Roberts' review of various estimates of US subsidies to fossil fuels included a section, excerpted below, on the analysis jointly done by SEI and Earth Track that was published in Nature Energy in 2017:
..."The effects of consumption subsidies are fairly well-understood, as it is fairly easy to aggregate consumer decisions and find patterns. But the effects of production subsidies are trickier to pin down; it is difficult to tie particular background subsidies to particular investment decisions by producers.
"A package of legislation that represents a last chance to avoid severe climate crisis impacts was dramatically defanged late last week by conservative West Virginia Democratic Sen. Joe Manchin...
Despite Manchin’s cost-conscious approach — he has demanded a reduced $1.5 trillion price tag for the bill — he has fought to preserve domestic fossil fuel industry subsidies. On the potential repeal of international oil and gas subsidies put into place during the Trump administration, Manchin has been silent.
The world is spending at least $1.8-trillion every year, equivalent to 2% of GDP, on subsidies that are destroying nature, new research released on Thursday has found.
The study, titled Protecting Nature by Reforming Environmentally Harmful Subsidies: The Role of Business, was co-funded by The B Team and Business for Nature, and is the first estimate in 10 years of the total value of environmentally harmful subsidies (EHS) across key sectors including energy, agriculture, transport and forestry.
From 2010 to 2021, the United States’ major trade and development finance institutions, the U.S. Export Import Bank (EXIM) and U.S. International Development Finance Corporation (DFC), provided almost five times as much support to fossil fuels as to renewables – USD 51.6 billion compared to USD 10.9 billion.
Industry-specific reviews of government subsidies have been much more common than analyses examining several natural resource sectors at once. Yet there is a great deal of overlap across sectors. Indeed, it is the combination of support provided by multiple levels of government and government programs, across numerous natural resource areas, that can accelerate resource depletion, pollution, or habitat loss in particular regions.
The United States has supported the development of its oil and gas industry since the early twentieth century. Despite repeated pledges to phase out 'inefficient' fossil fuel subsidies, US oil and gas production continues to be subsidized by billions of dollars each year. In this study, we quantify how 16 subsidies and regulatory exemptions individually and altogether affect the economics of US oil and gas production in 2020–2030 under different price and financial risk outlooks.
Export credit agencies are little-known government-backed financial institutions that provide loans, guarantees, and insurance with the aim of supporting exports of goods or services from their country to outside markets. This report from Oil Change International and Friends of the Earth U.S. shows that since the Paris Agreement was made, G20 countries have used their export credit agencies to provide nearly 12 times more finance to fossil fuels than to clean energy.
Our article, Why Fossil Fuel Subsidies Matter, was published in the journal Nature yesterday. The piece is part of what we hope is a continuing dialog on the importance of valuing and ultimately eliminating fossil fuel subsidies at a granular level; and of more systematically integrating data on fossil fuel subsidies into the modeling of energy systems, climate change, and industrial investment.
The impetus for this piece was a 2018 study in Nature that used the results of integrated assessment models (IAMS) to infer that eliminating subsidies would yield “limited emission reductions…except in energy-exporting regions”, and described the emission reduction benefits as “small”.
This characterization is potentially misleading for reasons we describe. Our article uses a simple, sector-specific model to show how the emission reductions from producer subsidy reform could be more material than the 2018 study suggests. Factors such as concentrating the subsidies earlier in the production life of an asset; setting floors on risks (thereby reducing investment risk and hurdle rates); and localized uplift on particular producers, regions, or resource types can all result in material growth in fossil fuel supplies that would not have occurred absent government support. The importance of these factors can be muted when relying primarily on national estimates of subsidy values.
Earth Track and the Stockholm Environment Institute teamed up for this type of analysis for US oil in 2017, and are currently working on a deep dive on federal and sub-national support to natural gas.
Fossil fuel producer subsidies delay a low-carbon transition in ways both material and political, and they deserve greater attention and transparency in global modelling analyses, as well as in policy-making.
Analysis of the early post-tax reform data from large public companies suggests that many profitable firms are paying no federal income taxes, and often getting refunds. Firms involved with fossil fuels have been big winners. An April paper by the Institute on Taxation and Economic Policy in Washington, DC reviewed data on Fortune 500 firms. They found 60 that paid zero federal corporate income taxes despite having significant pretax income. Indeed:
The report finds that in 2018, 60 of America’s biggest corporations zeroed out their federal income taxes on $79 billion in U.S. pretax income. Instead of paying $16.4 billion in taxes at the 21 percent statutory corporate tax rate, these companies enjoyed a net corporate tax rebate of $4.3 billion.
Goals versus political reality of tax reform
Good tax reform isn't supposed to do this. In return for cutting tax rates on everybody to spur economic activity, properly-structured reforms are supposed to eliminate tax subsidies to everybody at the same time. Lower rates, broader base. Reforms should yield a lower tax burden on all economic activity while simultaneously removing politically-driven disparities between different sectors of the economy. People keep more of what they make, market pricing signals are cleaner, and revenue impacts are reduced.
Or so goes the theory. This ideal policy outcome for society as a whole is very different from what "winning" tax reform looks like at the firm level. Industry lobbyists want to see rates cut on everybody, but cut even more for their sector. And they would like for everybody else to lose their tax subsidies while somehow keeping their own.
This type of political outcome flows only to the powerful. In the massive Tax Reform Act of 1986, many tax subsidies were cut -- though most of those to oil and gas remained. And despite lots of new windmills and solar cells popping up around the country, the fossil fuel industry remains powerful.
As the tax reform package was nearing a vote at the end of 2017, I noted this concern in my review:
A combination of key subsidies to fossil energy remaining untouched while core subsidies to renewables are repealed, along with significant use of tax‐favored corporate structures by oil and gas both suggest that were the current proposals to become law, they would materially benefit fossil fuel industries relative to other energy market participants.
Unfortunately, this seems to be how things are playing out. The Tax Cuts and Jobs Act (TCJA) did greatly cut corporate rates across the board (from 35% to 21%). But it also cut the overall tax burden (corporate plus personal) on Master Limited Partnerships used mostly by oil and gas firms even more. For example, a special amendment by Senator Cornyn of Texas ensured that an ability to deduct 20% of income was not limited by the wage payments made by the partnership, a constraint applicable to most other partnerships under TCJA.James Chenoweth and David Sinak (2017). "Houston, We have New Tax Rates – Guiding Oil and Gas Companies Through Tax Reform," Gibson, Dunn & Crutcher, 21 December (accessed 4/23/2019).
Capital equipment expensing was also broadly implemented, with the majority of the gains flowing to capital-intensive industries with long-lived capital assets, such as fossil fuels. And those deductions can be taken on used assets too, not just new. Here's the Oil & Gas Journal:Conglin Zu, "US upstream and tax reform," Oil & Gas Journal, 2/26/2018.
Importantly, the Act allows the 100% deduction for capital expenditures used to acquire pre-existing (that is, used) property from unrelated persons. In the current oil and gas environment, where companies are shedding non-core assets, the 100% bonus depreciation regime provides an extra incentive for buyers of such assets to close deals in the next 5 years.
The Oil & Gas Journal review reported on modeling by long-time industry consultant Wood Mackenzie. Wood Mack looked at how the TCJA affected asset values within the exploration and production sector of US oil and gas markets. They indicated a post-tax increase of more than $190 billion.
ITEP: More than one-third of profitable firms in their review that paid no federal taxes in 2018 were oil and gas or utilities
ITEP periodically analyzes the effective tax rates of publicly traded companies. Earlier this month, their analysts looked at Fortune 500 companies post tax reform and found that 60 of the profitable firms were paying zero in federal income tax.Matthew Garder, Steve Wamhoff, Mary Martellotta and Lorena Roque (2019). "Corporate Tax Avoidance Remains Rampant Under New Tax Law: 60 Profitable Fortune 500 Companies Avoided All Federal Income Taxes in 2018," (Washington, DC: ITEP), April. I sorted their data by industry to focus in on the sub-groups most directly linked to fossil fuels: oil, gas & pipelines; and gas & electric utilities. Twenty-two of the 60 firms paying no taxes were in these two sectors. As shown below, they comprised 47% of the group's total pre-tax income and 41% of the net federal tax refunds.
ITEP notes that renewable production tax credits were one of the causes of low tax rates for the utility firms. To assess the import of this factor, I included data on renewable PTCs claimed, as reported by ITEP; and assessed the share of tax underage from the new statutory rates that the renewable PTCs comprised.
In a few cases, the benefits were significant: renewable PTCs dominated the underage for one utility and were material in a second. However, for most of the utilities (and all of the oil, gas and pipelines segment), other factors drove the results. The utilities include renewable and nuclear infrastructure, but continue to be dominated by natural gas and coal in most cases.
Table 1: Many profitable firms in oil, gas, and utility sectors paying no federal tax under TCJA
PJM Interconnection LLC (PJM) has been worried that certain state subsidies harm the competitiveness of capacity auctions within its territory. PJM serves as the grid operator for all or parts of Delaware, Indiana, Illinois, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. Its service area spans nearly a quarter million square miles, and a population of 65 million -- roughly 20% of the country.
In an April 9, 2018 filing submitted to the Federal Energy Regulatory Commission (FERC), PJM proposed two mutually exclusive options to protect capacity auctions from the impacts of these subsidies.[1] PJM, Capacity Repricing or in the Alternative MOPR-Ex Proposal: Tariff Revisions to Address Impacts of State Public Policies on the PJM Capacity Market,” filing before the Federal Energy Regulatory Commission, April 9, 2018, pp. 1,2 citing ISO New England, Inc., 162 FERC ¶ 61,205 at P21 (2018) (“CASPR Order”).Capacity repricing would increase the market clearing capacity price paid to all bidders that clear by adjusting bids to account for subsidies received by certain generators, though would not alter which specific bidders cleared. A second option, MOPR-Ex would adjust the bid price for subsidized resources prior to evaluating their competitiveness, changing the mix of facilities that would clear the capacity auction. In part because of the scale of PJM's service area, and in part because of the precedential nature of the case, FERC's decision on this matter can be expected to have national implications on the relative competitiveness of different energy resources and the direction of future investment.
"Fixing" subsidies requires systematic capture of all mechanisms of support
Earth Track analyzed the details of the filing to evaluate potential gaps in how subsidies were defined and whether those gaps might have unequal impacts on different fuel cycles. The review incorporated updated information on state-level supports to fossil fuels compiled by the OECD; state and local subsidies to local industry compiled by Good Jobs First, a DC-based organization; and other resources.
Earth Track's summary report to Sierra Club can be accessed here. The full comments by Sierra Club and othersThe filing was submitted by the Sustainable FERC Project, Sierra Club, Natural Resources Defense Council, and Environmental Defense Fund can be accessed here. The full comments to FERC include not only the Earth Track report, but some interesting analysis on how generators might game the new capacity bidding structures in a manner that drives up costs and reduces pricing transparency.
PJM’s proposal describes the types of subsidies that would be “actionable” under its proposals, including policy types, materiality, and exclusions. Their description of which subsidies are actionable initially seems broad enough to capture most types of potential subsidy. However, exclusions added just a few paragraphs later winnow down coverage in ways that are likely both material and unequal in how they affect different fuel cycles.
These exclusions will likely impede PJM’s core objective of ensuring competitive, nondiscriminatory auctions in the wholesale capacity market. Because subsidies flow to all forms of generation, and nearly every upstream and downstream stage of each power-related fuel cycle as well, a comprehensive review process is needed if PJM is to address these subsidies in a neutral way. Key findings of our analysis include:
Blanket exclusion of federal and many state and local subsidies will reduce the accuracy of subsidy screening significantly. PJM excludes all federal subsidies, and any state or local support that is in place for regional economic development or to convince a plant to locate (or stay) in a particular region. Federal subsidies can be both large and highly targeted to an industrial facility. State and local subsidies excluded on the basis of their stated purpose can also be very large. They may represent multiple state programs, originating from more than one agency – some of which may be excluded and others not based on the PJM proposal. In all of these areas, it is the scale of support rather than the justification for granting it that will drive capacity market distortions.
Revenue-based metrics for actionable subsidies need to be broadened to incorporate cost- and risk-reducing subsidies. Subsidies operate using three main levers: boosting revenues, reducing costs, and reducing the volatility of expected return by absorbing or capping credit, liability, or other business risks. The PJM proposal, as currently worded, focuses only on revenues and as a result will not treat different power sources equally. If a policy of mitigating subsidies is to be pursued, then the materiality test should shift from 1% of revenues to “a subsidy equal in magnitude to one percent of revenues” to incorporate the broad array of subsidy mechanisms.
Purchase mandates are one technique of many that governments use to transfer value to the energy sector; subsidy screening needs to incorporate all of them. Not every form of electrical power has the same cost structure. Some are capital-intensive, rolling out new technologies, or face long or uncertain build times. Others require complex fuel supply chains, have risks of severe accidents, or significant and complex post-closure concerns. Still others have variability in their ability to produce electricity. As a result of these differences, the importance of particular types of subsidy support varies significantly across fuels, and rules that by definition or effect limit review to a small subset of subsidy approaches will materially disadvantage some energy resources over others.
PJM’s current focus almost entirely on purchase mandates will understate the level of subsidies to other forms of energy. In addition, where interventions are focused on internalizing environmental or health externalities that are not being addressed in other ways, PJM needs to evaluate the impact on efficiency using more than just generator costs of operation.
Large subsidies to upstream or downstream fuel cycle steps need to be addressed to determine when a subsidy should be actionable. These types of supports are most relevant regarding subsidies to coal and natural gas extraction and transport; coal mine land reclamation; large state support to ancillary infrastructure to move or process fuels; or state subsidy for high risk, long-term parts of the nuclear fuel cycle.
Subsidy combinations matter. If there are multiple subsidies flowing to the same beneficiaries that in total exceed PJM’s action threshold of support equal to 1% of revenues, these should be reviewed as a group for action even if individually they don’t hit 1%. Subsidy “stacking” is common across the world, and it is the joint effect of multiple subsidies that will drive the distortions in market behavior.
Test case illustrates the importance of a more systematic inclusion of subsidies as potentially subject to PJM action. A test case relating to tax exemptions for coal in the state of Pennsylvania indicates that more subsidies than just purchase mandates would exceed the PJM’s proposed revenue threshold. Additional analysis would likely illustrate a similar situation in multiple other parts of PJM, though this one example is useful in illustrating why a narrow focus on purchase mandates will be insufficient in addressing potential distortions.
