Partisans Joining Forces to Cut Energy Subsidies

Recommendations Given to Super Committee

Ken Silverstein | Aug 28, 2011



The political food fighting has paused. An unusual group of partisans are joining hands and asking the joint congressional committee set up to cut $1.5 trillion from the national debt to review its suggestions -- ones that promise to rile the feathers of key interest groups. 


What makes the 2011 Green Scissors so interesting is not just its recommended cuts but also its political composition. And more importantly, its roadmap is coming at a time when the partisan differences are so sharp that any civil dialogue seems remote. Environmentalists and conservative tax-cutting interests have illuminated $380 billion in possible savings over five years.  


“We can go a long way toward solving our nation’s budget problems by cutting spending that harms the environment, and this report provides the Super Committee with a road map,” says Friends of the Earth climate and energy tax analyst Ben Schreiber. “At a time of great polarization, Super Committee members can and should find common ground by ending wasteful polluter giveaways.”

Friends of the Earth combined with the conservative think tank The Heartland Institute and Taxpayers for Common Sense as well as consumer watchdog Public Citizen. Overall, they set aside their preconceived notions, although the document focused almost exclusively on mature energy endeavors. 

The rancorous budget deal reached by Congress -- the one that caused Standard & Poor’s to question the country’s credit worthiness -- allowed a $14 trillion debt ceiling to be lifted by $2.4 trillion. However, that increase must be accompanied by $2.7 trillion in budget cuts over the next decade. 

Of that $2.7 trillion, $917 billion will come from discretionary programs. A bipartisan super committee will propose the remaining cuts of $1.5 trillion. Lots of commentary is suggesting that this group will find a way to circumvent its responsibilities. Some of it is saying they will just fail to agree. 

With that as a context, the Green Scissors quartet has weighed in: Its biggest targets are the ethanol and oil industries. Beyond those, it examines subsidies or loan guarantees to nuclear, coal and natural gas, saying that this spending is “wasteful and environmentally harmful.” 

Feeding at the Trough

The report did not examine subsidies given to wind, solar and other green technologies. While obvious disagreement abounds over such assistance, the participants say those renewable fuels did not fall into the category of being “environmentally harmful” and, with the exception ethanol, were excluded from this analysis. 

For the record, the U.S. Energy Information Administration says that in 2010 alone renewable energy subsidies were $14.7 billion, accounting for 55.3 percent of all assistance given to power production while providing just 10.3 percent of the country’s energy production. Bio-fuels like ethanol got $6.6 billion; wind $5 billion; solar $1.13 billion and biomass $1.1 billion. 

Ethanol subsidies are the “granddaddy of wasteful alternative fuels,” Green Scissors says. At issue is whether to continue to extend the current 45-cent a gallon tax credit as well as other incentives to boost the use of bio-fuels. Critics of the largess say that current law already requires the use of ethanol in gasoline products and that there is no reason to pay such high subsidies to producers. 

At least a dozen U.S. Senators from both parties have asked their respective leaders to reduce the break to 36-cents per gallon. And it appears that they may get their way when the credit is up for review at year-end. Green Scissors also says the Renewable Fuels Standard that requires the purchase of ethanol by fuel blenders should be repealed. At least $50 billion is at stake over 5 years for both provisions. 

Meantime, the group says that the oil and gas sector must give up at least some of the 20 different individual tax credits and direct payments it is now receiving as well as forego some royalty-free leases. That would add up to $61 billion in savings in five years. 

“The oil and gas industry simply does not need the government handouts coming its way; its bottom line benefits from high prices at the pump,” the report says. It notes that less than a year after the Deep-water Horizon catastrophe, BP saw its second quarter profits rise to $5.3 billion. 


The study is also critical of handouts it says are given to natural gas and cleaner coal. It essentially says that many older fossil fuels have fed at the federal trough for nearly a century and that they are now making subtle changes and marketing themselves as green -- to get even bigger subsidies. 


Similarly, Green Scissors says that nuclear is a mature industry that despite much government help has not built any new reactors since the 1970s. It is asking Congress to deny President Obama’s request to increase the federal loan guarantees program from $18 billion to $54 billion. 


Each interest group is committed to its cause. But reducing the size of the federal debt will require shared sacrifice. The members of Green Scissors have bargained in good faith. It’s time members of Congress do the same. 



EnergyBiz Insider has been named Honorable Mention for Best Online Column by Media Industry News, MIN. Ken Silverstein has also been named one of the Top Economics Journalists by Wall Street Economists. 

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Oil & Gas Subsidies

To the writer who said that "nobody has ever identifed an oil & gas subsidy", here are two:

1. Master Limited Partnerships (MLPs), available only to the oil and gas industries. MLP "combines the tax benefits of a limited partnership with the liquidity of publicly traded securities. Master Limited Partnerships are limited by US Code to only apply to enterprises that engage in certain businesses, mostly pertaining to the use of natural resources, such as petroleum and natural gas extraction and transportation."

Depletion allowance:

Depletion is the using up of a natural resource by mining, quarrying, drilling, or felling. Depletion allowance, then, is the allowance available through the IRS code allowing an owner to account for the reduction (production) of reserves as a product is produced and sold. For purposes of this article, the depletion allowance we are concerned with is the depletion allowance associated with the production of oil and/or gas. The depletion allowance, like depreciation, is a form of cost recovery for capital investments. There are two ways of calculating depletion allowance: cost depletion and percentage depletion. Oil and gas royalty owners have the availability of using either, yet for mineral properties you must generally use the method that gives you the larger deduction.

Percentage Depletion Allowance

Under percentage depletion, the deduction for the recovery of one’s capital investment is a fixed percentage of the gross income (sales revenue) from the sale of the oil or gas. For oil and gas royalty owners, percentage depletion is calculated using a rate of 15% of the gross income based on your average daily production of crude oil or natural gas, up to your depletable oil or natural gas quantity. An attractive element of percentage depletion is that the cumulative depletion deductions may be greater than the capital amount spent by the taxpayer to acquire the property.

If we are to have a level playing field, why not give these two tax subsidies to the renewables industries? MLP's reduce the cost of financing which is a crucial component of renewables costing, and the wind is very clearly depleted after it passes through a wind turbine. Obviously there are more tax-advantages enjoyed by the politically powereful oil and gas industries, but these two should suffice to demonstrate the point...

Oil and Gas Subsidies

You provide a good description of cost and percentage depletion TAX TREATMENTS.  You almost said that all tax treatments are subwsidies whichthey are not.  They exost for specific reasons which congress and the President deemed worthy of consideration.  Such as writing off home mortgage interest payemnts against gross income encourages home ownership.

Oil and gas depletion is similar to depreciation of capital invetment in a manufacturing except you will, ostensibly, be able to produce goods and market them.  There is no guarantee that all the dollars spent in geology, geophysics, leasing and permitting including drilling will find any hydrocarbons.  That is a risk only a few are willing to take.  We need the energy and therefore the tax treatment of this industry must be at least similar to other indutries whcih have very litttle risk when compared to oil and gas exploration. 

the oil and gas industry is not allowed to write off exploration expenses entirely in the year they occur.  the depletion allowance is also there because the resource is depleting and the minetral interest owner has no way of renewing the resource and the value of the mineral interest approaches zero as the production runs to its economic life.  For a mineral interst owner who also owns the surface this depreciates the value of the total land ownership, regardless if land prices rise or not.

Though various rules apply, Master Limited Partnerships have gone through numerous iterations over the past 25 years.  They were not allowed to grow  and then they could acquire projects.  a real lack of stability.  They are not necessarily a funding mechanism enjoyed by the oil and gas industry at a cost to any other industry.

The oil and gas industry does not get to avail itself of the PURPA rules and avoided cost models replete with the surrogate avoided resource.  they do not get a production tax credit right off their income or a sales tax or proerty taxc credit or guaranteeed loans from Secretary Chu orreduced ad valorem taxes within a state. 

Each industry source shouldfight its own battles but not by attempting to leverage their needs versus the misunderstood needs of the other sources.  the oila nd gas industry doens't begrudge the renewables their needs and hwo they are seeking to meet them.  Without the oil and gas industry one would not be able to drive to their wind farm.

The 15% percentage depletion allowance for royalty owners is applied agains the gross income of the hydrocarbons received allocable to the royalty owner's interest. 

Agree--end them all--only support basic research

If any subsidies should go--and they should--then all subsidies should go.  Taxpayer dollars should only be used to support basic research which should then be made available to all American manufacturers/developers in the energy sector.  They can then compete to develop that technology in the most cost effective manner.

"Green" energy is not necessarily all that green when one considers the invasion of pristine wilderness with the attendant roadways to access them, highlines to carry the power to load centers, massive use of building materials for wind turbines in relation to delivered energy, bird and bat kills etc.  Large solar PV projects on "government-owned" land will alter the ecology of that land and I have not yet heard an answer about the impact of the infrared radiation of unused solar energy from PV panels--the majority of the energy absorbed by the panels does not get converted the electricity.

One of the chief sources of new technologies that were picked up by private industry has been hamstrung--NASA.  My wife did an article for a local magazine in which she listed some of the many products discovered or developed by space program R&D that became viable, useful products.  The list is long and likely would surprise a lot of people.  That source of technology will dry up in short order.

As for BP--my opinion is the feds ought to consider banning them from business in the USA, US territories, and all territorial waters.  The consequences of their way of doing business have been harmful to the US in a number of ways so they should have to surrender their assets to be auctioned off in a public auction from which they and/or any affiliates are banned.  Our government officials did not handle the aftermath that well either, so they share some of the blame for the extent of damages.

Cut Energy subsidies

Regarding cutting subsidies to the oil and gas industry, no one yet has been able to identify subsidies this industry gets that aren't available to any commercial or imanufacturing industry in some form of depreciation, expense writeoffs or depletion.  They are a convenient whipping boy because they invest large sums of risk capital and are modestly successful based on the discovery and use of new technnologies.  Those who want to get rid of all hydrocarbon usage are unrealistic and doing it by treating the oil and gas industry different on a tax basis than any other business is inappropriate.

As to stopping subsidies for research and development including loan guarantees for renewables we should proceed cautiously.  We will be happy one day that we have these energy forms.  We should be mindful of the difference ofjumpstarting versus long term market price subsidies.  Also we should not be paying for the same research twice just at different universities.  Secretary Chu has given out so much startup and loan dollars that an entire new industry of projecct auditing has taken place.  therein lies the potential for waste.

Eliminating subsidies is a

Eliminating subsidies is a brilliant idea ... that will not pass.

But even if there is agreement, we would have to look carefully at how the subsidies are eliminated.  Should they be eliminated immediately accross the proverbial board?  If so, how could say PV or wind compete with the oil and gas sectors who, even now -- in their maturity, continue to receive subsidies?

Or should subsidies be eliminated immediately for the mature industries and over a couple of decades for the newer (wind & PV) sectors?

I believe that the competitive market can solve most problems, but competition has to be fair.

Green Subsidies Should go too

We should end all subsidies. Let the market dictate which energy resources should prevail. There should be no subsidies for any energy development. It's time that we stop the green movement's version of social engineering. we can't afford it in an economy that's in a depression. Stop all subsidies and let the economy alone.

Green Subsidies Should go too

Well said!  This government disruption of the market is costing us in many ways, the least noticed it the innovation and products we never see.