The End Polluter Welfare Act, fossil fuel subsidy reform, and the power of lists

Written by dkoplow Posted: 05/14/2012 1:14 PM EDT

The "End Polluter Welfare Act (EPWA)," introduced by Sen. Bernie Sanders (I-Vt.) and Rep. Keith Ellison (D-Minn.) last week aims to strip away as many federal subsidies to fossil fuels as possible.  The bill reaches well beyond the short-list of most obvious subsidies that past reform efforts have targeted.  This elevated reach can be seen in the length of the subsidy list (four pages); in the estimated fiscal benefits of reform ($110 billion over ten years, roughly 2.5x the take of the narrower proposals, such as in President Obama's budget, or bills introduced by Sen. Robert Menendez (D-NJ)); and in the variety of groups supporting it (including the grass-roots powerhouse, run by Bill McKibben).  You can read the full text of the proposed legislation here.

Will Sanders and Ellison succeed where far more modest reform attempts quickly ran aground?  Perhaps not.  But that is hardly the only point of introducing something like this.  There is much to be gained simply by making a subsidy list that is far more comprehensive than the lists that have come before.

The bill takes the first step in undoing a big limitation of the prior, narrowly-cast legislative reform efforts.  Those initiatives focused only on a handful of the ways the feds have bolstered the fossil fuel industry for nearly 90 years.  As a result, they created the impression that the whole oil and gas subsidy trough wasn't really that large:  four billion or so per year and a handful of tax breaks -- end of story.  Such an impression was not accurate, of course.  But it has been quite useful to the lobby groups fighting to protect their fossil fuel pork.  With the number of targeted policies smaller, the lower fiscal savings from reform also led to more muted public outrage.  As a result, the lobbying job for industry to deter subsidy elimination was vastly simplified.

Enter EPWA.  By listing a much wider range of policies subsidizing oil, natural gas, and coal, the EPWA forces a more honest debate on the distortionary effects of federal policies on energy markets.  Though earlier reform efforts have primarily focused on stripping away tax breaks, the subsides to conventional fuels come in many guises.  There are below-market royalty rates, subsidies to fuel-related pollution controls, direct spending, caps on liability, and assorted subsidized credit for domestic power plants and exports of oil and gas-related goods and services.  There are subsidies to transporting bulk fuel, and to corporate structures particularly useful for natural resource extraction firms.  And there is subsidized oil security -- an area that despite it's large size was too political even for Sanders and Ellison to take on.  But other OECD countries with oil stockpiles to stave off supply disruptions (required of all member countries of the International Energy Agency) routinely recover the cost of these activities from oil markets rather than taxpayers.  The US should do the same.

Here are some of the subsidies I was particularly happy to see included in the EPW Act:

  • Royalty relief.  Energy resources are a public endowment, and selling them for less than they are worth is foolish.  EPWA targets a number of these areas.  It increases the onshore royalty rate for production on public lands to equal the rate of offshore production.  It eliminates reduced royalties on all "special" types or locations of fossil extraction, recognizing that a variety of factors have changed:  market prices are higher, technical capabilities have improved, and high-cost "marginal" oil reserves ought to be viewed as competing not just against other oil, but against any other marginal energy resources.  The bill also includes language to claw back some value from a small "mistake" in the late 1990s that resulted in a huge amount of oil and gas from leases in the Gulf of Mexico being given away with no federal royalties at all.  Since the losses on this error are likely to exceed even Bernie Madoff's ponzi scheme, it would also be nice to see somebody prosecuted for this negligence.  I don't believe anybody has ever been called to task.
  • Lease competitiveness.  Part of ensuring a proper return on mineral resources is making sure that leases are tendered competitively.  EPWA addresses this issue with respect to the Powder River Basin coal region, one of the most abundant coal deposits in the world.  Past problems with leasing in this area have been estimated to provide nearly $30 billion in subsidies to coal producers.
  • Manufacturing deduction.  Special tax deductions are available for firms manufacturing products in the United States.  Including the endowment value of extracted minerals as though it is a "manufactured" value is problematic, as I've laid out here
  • Subsidized pollution control.  One of the main benefits of many emerging clean energy resources is that they are, well, cleaner.  Because at present these newer technologies are often more expensive than coal or oil, it is critical that conventional energy resources not receive subsidies for investments in pollution controls.  The cost of compliance should be passed through to consumers.  EPWA takes on a number of ways we subsdize pollution control from the fossil fuel sector:  more rapid amortization of investments into pollution control equipment (heavily used by coal plants); the ability to expense costs associated with complying with EPA rules on sulfur pollution; deductions for environmental clean-up costs; and tax credits for CO2 sequestration.  The bill also requires that tar sands oil pay into the Oil Spill Liability Trust Fund just like other forms of oil transported across US territories, a simple and logical change given the growing levels of production, particularly imported from Canada.
  • Bypass of corporate income taxes.  It turns out that multi-national fossil fuel firms have been extremely skilled at bypassing corporate income taxes.  Sanders and Ellison target the misuse of foreign tax credits where oil and gas companies characterize royalty payments (which are tax deductible) as foreign tax payments (on which they earn more valuable tax credits).  They also target the use of master limited partnerships by oil, gas, and coal companies to bypass corporate taxes entirely.  These structures, which are not available to clean energy firms, have been used disproportionately by the fossil fuel industry.  I reviewed treasury data on this issue (Table 6, page 42 in this report)  and found that for 2008, the sector comprised only 3.9% of total assets owned by pass-through entities (i.e., corporate structures for which all gains an losses pass through directly to partners), but 11.8% of net income.  These statistics include all sorts of corporate forms, such as LLCs that are used by a variety of sectors.  It is likely that the fossil fuel share of master limited partnerships alone would be much higher, and that the surge in fracking-related partnerships since 2008 would result in a higher oil and gas share as well.  Lest one believe killing these subsidies will bring ruin to the industry, it is useful to recognize that Energy Trusts, a similar structure used by Canadian firms, were eliminated due to the high revenue loss to the Canadian government.
  • Transport infrastructure and transport. The United States is suddenly exporting large quantities of refined petroleum products.  Coal producers are itching to build huge new export terminals in the Pacific Northwest to move coal out to Asian markets.  These exports require massive infrastructure to move the bulk fuels to ports and load them on vessels.  Ramping up exports raises important environmental concerns about locking us in to many decades of higher carbon power once these facilities are built.  But these concerns are particularly acute where the port projects are not simply built because the returns are so high, but because the construction is subsidized by taxpayers.  Subsidies are quite common in port and pipeline projects.  EPWA would prohibit at least federal transportations funds for rail or port projects to transport and/or export fossil fuels.  It's a good start, but port subsidies also come through credit support as sub-national subsidies.  Those venues need to be targeted as well.