revenues through tax exemptions and preferences; transfer of financial liability to the public; and below-market provision of government goods or services.” The authors found that subsidies for “intangible drilling costs” (IDC), defined as “costs related to drilling and necessary for the preparation of wells for production, but that have no salvageable value”, offered the largest benefit to the oil and gas industry.
Since the country’s federal income tax code was first implemented in 1912, U.S. law has allowed oil and gas companies to deduct IDC expenses up front rather than as they are incurred, Roberts explains. The intent behind was to encourage oil exploration by lowering the financial risk of potentially fruitless investments. Proponents of the deduction argue that exploration is costly, and that fossils are being treated the same as other manufacturing and extractive industries.
“All those arguments are true,” Roberts says, “but the subsidy is still bad.”
And then there are regulatory exemptions that boost industry profit margins at the expense of environmental and public health. The authors do not attempt to quantify the extent of these “implicit subsidies,” but Roberts points to another study by Yale University economist Matthew Kotchen that does.
“Those implicit subsidies are far larger than any direct subsidies,” writes Roberts.
The research yields three major insights in Roberts’ eyes. Subsidies do encourage investment and exploration by U.S. oil and gas companies, he says. Companies materially benefit from regulatory exemptions as they “offload” the costs of environmental and health risks onto the public. And so, rather than protesting the umbrella concept of “fossil fuel subsidies”, campaigns to curtail further industry expansion should focus specifically on IDC deductions.
Roberts notes that President Joe Biden’s proposed 2021 budget would eliminate the IDC deduction, but he is not optimistic that effort will be successful. Because the benefits of exploration are regionally concentrated, “the members of Congress who represent those communities are hyper-motivated to preserve existing advantages,” he explains.
“In contrast,” he adds, “the benefits of decreasing fossil fuel production are spread out,” so “few members of Congress will champion it with the same vigour.”