SACE | Southern Alliance for Clean Energy
Federal Subsidies for Fossil Fuels
Government subsidies for energy industries –whether for oil, coal, nuclear or renewable energy sources – are typically intended to help nascent industries or businesses get a toehold in the marketplace without extending excessive initial capital. In reality, though, subsidies often become an expected source of financial support, especially for the producers themselves ultimately locking in dirty energy profits and falsely altering the markets.
While some “smart” subsidies, such as targeted tax breaks, financial incentives or other market mechanisms may benefit the economy by stimulating emerging energy sources, if subsidies exist simply to hold down the price of fuel, then everybody will use more of it, increasing pollution levels as a result. Given that human-induced climate change is one of the most serious and urgent challenges of our lifetime, all possible energy options should be explored and examined in our quest for viable solutions. However, to have an honest and fair debate about the merits and shortcomings of each energy option, it is essential to have a clear understanding of the explicit and hidden government subsidies that affect energy and production use.
Fossil fuels receive substantially larger subsidies than renewable energy sources do as the chart below shows:
General Fossil Fuel Subsidies
The federal government has subsidized production of fossil fuels via the tax code for over a century. In the past, these subsidies helped increase investments in what was once a very risky economic activity. Advances in technology and other economic changes in recent years, however, have significantly altered the risk-reward calculus for U.S. fossil fuel investments. Recently, the International Monetary Fund conducted a study that found that over the longer term, limiting energy subsidies could spur economic growth because it would encourage a more efficient distribution of resources and encourage investment in energy-efficiency alternative technologies.
In October 2013, the White House announced that it would finally begin publishing annual tallies of federal subsidies for petroleum and coal as part of a wider “open government” plan. The federal government uses tax expenditures to effectively transfer $4 billion annually from taxpayers to fossil fuel producers, according to a 2013 Brookings Institute report. The report, “Innovative Approaches to Tax Reform,” identifies 12 federal fossil fuel subsidies that, if discontinued, would result in a $41 billion deficit reduction over a ten-year period. Recognizing the political controversy surrounding fossil fuel subsidies, this report suggests several approaches that could broaden political support for eliminating such subsidies. For example, the elimination of fossil fuel tax preferences could be paired with corporate tax reform that lowers the marginal tax rate on corporate income. The elimination of subsidies for U.S. fossil fuel production could provide meaningful deficit-reduction benefits without increasing energy prices, adversely impacting U.S. energy security, or undermining job creation.
A 2009 Environmental Law Institute study, “Estimating U.S. Government Subsidies to Energy Sources: 2002-2008,” confirmed that the U.S. government provided more than $72 billion in taxpayer-supported subsidies to fossil fuels during 2002-2008. This number should be compared to subsidies given to renewable energy resources, which only currently total $29 Billion (between 2002-2008). Over half of these renewable subsidies unfortunately go to corn ethanol – the least sustainable form of biofuel that exists.
According to the Environmental Law Institute, “Most of the largest subsidies to fossil fuels were written into the U.S. Tax Code as permanent provisions. By comparison, many subsidies for renewables are time-limited initiatives implemented through energy bills, with expiration dates that limit their usefulness to the renewables industry.”
Coal Specific Subsidies
Two laws enacted in response to the financial crises of late 2008 and early 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) and the Energy Improvement and Extension Act (EIEA), included significant energy related provisions. The EIEA authorized $1.5 billion for “clean” coal, $1.5 billion for advanced coal-based generation technologies that sequester at least 65% of CO2, and $250 million for projects that sequester 75% of CO2. In July, 2010, the builders of the 602 MW Taylorville, IL “clean” coal power plant were awarded a $417 million tax credit from the federal government. Construction of this plant, however, was cancelled only two years later due to it no longer being economically viable.
A section of the EPAct 2005 provides for a 20% tax credit for clean coal facilities. Spending associated with this credit showed a marked gain, raising from $31 million in 2007 to $240 million in 2010. Also in the EPAct 2005, plant owners can recover the cost of any certified pollution control facility over a period of 60 months. A certified air pollution control facility used in connection with an electric generation plant that is primarily coal fired is eligible for 84-month amortization if the plant started operation after 1976. These types of credits change the economics drastically when a utility is deciding whether to upgrade or retire older coal units.
Learn More about subsidies for high risk energy like nuclear power.