Fossil fuel subsidies: fiction versus reality
Advancing the ideological agenda of the left is hardly a solid basis for energy policy.
Some Political targets are temporary, little more than props deployed in pursuit of a tactical advantage in today’s Beltway Skirmish. Others are permanent elements in the landscape, the foundations of an ideological worldview impervious to the facts, reasoning and perverse results that the associated political imperatives would engender.
Long-standing opposition to fossil fuels, the companies that produce them, the people engaged in such economic activity, and the regions of America where fossil fuels are concentrated is prominent among these. In terms of this ideological worldview, the attacks on the fossil fuel sector were motivated precisely by the creation of national wealth, freedom and promoting human well-being ceded by the energy availability both abundant and effective. Such availability is the antithesis of long-term effort by the political left to extend its power enormously while centralizing it in a metastasizing bureaucracy that is politically irresponsible and impervious to the popular will, motivated instead by the whims, passions and self-interest of elites and “experts”.
A manifestation of this worldview is the renewed effort in Congress to reduce or eliminate the so-called tax breaks and “subsidies” enjoyed by fossil fuel producers. A bill entitled “End Polluter Welfare Act” contains a large number of provisions, the most important of which are the following.
Increases the onshore royalty rate to 18.75%. the Mining Leasing Act of 1920 established a 12.5 percent royalty payable to the federal government by energy companies on the sale of oil, gas, or coal extracted from federal Crown lands. The proposed increase is a classic example of Beltway’s confused thinking: it would obviously reduce the amount of the initial offer for the leases. Therefore, there would be no increase in the expected present value of the lease offer plus the flow of royalty payments, but there would be a transfer of risk from fossil fuel producers to federal taxpayers. If this royalty increase were imposed on existing leases, it would represent a ex post the appropriation of private property, one of the results of which would be a further reduction in the amounts of offers for future leases. In addition, the increase could reduce production from existing leases and therefore lead to lower royalty payments. Is myopia a solid basis for policy formulation?
Cancels and prohibits the use of funds allocated by the United States to the World Bank and by US government lending agencies for fossil fuel projects. An increase in the supply of energy is a fundamental condition for economic progress in the less developed economies. Notwithstanding widespread claims to the contrary, unconventional energy – wind and solar power are the central examples – quite simply is not competitive with fossil fuels. Because all of this funding is limited by definition, a ban on fossil fuel projects means fewer energy resources for the world’s poor – even apart from the inherent unreliability of renewables – and therefore a doom to greater poverty. it would not be otherwise. Is the promotion of poverty a solid basis for policy formulation?
Imposes the liability of financial institutions for “environmental damage” caused by their investments in conventional energy. This amounts to making a bank that finances the purchase of an automobile liable for an accident caused by the driver of that car. This provision is an obvious attempt to restore Operation Chokepoint, the illegal effort (finally abandoned after strong criticism) of the Obama administration to cut banking services to underprivileged industries such as payday lenders, gun manufacturers and the fossil fuel industry. Is massive capital market distortion a solid basis for policy formulation?
Eliminate the percentage burnout allowance. Large integrated fossil fuel producers are already denied the use of the percentage depletion allowance, which is little more than a form of depreciation. The allowance is limited in practice to small producersbecause it is only allowed for the first 1,000 barrels per day of production and is limited to 65 percent of net income. Coal producers would also be denied the use of the percentage depletion allowance, even though it is allowed for all other extractive industries. This provision is little more than a punitive exercise targeting an unpopular industry in specific ideological circles. Does such discrimination constitute a solid basis for policy formulation?
Eliminate the partial expense of intangible drilling and development costs. These are labor and other “intangible” costs (eg, fuel) incurred when drilling a well. Strictly speaking, since the well is a capital asset, the costs of creating it should be amortized rather than expensed. But the same goes for research and development costs in other industries, which under current law can be fully expensed; but from 2022, these R&D costs must be amortized over a period of five years. The current expenditure of intangible drilling costs for fossil companies is capped at 70% with the remainder deducted over five years. The Polluter Welfare Act would end spending and require a seven-year payback period for the fossil fuel industry. Again: does such discrimination provide a solid basis for policy formulation?
And so on, justified as an effort “to close tax loopholes and eliminate federal subsidies” for the fossil fuel sector. Note that the Biden administration made it clear that he intends “Remove subsidies for fossil fuel companies,” but did not specify the tax arrangements it contemplates for such elimination, even as it seeks to increase “incentives” for the production of unconventional energy. Thus, the Biden Plan classifies tax preferences for conventional energy as “subsidies” while describing different preferences for “clean energy” (no, this is do not) as “incentives”, a classic exercise in verbiage in the service of propaganda.
Let’s compare the fiscal incentives for fossil fuels and renewables, as summarized in the following table.
Whatever verbiage we choose, any defensible interpretation of the data would show that renewables receive grossly disproportionate taxpayer support. Because renewable energy is far from being “clean” – it causes massive heavy metal pollution, noise, flicker effects, destruction of wildlife, unsightly and unsightly land use. senseless (in terms of acreage), landfill issues, and much more – the real welfare for the ‘polluters’ is not the so-called ‘subsidies’ for the fossil fuel producers, but rather the political subsidies for renewable energies. Maybe Congress and the Biden administration should tackle this.