Should Fossil Fuel Subsidies go to Green Energy?

Obama focuses on corporate tax reform

Ken Silverstein | Feb 28, 2012

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President Obama is trying to renovate the country’s intricate tax system. He won’t succeed in time for the November election. But he might pull it off if he sticks around and can build on the existing bipartisan support to accomplish just that.

For now, the framework that the president has established is as much a political proclamation as its is a budgetary or tax document. Obama would reduce the top corporate tax rate from 35 percent to 28 percent -- to be paid in part by cutting or eliminating the breaks and subsidies given to the fossil fuel industry. Manufacturers, meanwhile, would see their top bracket fall to 25 percent.

“The tax code currently subsidizes oil and gas production through tax expenditures that provide preferences for these industries over others,” reads the president’s 2013 corporate tax reform plan. “The Framework would repeal tax preferences available for fossil fuels.” Such breaks, it adds, distort markets and serve to play down the strengths of green energy.

It’s reminiscent of bygone era -- just after the President Reagan had won a second term and one in which he rallied the nation to support tax reform. Like today, the call back then was to simplify the code and to minimize the “favoritism” in exchange for lower tax rates. Slowly but surely, however, the loopholes were re-applied, allowing the federal debt to climb as well.

In its most elementary form, the president’s proposals would eliminate specific tax breaks given to oil, gas and coal to the tune of about $41 billion over 10 years. Some of that money would be shifted over to help out renewable energy, including making permanent the production tax credit that will expire in December.

Many experts agree that it is much easier to close the existing loopholes provided to the mature fossil fuel industries than to raise their taxes. According to the White House Office of Management and Budget, oil and gas companies are to get $46 billion in subsidies during the next 10 years.

“While it is unlikely that Congress is prepared to complete action on tax reform in advance of the 2012 elections, key tax policy leaders in the House and Senate this year are expected to continue laying a foundation for tax reform ... to (possibly) overhaul US tax laws this year or in following years,” says Matt Haskins, PwC’s Sustainable Business tax leader, in firm’s 2012 outlook.

Political Targets

The concept of an intelligible tax code does have bipartisan support. But that is where the congeniality ends.

Oil companies make good political targets. No one likes paying high gas prices while they see those giant companies earning record profits. Do they really need those tax breaks? Would erasing some breaks truly deter their efforts to find new product? Here, sharp disagreements exist.

“Oil and gas subsidies are costly to the American taxpayer and do little to incentivize production or reduce energy prices,” says Obama’s corporate tax reform plan. “Repealing fossil fuel tax preferences helps eliminate market distortions, strengthening incentives for investments in clean, renewable, and more energy efficient technologies.”

The oil lobby is too powerful to give in. It is responding by saying that eliminating the tax breaks is a de facto tax increase. That would lead to less domestic energy, fewer jobs and less government revenue. The oil and gas industry pays $86 million each day into the federal treasury, the industry says, which references a study by the Strategic Energy & Economic Research calling oil and gas companies “probably the biggest stimulus” that this country has going.

“To spur new jobs, the president advocates tax breaks for everyone but the oil and gas industry – the one sector with the proven ability to create jobs and already supporting 9.2 million of them,” says Jack Gerard, head of the American Petroleum Institute.

Wind and solar require enormous subsidies and have not shown that they can operate at commercial scale, the petroleum industry has said publicly. Trying to replace fossil fuels by mandating the production of and use of renewables before the technologies are ready would only increase costs.

But critics maintain that the favorable tax treatment given to oil, gas and coal companies has been around since the early 1900s. They are the equivalent of government spending and Congress must account for each of those provisions. In an austere time, they say that the oil companies should make sacrifices.

Indeed, that’s the pitch that the Obama administration is now taking to the people. For the next few months, it will be politicized. But after the election, the message may have wider resonance in the context of corporate tax reform. 

EnergyBiz Insider is the Winner of the 2011 Online Column category awarded by Media Industry News, MIN. Ken Silverstein has also been named one of the Top Economics Journalists by Wall Street Economists.

Follow Ken on  www.twitter.com/ken_silverstein

energybizinsider@energycentral.com

Industry thought leaders will be discussing this topic and more at the upcoming EnergyBiz Leadership Forum, Harnessing Disruption, taking place in Washington D.C., March 19-21, 2012. Review full conference details by visiting www.energybizforum.com



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Comments

NO

If one looks at the "subsidies" to the oil & gas industries, one finds a number of tax deductions--some in the form of accelerated depreciation for some pipelines and equipment, purchased reserves of oil or gas, and exploration expenses.  There is a foreign tax credit that applies to any industry doing business overseas and paying taxes in the host countries.

The subsidies already enjoyed by green energy companies include production tax credits and cash grants to prop up a technology that simply is not developed enough to make it on its own.  Green energy companies get a depreciation period even shorter than oil and gas companies enjoy.

To remove the tax breaks is to raise the price of oil and gas.  Oil prices are pretty high already.  But then to take the increased tax revenues from oil and gas and give them as subsidies to green energy will have the effect of doubling down on the burdens already borne by non-energy industry taxpayers--that is individuals and businesses not involved in oil and gas or in green energy because the government will be taking the increased revenues that might decrease the national debt and put it into technologies that are not economical.  The result will be the economic downturn being further exacerbated by rising fuel costs which will cause businesses to fail or close, which will cause more unemployment, which will cause more expenditures on social relief, which will increase the national debt.

What part of "wind and solar are not economically viable" does the government not understand?

Mark Wooldridge

SHOULD FOSSIL FUEL SUBSIDIES GO TO GREEN ENERGY

Money (subsidies) goes where it is treated best.  The green energy field has failed to prove it's worth in the current market place although many billions have been allocated to green energy. (ASK SPAIN  THE BENEFITS OF GREEN ENERGY TO THEIR ECONOMY)  Following the failed model being used by this administration will produce another failure. The government should not be in the business of picking winners and loosers.

Would you want your heart and lung machine hooked up to a windmill?

Taking benefits from the technology that has provided the US with the best energy economy in the world and  trying to develope a competative technology that may or may not work has already injured millions of United States Citizens.  The risks  taken by this administration affecting the lives of all citizens of this great country shows poor judgment in the administrative field.     In these difficult times investments in proven energy fields which have served us well to this point is where we should be placing our trust.  When a building is on fire, you want to make sure the elevators, exit signs and fire extinguishers all work.  Research and developemnt by the government shoud be put on the back burner until the emergency is over.  You want to get out of the building. I am sure the free market will pick up the R&D when it is appropriate and profitable.

R. P. Suto

Financial Behaviour Impacts

I might be late to the debate, but people need to focus on the economic / financial realities of such an action.  This post is not a voice of support one way or other and I'm not arguing for or against the positions.  However, I am going to point out that if you remove the souces of revenues or tax breaks from a company, and in this case an entire industry, what do you imagine the reaction would be? 

The only way this works for the consumer is if the government passes through the savings, and even then I believe there is great doubt the consumer will come out better.  The main reason is that those companies will look to replace the lost revenue / tax breaks.  The only real method for them to recoup what was lost will be to increase revenues or decrease costs.  All things considered, what do you think they would do?

Barring potential consumer backlash, and as an industry they could point to the government's actions to lay blame, the industry would increase energy prices to a level that equalizes their positions to pre-tax / regulatory change.  Which means that consumers would still be paying for the subsidies, only direct from the wallet and not via government subsidy.

Unless the energy companies decide to take one for the team, such an action will either immediately or over time put upward pricing pressure on fuel prices.  This may have the impact of making green / clean tech investment and development more economic, but it will nonetheless result in a tax or subsidy in the form of higher energy prices.

What Loopholes Are We Talking About?

I would like to see more information about the specific ‘loop holes’ that are to be closed. 

 

When I have reviewed the claims of subsidies to oil and gas; the principal ‘subsidies’ are: 1) the foreign tax credit, and 2) accelerated depreciation.  From the perspective of a MBA, I think both could be reasonable.  The foreign tax credit simply allows taxes paid to foreign governments to be a deduction; it is a legitimate expense, why can’t it be deducted.  Similarly, accelerated depreciation allows the cost of exploration to be deducted as exploration proceeds, not depreciated over the life of the field.   Regardless of one’s position on drill-baby-drill, I hope we can all agree that more domestic oil production (and that first requires exploration) is desirable and such favorable tax treatment for domestic exploration is good policy.  Are there other ‘subsidies’ in play?

 

Clearly I suggest allowing: 1) deduction of foreign taxes as an expense, not a tax credit; and 2) accelerated depreciation for domestic exploration, but not foreign. 

 

I agree with the other writers that the US needs to get the newly found natural gas bonanza into auto gas tanks.   I am not sure that compressed gas is the best path – my guess is that adding CH4 to heavy crudes at refineries would be the quickest and probably cheapest path.  Note this would also get natural gas into gasoline, heating oil and aviation fuel basically in one step.  This would require participation by the oil and gas industry.   I hope my green friends would consider subsidies, accelerated depreciation (?), for this modest proposal. 

oil industry

If the oil industry were more flexible in its positions, it would create a lot of goodwill. It's strident views only serve to create more ill-will toward it. Let's see ... it's profits are more than any other and the salaries it pays its top execs are more than all of these readers combined will make in a lifetime. Yet it pretends it is a public service industry? Give me a break. Right, give us all a break and make the oil companies pay their fair share.

No to all subsidies

bridge technologiy and failure of wind subsities

The failure of the USA to allow conversion of the automobile industry to natural gas and LPG is ignored in the article.  Leaving fracking aside, the first step to getting off oil is gas.  Focus must be on energy policy, not just the electricity component.  Otherwise we are comparing apples to oranges.  Further, the article blindly assumes that the utility sized wind subsidies are actually helping the situation.  The growing consensus points up Federal and State subsidies are simply enabling utility companies to lift more money out of consumer pockets while continuing to operate (same old utility image) ineffectively.  --------- Wind and solar is extremely efficient for the consumer if operated at a distributed power production level, in conjunction with utilities production and the grid and regulated in the interest of the consumer by government regulatory agencies.  The subsidies only support a weak economic model.  Federal and State guaranteed residential and small business loans, net metering, and feed-in tariffs work, subsidies do not.  ------- Chad Charles, former Head of Quality at Suzlon Energy Ltd. and supply chain professional

All subsidies should go away

If we are ever going to get out of debt and have the chance at life in a free natino that our forefathers had then we are going to have to get rid of all of the subsidies.  We are $1,600,000,000,000 dollars in debt JUST THIS YEAR.  The government needs to get out of the central planning business and concentrate on doing a very short list of things that the federal government should do.  Subsidizing the energy industry is not one of those things.