There was some consternation last week over the future of fossil fuel subsidies in the United States.
The Democratic National Committee, which had previously included a pledge to phase out fossil subsidies in its 2016 platform, conspicuously failed to include a similar promise heading into the November 2020 election. Environmentalists noticed. “We demand that the Democratic National Committee (DNC) immediately reinstate the language,” wrote the Sierra Club. “This platform is a step backwards, and we deserve better,” said Charlie Jiang, a campaigner at Greenpeace.
The pressure from environmentalists appears to have yielded quick results, with the Biden campaign recommitting to the pledge later in the week. But despite the priority environmental groups and Democratic politicians have placed on eliminating fossil energy subsidies, the debate so far has elided what those subsidies really do, what eliminating them would entail, and how the government could better spend the money currently devoted to coal, oil, and natural gas production. Indeed, the best idea might be to redirect those subsidies to other activities within the coal, oil, and gas sectors: namely, the reclamation, remediation, and repurposing of fossil energy infrastructure.
Beneath campaign and activist slogans, there is considerable disagreement and confusion over what policies do and don’t qualify as fossil energy subsidies. “Fossil fuels subsidies” could describe direct subsidies for coal, oil, and gas production, standard depreciation and tax credits available to a range of industrial sectors, price supports for low-income Americans, and more, depending on the analysis. And while most direct subsidies for fossil energy development are wasteful and should thus be eliminated, their repeal would likely have a trivial impact on actual fossil energy production in the United States.
Direct subsidies for fossil fuel production include a diverse set of federal tax credits, capital depreciation allowances, and financial treatments for royalties, passive losses, and the like. Figures vary, but Joseph Aldy at Resources for the Future (RFF) estimates that the federal government subsidizes fossil fuel extraction to the tune of about $4.9 billion a year. That’s not chump change, but compared to fossil industry revenues of $180 billion, it hardly seems essential to fossil energy operations.
Other estimates are much higher. The International Monetary Fund (IMF) pegs US fossil fuel subsidies at $649 billion, a figure that is widely cited in the media. But the vast majority of what the IMF describes as “subsidies” is unpriced pollution and greenhouse emissions, not direct payments or credits from the government.
And other analysts include programs that Aldy doesn’t. The Environmental and Energy Study Institute (EESI), for instance, includes “indirect subsidies” that benefit fossil interests such as “last-in, first-out” accounting and the ability of oil and gas firms to structure as master limited partnerships (MLPs). Such provisions are available to several industrial sectors.
Like many analysts, neither Aldy nor the EESI includes the Low Income Home Energy Assistance Program (LIHEAP) in their calculations. The EESI analysis suggests why that is the case: “Some fossil fuel subsidies provide public assistance,” they write, “such as the Low Income Home Energy Assistance Program (LIHEAP), which assists low-income households with heating costs.” Where one would draw the line between a wasteful subsidy and “public assistance” is not made precisely clear.
It turns out there are a number of activities the government could support within the fossil industry itself, activities that would accelerate the transition to clean energy and clean up outdated and abandoned fossil energy infrastructure.
Complications over LIHEAP and MLPs notwithstanding, that still leaves the federal government on the hook for billions of dollars in direct subsidies for extremely mature industries. But would “ending subsidies to producers ... play a key role in taking the fossil fuel economy off life support,” as Robert Kauffman writes at Resilience.org?
Probably not. RFF’s Aldy concludes that, in return for federal subsidies, “there is virtually no change in US production” of fossil fuels. That means the subsidies are wasteful, yes, but it also means that eliminating them wouldn’t have much impact on fossil fuel production in the United States.
This shouldn’t surprise us. As observed in an article Breakthrough published a few years ago, “the per-unit subsidization of fossil energy today remains much lower than it is for renewable energy technologies.” That remains the case. In 2019, the federal government spent about $7 billion on tax credits for wind and solar production in the United States. Compared to the $4.9 billion that Aldy identifies in fossil energy subsidies — and considering that wind and solar supply about 2.67 exajoules of energy next to 96.61 exajoules from coal, oil, and gas — that works out to about $50 million per exajoule of fossil energy versus $1.91 billion per exajoule from wind and solar (data from BP Statistical Review and the Joint Committee on Taxation).
This apparent disparity is perfectly understandable. Wind and solar are less mature industries than the coal, oil, and gas sectors, and are still benefiting from federal deployment subsidies like many new technologies before them. But these federal spending levels do highlight which industries are more and less dependent on subsidies for their survival.
While most direct subsidies for fossil energy development are wasteful and should thus be eliminated, their repeal would likely have a trivial impact on actual fossil energy production in the United States.
If the federal government does eliminate various direct tax breaks for the fossil industry, as it should, what ought it do with that money instead? It turns out there are a number of activities the government could support within the fossil industry itself, activities that would accelerate the transition to clean energy and clean up outdated and abandoned fossil energy infrastructure.
Start with old oil and gas infrastructure. “Orphan” oil and gas wells are wells that have been abandoned by companies that cannot pay to remediate them, a problem that is exacerbated whenever oil and gas prices plummet. These wells pose a threat to the environment, as they can leak methane into the atmosphere and can cause groundwater contamination. Many states have a backlog of unplugged wells that dates back decades, with some orphan wells dating to the late 1800s. When abandoned and idled wells that have an identifiable owner are included, there are as many as 3 million, according to some estimates. Not all states have effective programs to pay for plugging wells, and even in states that have incorporated adequate requirements, the backlog of orphan wells is still an issue.
Likewise, abandoned coal mines pose a public health, safety, and environmental risk for a variety of reasons. Open or inadequately sealed mine shafts and slopes can lead to gas leaks, groundwater pollution, erosion, mine fires, and subsidence problems. States and tribes have estimated total unfunded costs for the reclamation of eligible sites at approximately $10.7 billion to date, and as of November 2018, the unappropriated balance of the Abandoned Mine Reclamation Fund was approximately $2.3 billion (approximately 9 billion has been paid out already). As the coal industry continues its downward spiral, sped up by the pandemic, it may be time for policymakers to expand their options for funding coal mine reclamation.
Coal plants, of course, are also shuttering. Since 2010, more than 300 coal power plants have been shut down. Because coal power plants often have excellent access to transmission, they can be repurposed for electricity storage or other types of electricity generation, including wind, solar, advanced nuclear, and natural gas with carbon capture.
Finally, there is also growing pressure to transition oil and gas assets as demand for oil and gas is unlikely to recover fully from the ongoing COVID-induced demand slump. These companies can and should take a hard look at hydrogen production and CO2 captured from carbon removal operations as a critical opportunity to add new value as other assets decline and become uneconomic.
Each of these opportunities to remediate, reclaim, and repurpose fossil fuel infrastructure demands a clear policy framework to guide recovery and incentivize decarbonization. And existing fossil fuel subsidies are a good place to start funding those opportunities.