Biden wants to end oil subsidies. First he has to find them

Source: By Scott Waldman, E&E News reporter • Posted: Tuesday, March 9, 2021

The Biden administration has vowed to end federal subsidies to fossil fuel companies, but even supporters of the effort say it will be hard to shut off the spigot.

There are two major hurdles. For one, Congress — not the White House — controls the flow of most federal dollars. That means Biden will need help from Capitol Hill.

Then there’s the challenge of reaching agreement on the precise definition of a federal subsidy. There’s broad disagreement on the term, and the Biden administration will have to settle that debate before doing much else.

“The subsidies that we’re talking about for fossil fuel are pretty wide-ranging, and they are pretty costly and some of them are direct, some of them are less direct,” said Daniel Bresette, executive director of the nonpartisan Environmental and Energy Study Institute.

On average, the United States spends about $20 billion annually on fossil fuel subsidies, according to Oil Change International, a climate activist group. About 80% of that purse goes to the natural gas and crude oil industries. The rest is allocated to coal.

Estimates of these incentives can vary, however, as there are several ways to define a fossil fuel subsidy. Environmentalists have criticized some estimates as being too low because they don’t take into account the negative economic impacts of greenhouse gas pollution.

As part of his climate agenda, Biden has directed federal department heads to track down fossil fuel subsidies within their agencies. They then must “take steps to ensure that, to the extent consistent with applicable law, federal funding is not directly subsidizing fossil fuels,” according to one Biden executive order. It sets the 2022 budget as the deadline to remove the subsidies.

“Unlike previous administrations, I don’t think the federal government should give handouts to Big Oil,” said Biden earlier this year.

Environmentalists have long called on the government to take this step. But the politics of defining a subsidy are tricky, Bresette said.

While some subsidies are easily defined, such as tax breaks or pools of funding, others are more challenging. Those include the public health costs of burning coal, oil and gas — which some activists might consider a de facto subsidy, Bresette said.

The more easily defined fossil fuel subsidies often center around energy production costs. Those include tax policies, such as the intangible drilling costs deduction, that allow companies to deduct most of the costs of drilling wells.

They also include the percentage depletion benefit, which allows for companies to write off generous annual depreciation costs after a well is tapped and its total inventory is reduced each year. There are also tax credits for investments in coal technologies that capture carbon.

The fossil fuel industry also benefits from indirect subsidies. One example is the domestic manufacturing deduction that allows oil companies to reduce their corporate tax rate under a benefit designed to encourage domestic manufacturers to keep jobs in the United States.

Another is the master limited partnership, which combines the investment advantages of publicly traded corporations with the tax benefits of partnerships, according to the Environmental and Energy Study Institute. The structure allows oil and gas companies to avoid corporate taxes, even as shareholders must pay them. About three-quarters of master limited partnerships are energy companies.

Biden has framed his anti-subsidy effort as a way to cut corporate handouts. But the administration has to convince Congress.

And the politics there are tricky. The Senate is evenly divided, and some Senate Democrats — such as Joe Manchin of West Virginia — have a history of siding with the fossil fuel industry.

Even eliminating direct subsidies is a hard lift, said Michael McKenna, a former Trump energy adviser.

For example, he said that if the Biden administration cuts the most frequently targeted subsidy — intangible drilling costs — companies then will start treating it like a business expense. To eliminate that workaround, the Biden administration would have to upend the tax code on business expenses — a major undertaking.

Compounding the challenge are regional politics. Lawmakers from states with a big fossil fuel presence likely would have reservations about undercutting their home state industries.

“I think politically any tax legislation is very messy, in large measure because voting tends to break down along geographical rather than ideological lines,” McKenna said. “That makes sense, as tax policy is the ultimate in protecting your home turf. So, politically, it would be tough to do. Those votes would be especially touchy for the New Mexico delegation.”

Meanwhile, climate advocates want Biden to do more. They have urged him to attack what they consider indirect subsidies of the fossil fuel industry — such as its ability to contribute to health and climate costs without paying the price for it.

That policy fight, which would hold fossil fuel companies accountable for these costs of their products, is far less likely to get through Congress — except perhaps as a form of carbon pricing.

Leah Stokes, a professor of energy policy at the University of California, Santa Barbara, said fossil fuel companies have benefited from government assistance for more than a century.

By contrast, renewable energy tax credits and benefits are “a constantly moving target” that can rise and fall depending on which party controls Congress and the White House.

The difference between the two technologies — where one pollutes and warms the planet while the other has relatively little environmental cost — is one of the most significant subsidies, she said. Defining subsidies in the context of tax benefits or federal spending doesn’t account for the steepest costs of the industry, she said. And when industry doesn’t pay for the true cost, it’s being subsidized, she said.

“It doesn’t take into consideration all the harm that the industry causes, which some people might think of as a subsidy,” she said. “We don’t make the industry pay for the true cost of polluting our environment, shortening people’s lives, giving children asthma, etc. They’re being subsidized in a certain sense by society through things like our health care system.”

In addition to the public health costs of burning fossil fuels, there is also the use of public lands that are intended to benefit all Americans, said Becca Ellison, a policy manager at Evergreen Action. She said fossil fuels are well-established in the United States, whereas renewables are still growing and need government benefits to expand further.

“Any public resource that is expended to support fossil fuel corporations is a fossil fuel subsidy,” Ellison said. “As part of that, when the federal government leases public lands and water to fossil fuel corporations for bargain prices and with little oversight, that is using resources that the public has and in turn polluting air and water and making the climate crisis worse.”