Wednesday, April 13, 2011

Talking About Oil Subsidies

In a recent Facebook thread about the Federal budget, one of my friends said, “What puzzles me is that NO ONE seems to talk about reducing subsidies to for-profit companies that are making tons of money, such as the oil industry. Is their lobby really THAT powerful?”

West Texas Pumpjack. Public Domain photo by Eric Kounce

Ok, I'll talk about it. I did some research on how much of a dent fossil fuel tax breaks and subsidies make to the U.S. Treasury, and what efforts have been made to rein them in. Here's what I found:

The best study on the topic (or at least the best that an hour of research revealed) is Estimating U.S. Government Subsidies to Energy Sources: 2002-2008 from the Environmental Law Institute. As you can see in the graphic below, ELI calculates that the bill comes to $72.5B over the seven-year period, or $10.4B per year. This is somewhat higher than the $6.2B per year from an earlier Cato Institute study but lower than a much-cited $15.7B to $35.2B per year Greenpeace estimate. Inclusion of some defense costs as oil industry "subsidies" is responsible for the higher pricetag from the proprietors of the Rainbow Warrior. The $72.5B in the ELI study is divided between $54.2B in tax breaks (including $15.3B for the Foreign Tax Credit, which is a reasonable measure to prevent double taxation and is not specific to the fossil fuel industry) and $18.3B in bona fide subsidies.

Source: Environmental Law Institute. Click on image for expanded view.

I’ve argued elsewhere that corporations shouldn’t pay income taxes at all. That would make the whole question of tax credits for the fossil fuel industry go away. Given that we do have corporate taxes, however, they should not be used to provide preferential treatment to one industry over another; such treatment only serves to distort markets. Subsidies have a similar effect, although I should point out that about two-thirds of fossil fuel subsidies are for Low Income Home Energy Assistance and the Strategic Petroleum Reserve. I suspect that many of the people who promote a harder line on the oil and gas industry would not favor cuts to these programs.

Attempts have been made to shrink tax breaks and subsidies that benefit purveyors of fossil fuels. The leading industry group, the American Petroleum Institute, fought hard to defeat these attempts. Victory was theirs. API's political muscle is considerable; it spent over seven million dollars on lobbying in 2010. (An aside: What American politician is virtually alone in successfully standing up to the Oil and Gas Industry? Answer below.) However, industry lobbying is not the only reason for the failure of these efforts. The proposals were flawed. They sought to replace oil industry subsidies with subsidies for so-called green energy (which according to the same ELI report received $29B during the study period). As such, they were not budget cutting measures, and consequently did not receive the support of deficit hawks or of right-wing opponents of corporate welfare. This was the case for the 2007 CLEAN Energy Act (for an excellent article on this from the Cato Institute, see Oil Subsidies in the Dock by Jerry Taylor and Peter Van Doren). This is also the case for Obama’s 2012 budget, which, according to Reuters, cuts oil and gas subsidies by $3.6B (with a big chunk coming from heating oil assistance for the elderly), but adds $8B for “research, development and deployment investments in clean energy.” (Am I being too cynical in speculating that Obama is counting on Congress to restore heating oil assistance?)

So yes, plenty of people are talking about reducing subsidies to the oil industry. Trouble is, they’re saying the wrong things. They are not questioning whether the Federal Government should use its financial power to pick winners and losers in the economy. They are only arguing about who the winners and losers should be.

Answer to earlier question: Sarah Palin. As Governor of the Last Frontier, she battled oil industry lobbyists to pass the Alaska’s Clear and Equitable Share Act, which provides incentives to the industry for drilling while increasing the revenue to the state. See What Palin Really Did To the Oil Industry in the Wall Street Journal.

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