US subsidizes oil and gas so investors never lose
It’s not a secret that subsidies for fossil fuels get in the way of decarbonization. Nations from the G20 group —including the U.S. — have pledged to phase out inefficient tax breaks for the fossil fuels industry.
And yet, every year, the U.S. federal and state governments
pour around $20.5 billion in subsidies into the oil and gas industry. But there
are few concrete numbers that quantify the impact of these subsidies in the
nation’s efforts to meet its climate goals. So Ploy Achakulwisut, a climate
policy researcher at the Stockholm Environmental Institute, embarked on a
project to put a tag on it.
Her team found that, as Achakulwisut puts it, “these
[subsidies] are either bad or bad.”
Her research, published in Environmental Research Letters,
puts a number on the effects that 16 tax breaks and exemptions will have on
1,000 new U.S. oil and gas production fields projected to be built before 2030.
The paper shows that if fossil fuel prices stay high, most of the subsidies —
96 percent in oil, 87 in gas— will go directly to the pockets of investors as
profit. And if prices go down, these subsidies will help 60 percent and 74
percent of new oil and gas fields to remain profitable. The authors estimate
that by helping the industry stay profitable in either scenario, these
subsidies could add 150 million tons of CO2 emissions to the atmosphere in
2030.
“We have to reduce emissions, but we also have to stop doing
things that increase emissions; these things go hand in hand,” said Daniel
Bresette, director of the non-profit Environmental and Energy Study Institute,
and who wasn’t involved in the study. “This report helps demonstrate how what
we’re doing now is exacerbating the [high-emissions] situation that we’re in
right now.”
The research took “many, many hours of programming,”
Achakulwisut explains. Before even getting started, the team had to define what
they would consider a subsidy. They used the World Trade Organization’s
definition because it allowed them to include benefits that are not explicit
tax breaks, like state and federal help in paying well cleanup costs or the
public coverage of road damage costs. The team found 16 subsidies dating back
decades. Simultaneously, they went into a database that includes all the gas
and oil fields that are projected to be built from 2020 to 2030, around 1000.
Then, they tested the profitability of each field in 20 different price
scenarios, with and without each individual subsidy.
Unsurprisingly, the team found that the Accelerated
Deduction Intangible exploration and Development Costs tax break (IDC) had the
biggest effect of all evaluated supports for the industry. The tax break is a
1916 exemption that allows oil companies to deduct the cost of new wells from
their taxes, which could bump up the annual growth of oil and gas investments
by 11 and 8 percent, respectively.
But, since they went with a definition of subsidies that
allowed them to include indirect benefits as a subsidy, they were able to make
interesting points about other forms of government support for the industry,
Bresette points out. Transferring part of
the costs of closing and cleaning up wells to the government, the team
found, made every new well $60,000 cheaper (and that value doesn’t even account
for the health and environmental costs associated with abandoned wells.) Over
time, a series of complicated loopholes has left 2 million unplugged oil and
gas wells in the U.S., with cleanup costs of billions — around $10 billion in
states like Texas, Pennsylvania, and Oklahoma, which have large inventories of
abandoned wells.
“We’ve been talking about phasing out fossil fuel subsidies
for years and years,” Achakulwisut said. “We just hope that this kind of
analysis, and with all the ongoing efforts to phase out fossil fuels, will just
compel policymakers to finally take action.”
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