What are Fossil Fuel Subsidies?
A fossil fuel subsidy refers to any government action that reduces the cost of fossil fuel energy production, decreases the price paid by energy consumers, and increases the revenue received by energy producers.
It is anything that rigs the game in favor of fossil fuels like gas, oil, or coal compared to other energy sources.
Fossil fuel is considered one of the most significant financial barriers hindering renewable energy sources.
They often take the form of direct payments or tax breaks.
They include price controls, research and development funding, loan guarantees, and measures allowing producers of fossil fuels to avoid paying the cost of complying with environmental regulations.
How Are Fossil Fuels Subsidized?
The two forms to subsidize fossil fuels are consumption subsidies and production subsidies.
Consumption Subsidies
The first one is known as consumption subsidies, which are considered to cut fuel prices for the end-user, like fixing the price at the petrol pump to lower the market rate.
In another sense, consumption subsidies reduce the cost of burning for energy, sometimes reducing household energy costs and addressing energy poverty. And most common in lower-income countries.
Production Subsidies
On the other hand, the second form is the production subsidies, tax breaks, or direct payments that decrease the cost of producing oil, gas, and coal. The countries that are common to this are the Western.
Tax Subsidies to the Fossil Fuel Industry of the U.S.
Tax subsidies to the fossil fuel industry in the U.S. can be direct or indirect.
Direct Subsidies
Intangible Drilling Costs Deduction (26 U.S. Code § 263. Active)
Companies can reduce most of the costs incurred from drilling new wells domestically.
The intangible drilling costs would generate $1.59 billion in revenue or $13 billion in the next ten years, as the Joint Committee on Taxation (JCT) estimated.
Percentage Depletion (26 U.S. Code § 613. Active)
Depletion lets businesses deduct a certain amount from their taxable income as a reflection of declining production from a reserve over time.
However, percentage depletion is not based on capital costs, it grants firms to deduct a set percentage from their taxable income, and thus total deductions can exceed capital costs.
Credit for Clean Coal Investment (Internal Revenue Code § 48A (Active) and 48B (Inactive)
Tax credits for energy investments, particularly coal, make up this kind of subsidy.
In 2005, Congress authorized credits for integrated gasification combined cycle properties of $1.5 billion, and $800 million of this amount is reserved mainly for coal projects.
Non-Conventional Fuels Tax Credit (Internal Revenue Code § 45. Inactive)
The so-called Crude Oil Windfall Profit Tax Act of 1980 made this tax credit to promote lower dependence on foreign oil and domestic energy production. This credit supplied $12.2 billion to the coal industry from 2002 to 2010.
Indirect Subsidies
Last In, First Out Accounting (26 U.S. Code § 472. Active)
The LIFO, commonly known as Last In, First Out Accounting, grants companies like oil and gas to sell the fuel most recently added to their reserves instead of selling the older reserves under the traditional First In, First Out method.
The most expensive reserves allow being sold first, with their inventory lower its worth for taxation purposes.
Foreign Tax Credit (26 U.S. Code § 901. Active)
Generally, firms can deduct their expenses from their taxable income when operating in foreign countries and pay royalties abroad.
The gas and oil companies can treat them as fully deductible foreign income tax instead of claiming royalty deductions.
Master Limited Partnerships (Internal Revenue Code § 7704. Indirect. Active)
Numerous oil and gas companies are structured as Master Limited Partnerships (MLPs), and this structure merges the investment of advantages of publicly traded corporations with the tax benefits of partnerships.
More significant than three-quarters MLPs are fossil fuel companies and the MLP itself is free from corporate income taxes while shareholders still pay personal income tax.
Domestic Manufacturing Deduction
This subsidy keeps up a range of companies by reducing their effective corporate tax rate.
This deduction benefitted fossil fuel companies by letting oil producers declare a tax break planned to prevent job outsourcing by U.S. manufacturers, although it was available to domestic manufacturers.
Consequences of Fossil Fuel Subsidies
Fossil fuel subsidies have different impacts on the economy.
The governments encourage more fossil fuel use than would occur if they subsidized it.
In some instances, subsidies generate potential for companies to expand or build new fossil fuel infrastructure and delay the transition to renewables.
As for more specific results, fossil fuel subsidies can increase production, employment, and consumption in the short term.
However, long term, they may result in higher emissions of greenhouse gasses and other pollutants, which can cause environmental damage.
Conclusion
Fossil fuel subsidies are government actions that keep the price of fossil fuels below the market price or encourage production and consumption.
Depending on their design and use, subsidies can positively or negatively affect the economy.
The U.S. government provides a variety of subsidies to the fossil fuel industry, totaling billions of dollars each year.
These subsidies take many forms, including tax breaks, cheap loans, and guaranteed prices.
While some of these subsidies may positively affect the economy in the short term, they can also lead to higher emissions of greenhouse gasses and other pollutants over a long time.
FAQs
1) What are Fossil Fuel Subsidies?
Fossil fuel subsidies are government actions that keep the price of fossil fuels below the market price or encourage production and consumption.
2) How are fossil fuels subsidized?
Fossil fuels can be subsidized through consumption subsidies and production subsidies. Consumption subsidies lower the price of fossil fuels to consumers, while production subsidies help reduce the cost of exploration, extraction, and production.
3) What are some U.S. tax subsidies to the fossil fuel industry?
U.S. tax subsidies to the fossil fuel industry can be direct or indirect, including the Intangible Drilling Costs Deduction, the Percentage Depletion deduction, the Credit for Clean Coal Investment, and the Non-Conventional Fuels Tax Credit.
4) What are the consequences of fossil fuel subsidies?
The consequences of fossil fuel subsidies can be positive or negative depending on their design and how they’re used. Subsidies can encourage more fossil fuel use than would occur otherwise, delay the transition to renewables, and increase production, employment, and consumption in the short term. However, long time, they may result in higher emissions of greenhouse gases and other pollutants, which can cause environmental damage.
5) How do fossil fuel subsidies work?
Fossil fuel subsidies work by either keeping the price of fossil fuels below the market price or encouraging production and consumption.
