Fossil fuels still getting largest U.S. subsidies

by Antonio Pasolini on September 21, 2009

The Moss Landing Power Plant burns natural gas...
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A new research to be released on Friday by the Environmental Law Institute (ELI) reveals that “the largest U.S subsidies to fossil fuels are attributed to tax breaks that aid foreign oil production”. The report was produced in partnership with the Woodrow Wilson International Center for Scholars. The study reviewed fossil fuel and energy subsidies for Fiscal Years 2002-2008 and shows that the lion’s share of energy subsidies supported energy sources that emit high levels of greenhouse gases.

During that period, the federal government provided substantially larger subsidies to fossil fuels than to renewables. Fossil fuels benefited from approximately $72 billion over the seven-year period, while subsidies for renewable fuels totaled only $29 billion. More than half the subsidies for renewables – $16.8 billion – are attributable to corn-based ethanol, the climate effects of which are hotly disputed. Of the fossil fuel subsidies, $70.2 billion went to traditional sources – such as coal and oil – and $2.3 billion went to carbon capture and storage, which is designed to reduce greenhouse gas emissions from coal-fired power plants.

Why is this happening? The U.S. energy market is shaped by a number of national and state policies that encourage the use of traditional energy sources. These policies range from royalty relief to the provision of tax incentives, direct payments, and other forms of support to the non-renewable energy industry. “The combination of subsidies – or ‘perverse incentives’ – to develop fossil fuel energy sources, and a lack of sufficient incentives to develop renewable energy and promote energy efficiency, distorts energy policy in ways that have helped cause, and continue to exacerbate, our climate change problem,” says ELI Senior Attorney John Pendergrass. “With climate change and energy legislation pending on Capitol Hill, our research suggests that more attention needs to be given to the existing perverse incentives for ‘dirty’ fuels in the U.S. Tax Code.”

The subsidies examined fall roughly into two categories: foregone revenues (changes to the tax code to reduce the tax liabilities of particular entities), mostly in the form of tax breaks, and including reported lost government take from offshore leasing of oil and gas fields; and direct spending, in the form of expenditures on research and development and other programs. Subsidies attributed to the Foreign Tax Credit totaled $15.3 billion, with those for the next-largest fossil fuel subsidy, the Credit for Production of Nonconventional Fuels, totaling $14.1 billion. The Foreign Tax Credit applies to the overseas production of oil through an obscure provision of the U.S. Tax Code, which allows energy companies to claim a tax credit for payments that would normally receive less-beneficial treatment under the tax code.

Fossie fuels and renewable energy were defined according to conventional definitions. Fossil fuels include petroleum and its byproducts, natural gas, and coal products, while renewable fuels include wind, solar, biofuels and biomass, hydropower, and geothermal energy production.

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