“We’ve subsidized oil companies for a century. That’s long enough.”
“I will not walk away from the promise of clean energy”
– President Obama, 2012 State of the Union
By Danielle Ostafinski
During Wednesday’s State of the Union Address, President Obama stated his intention to increase domestic energy production. He stressed that “government support is critical” in spurring innovation in the renewable energy sector. Yet, another major roadblock is the opposite side of that coin – the artificially low price of fossil fuel energies long subsidized by the U.S. Government.
Clean energy and Alternative Fuel Vehicle subsidies such as the Production Tax Credit and the $7,500 tax credit for electric vehicles have been vehemently criticized. Opponents of these subsidies argue that most alternative energy technologies are not yet ready, government is picking winners and losers, and that alternative energy companies should compete in the “free market” like other energy companies. There is a huge problem with these oft heard arguments.
The U.S. has been providing federal subsidies to the oil and gas industry since 1918. This industry has enjoyed a century of significant public investment, and, after years of record profits, they still receive massive amounts of government support – a total of $72 billion in subsidies between 2002 and 2008 – or at least $10 billion annually.
Continuing to fund these mature technologies encourages the consumption of non-renewable fossil fuels and restricts our ability to invest in newer, cleaner energy technologies. It’s time to take a hard look at these subsidies and determine where the U.S. can trim the fat.
So what do some of these subsidies look like? There are a variety of tools that the federal government uses to provide a complex portfolio of subsidies for oil and gas companies. These can include tax incentives, direct and indirect appropriations, royalties and other forms of public investment.
Below are some of the most common and influential types of subsidies.
Federal Business Tax Subsidies:
- Tax incentives that allow the industry to expense “intangible” drilling costs like unsalvageable materials and wages, and independent companies can deduct a percentage of their income because they had expensive equipment to purchase.
- There’s also the accelerated depreciation allowance, which essentially allows companies to deduct more from their corporate income tax because of their high capital costs. And to avoid double taxation, the federal government only taxes companies when their income comes home in the form of dividends.
Federal Royalty Subsidies:
- Oil and gas companies pay for the ability to drill on federal and Native American lands for a reduced rate, or for less than what the oil is worth, and then the oil and gas is sold back to the American public at market rates. In some instances, the government is paid royalties with oil rather than cash, when it is put into the Strategic Petroleum Reserve. According to a review of studies by the Government Accountability Office, “The Federal Government receives among the lowest government takes in the world.”
Federal Research and Development Spending:
- Research and development, oil exploration and production tax credits, and basic operating expenses such as pipeline safety programs.
Federal Petroleum Reserve Subsidies:
- There are currently 727 million barrels of oil in the Strategic Petroleum Reserve. Keeping this reserve full and maintained costs tens of millions of dollars and represents a subsidy that works to keep oil markets “stable.”
Military Spending Subsidies:
- Some portion of U.S. national security spending is subsidizing global oil prices. It’s tough to put an accurate number on it, but the concept is undeniable. One timely example ripped from the headlines: U.S. taxpayers are paying for the U.S. military to protect places like the Strait of Hormuz in no small part to protect the flow of oil to international markets (and the U.S.) No doubt, protecting the strait is a broad national security issue about more than just oil, but it is also certain that some portion of this expense should be considered subsidized security for oil companies that keeps the price of oil artificially low.
- The majority of our transportation projects are funded by the federal gas tax that is controlled through the Highway Trust Fund – which is a fair benefit tax. But from 2005 to 2009, every state received more funding for highway programs than they contributed in fuel taxes. This was possible because the fund was augmented with general revenues. A very small percentage of this funding pays for mass transit projects, meaning that the majority of federal dollars is spent on creating and maintaining our highway system. As a result Americans continue to purchase fossil-fuel powered vehicles, rather than seeking alternative means of transportation.
“It’s time to end the taxpayer giveaways to an industry that rarely has been more profitable, and doubledown on a clean energy industry that never has been more promising. Pass clean energy tax credits. Create these jobs.”
In this era of budget deficits clean energy subsidies have been on the chopping block, but if critics are serious about deficit issues and creating a fair, competitive playing field in the energy sector, then they should argue that the U.S. should stop subsidizing all energy technologies, not just cean energy and alternative fuel vehicles.
Clean energy technologies have to compete with established fossil fuel sources that have been subsidized for decades. It’s obvious that what the government chooses to subsidize helps determine what industries will be successful. Providing clean energy subsidies somewhat levels that playing field, but simply eliminating all energy subsidies would be more fair, efficient, and would be a tremendous boon for clean energy both in the United States and globally.