Fossil Fuel Subsidy Frequently Asked Questions:
What is a fossil fuel subsidy?
A fossil fuel subsidy is any government action that lowers the cost of fossil fuel energy production, raises the price received by energy producers or lowers the price paid by energy consumers. There are a lot of activities under this simple definition—tax breaks and giveaways, but also loans at favorable rates, price controls, purchase requirements and a whole lot of other things.
How much money does the U.S. government give oil, gas and coal companies?
Estimates of the value of U.S. federal subsidies to the domestic oil and gas industry alone (not coal) range from “only” $4 billion a year, to an amazing $41 billion annually. One recent comprehensive study of U.S. energy subsidies (see graph below) identified $72.5 billion in federal subsidies for fossil fuels between 2002-2008, or just over $10 billion annually. For more information on the range of subsidies, see below.
Whatever the number, it seems ludicrous that any of our tax dollars would support such established and profitable industries. These energy subsidies are completely out of step with a nation that now broadly accepts the need to end our collective “oil addiction.”
What are the benefits from removing fossil fuel subsidies?
One of the most obvious benefits of ending fossil fuel subsidies is increasing the availability of public money. Additionally, ending excessive and wasteful support for fossil fuels would reduce greenhouse gas emissions that lead to global warming.
The money saved from fossil fuel subsidies could be used to promote clean energy and energy efficiency alternatives, which would be in line with public opinion. A 2010 poll by Stanford University found public support for government action to increase clean energy and energy efficiency. The poll found that 84 percent are in favor of giving companies tax breaks to produce more electricity from water, wind, and solar power; 81 percent want more fuel efficient cars that use less gasoline; 80 percent want more appliances that use less electricity; and 80 percent want more home and office buildings that require less energy to heat and cool.
What is the U.S. government doing to end fossil fuel subsidies?
For the last several years, President Obama has proposed eliminating $4 billion in oil and gas subsidies from the U.S. budget. While these are not all the subsidies that this mature and very profitable industry enjoys, they are some of the most obvious. But Congress hasn’t yet approved President Obama’s budget cuts.
Fossil fuel subsidies have come up in Congress – and rightly so! – in discussions of ways to cut government expenditures in order to balance the budget. In the spring of 2011, there was a push by some legislators to remove subsidies that target only the major oil companies – in particular, the “Big Five” (BP, Exxon, Chevron, Shell, ConocoPhillips). While this would end some of the oil subsidies, it would unfortunately exclude a number of huge companies such as Valero, Koch Industries, Occidental, Anadarko, Amerada Hess, Marathon, Murphy Oil and a number of more diversified energy companies that also produce large quantities of the nation’s oil and gas.
In the fall of 2011, there was some hope that fossil fuel subsidy reduction could be included in the Super Committee’s proposal to Congress for $1.5 trillion in deficit-reduction measures over the next ten years. There was support in Congress for this: In an October letter to the Super Committee, 36 House Democrats urged the committee to end subsidies to the fossil fuel industry that would save up to $122 billion over the next ten years.
But in the end, it proved to be an uphill battle to get the Super Committee to take a stand on fossil fuel subsidies – and perhaps that’s not so surprising, given the influence of fossil fuel industry money on the Super Committee. Eight Super Committee members received over $300,000 in contributions from the fossil fuel industry since 1999: Senators Baucus (D-MT), Kyl (R-AZ), Portman (R-OH), and Toomey (R-PA), and Representatives Camp (R-MI), Clyburn (D-SC), Hensarling (R-TX), and Upton (R-MI).
Is there any reason to be concerned about removing fossil fuel subsidies?
Calls for subsidy removal tend to be answered by the oil industry and their allies with dire predictions of falling domestic production, loss of jobs, and rising gas prices. But the reality is that removing fossil fuel subsidies (which the industry deceptively calls new taxes) will have little to no impact on domestic production, jobs, or prices at the pump.
According to the Treasury Department, removing the domestic subsidies as proposed in the President’s budget would reduce U.S. oil production less than one half of one percent, and will increase exploration and production costs less than two percent. Considering the price that the domestic industry receives for crude has more than doubled over the past several years, the industry can afford that – without laying anyone off or jacking up the price at the pump.
The global oil market, not the domestic industry, determines gas prices. Treasury estimates that subsidy removal would cause a loss of less than one tenth of one percent in global oil supply, and thus would have no impact on global or U.S. prices.
U.S. reliance on foreign oil has been a fact since the 1970s, and no amount of additional drilling or subsidies is going to change that. The only way to end our reliance on foreign oil is to end our dependence on all oil.
How come there’s such a big range in estimates of fossil fuel subsidies?
First, accounting methods and exact definitions of subsidies vary. Second, while environmental and consumer groups tend to calculate the total amount of revenue to the American taxpayer that these subsidies cost, others note that “many subsidies have a higher value to recipients than their direct cost to the government.” In other words, the higher values are more indicative of the corporate welfare given to the already highly profitable oil industry annually, while the more conservative figures are a better estimate of how much the elimination of these subsidies would save the U.S. taxpayer.
Finally, some of the highest estimates include a portion of defense spending (more info on defense subsidies to oil here and here). It should be noted that while the estimate of $41 billion in oil and gas subsidies annually does include some of the cost of U.S. military “defense” of the Persian Gulf region, it does not specifically incorporate any increase in defense spending relating to Iraq, or any quantification of the environmental externalities associated with oil. And none of the amounts cited include fossil fuel subsidies in the form of international aid, which is explained in greater detail below