Fossil fuel subsidies: fiction versus reality

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Advancing the ideological agenda of the left is hardly a solid basis for energy policy.

Some political targets are temporary, little more than props deployed in search of a tactical advantage in today’s Beltway skirmish. Others are permanent elements of the landscape, the foundations of an ideological worldview impermeable to the facts, reasoning and perverse results that the resulting political imperatives would engender.

Among these, long-standing opposition to fossil fuels, the companies that produce them, the people engaged in such economic activity, and the areas of the United States in which fossil fuels are concentrated is prominent. From the perspective of this ideological worldview, the attacks on the fossil fuel sector were motivated precisely by the national wealth creation, freedom and advancement of human well-being ceded by the energy availability both abundant and effective. Such availability is the antithesis of long-term efforts by the political left to extend its power enormously while centralizing it in a metastatic bureaucracy that is politically irresponsible and impervious to the popular will, driven instead by the whims, passions and personal interests of elites and “experts”.

A manifestation of this worldview is the renewed effort in Congress to reduce or eliminate so-called tax preferences and “subsidies” enjoyed by fossil fuel producers. A bill loosely called the End Polluter Welfare Act contains a large number of provisions, the most important of which are the following.

Increases onshore royalty rate to 18.75 percent. The Mining Leases Act of 1920 established a 12.5 percent royalty payable to the federal government by energy companies on the sale of oil, gas, or coal extracted from federal Crown lands. The proposed increase is a classic example of Beltway’s confused thinking: it would obviously reduce the amount initially offered for leases. As a result, there would be no increase in the expected present value of the rental offer plus the flow of royalty payments, but there would be a transfer of risk from fossil fuel producers to federal taxpayers. If this royalty increase were to be imposed on existing leases, it would represent a a posteriori the appropriation of private property, one of the consequences of which would be a further reduction in the amounts proposed for future leases. In addition, the increase could reduce production from existing leases and thus could lead to lower royalty payments. Is myopia a solid basis for policy formulation?

Cancels and prohibits the use of funds earmarked by the United States for the World Bank and by US government lending agencies for fossil fuel projects. An increase in the supply of energy is a fundamental condition for economic progress in the less developed economies. Notwithstanding widely held claims to the effect, unconventional energies – wind and solar power are central examples – simply is not competitive with fossil fuels. Because all of this funding is limited by definition, a ban on fossil fuel projects means fewer energy resources for the world’s poor – even outside of the inherent unreliability of renewables – and therefore a doom to greater poverty. it would not be otherwise. Is the promotion of poverty a solid basis for policy formulation?

Imposes the liability of financial institutions for “environmental damage” caused by their investments in conventional energy. This amounts to making a bank that finances the purchase of an automobile liable for an accident caused by the driver of that car. This provision is an obvious attempt to restore Operation Chokepoint, the illegal effort (finally abandoned after strong criticism) of the Obama administration to cut banking services to industries as disadvantaged as payday lenders, gun manufacturers and the fossil fuel industry. Is massive capital market distortion a solid basis for policy formulation?

Eliminate the percentage burnout allowance. The major integrated producers of fossil fuels are already denied the use of the percentage depletion allowance, which is little more than a form of depreciation. The indemnity is limited in practice to small producers, because it is only allowed for the first 1,000 barrels per day of production and is limited to 65% of net income. Coal producers would also be denied the use of the percentage depletion allowance, even though it is allowed for all other extractive industries. This provision is little more than a punitive exercise aimed at an industry unpopular in certain ideological circles. Does such discrimination constitute a solid basis for policy formulation?

Eliminate partial expensing of intangible drilling and development costs. These are labor and other “intangible” costs (eg, fuel) incurred when drilling a well. Strictly speaking, because the well is a capital asset, the costs of creating it should be amortized rather than expensed. But the same goes for research and development costs in other industries, which under current law can be fully expensed; but from 2022, these R&D costs must be amortized over a period of five years. Current expensing of intangible drilling costs for fossil fuel companies is limited to 70%, with the remainder deducted over five years. The End Polluter Welfare Act would end the expense and require a seven-year amortization period for the fossil fuel industry. Again: is such discrimination a solid basis for policy formulation?

And so on, justified as an effort “to close tax loopholes and eliminate federal subsidies” for the fossil fuel sector. Note that the Biden administration made it clear that he intends to “remove subsidies to fossil fuel companies”, but has not specified precisely the tax arrangements it envisages for such elimination, even though it seeks to increase “incentives” for the production of fossil fuels. unconventional energy. Thus the Biden plan classifies tax preferences for conventional energies as “subsidies” while describing different preferences for “clean energies” (no, It is not) as “incentives”, a classic exercise in verbiage in the service of propaganda.

Let’s compare the fiscal incentives for fossil fuels and renewables, as summarized in the following table.

Whatever verbiage we choose, any defensible interpretation of the data would show that renewables receive grossly disproportionate taxpayer support. Because renewable energy is far from “clean” – it leads to massive heavy metal pollution, noise, flicker effects, destruction of wildlife, unsightly and senseless land use (in terms of area), landfill issues and much more – true welfare as the “polluters” are not the so-called “subsidies” for fossil fuel producers, but rather political subsidies for renewable energy . Maybe Congress and the Biden administration should fix it.

Benjamin zycher is a resident researcher at the American Enterprise Institute.

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