Ending oil tax breaks saves money but not the environment — report

Source: Umair Irfan, E&E reporter • Posted: Monday, August 15, 2016

The federal government would have billions more in cash if the oil and gas sector in the United States gave up its tax preferences.

That’s according to a new discussion paper published by the Council on Foreign Relations.

“The big takeaway here is that we can free up $4 billion a year in the federal budget without doing any appreciable harm to the domestic oil and gas industry,” said author Gilbert Metcalf, a professor of economics at Tufts University.

This challenges some of the conventional wisdom around the idea that the United States could become more dependent on foreign energy and become more vulnerable to commodity price shocks if the tax subsidies were lifted, leading to domestic drillers facing higher operating costs.

“There’s been very little analysis of this question,” Metcalf said.

The Obama administration has scrubbed tax breaks for fossil fuels in every budget it has proposed, but Congress has rejected those attempts. The federal government created these subsidies to help the fledgling oil and gas industry in the United States get off the ground and create a secure supply of domestic energy.

Opponents of oil and gas tax breaks like to point out that the fossil fuel subsidies are permanent, unlike subsidies to solar energy through the investment tax credit and subsidies to wind under the production tax credit.

But with the oil and gas industry now fully mature, critics question why the sector continues to receive subsidies even as the United States maintains a dominant global position in the market.

In the new paper, Gilbert examined three major tax preferences for the oil and gas sector: percentage depletion, intangible drilling costs and the manufacturing deduction.

These three exemptions, the oldest dating back to 1916 and the newest to 2004, add up to more than 90 percent of the value of tax breaks for oil and gas companies.

Metcalf found that removing these tax breaks would barely move the needle in terms of energy security by increasing the global price of oil 1 percent by 2030. Oil production in the United States would fall an estimated 5 percent.

With natural gas, domestic prices would rise between 7 and 10 percent, while production and consumption would each fall by 3 to 4 percent, the paper found.

The American Petroleum Institute and the U.S. Oil & Gas Association did not respond to requests for comment.

This minimal impact on the industry also means limited effects on the environment. Metcalf found that global carbon emissions would scarcely budge, since prices wouldn’t rise enough to lead consumers and industries to rethink their oil and gas use. Increasing the price at the gas pump by 1 or 2 cents wouldn’t do much to dissuade driving, for example.

“It’s not like this is the solution to climate change by getting rid of these subsidies,” Metcalf said.

On the other hand, removing tax incentives for oil and gas would give the United States additional leverage in negotiating emissions treaties with other countries. Fossil fuels are subsidized around the world, for both producers and end-users, so the United States would have greater credibility in asking other nations to reconsider their support for coal, oil and gas if it moved first, Metcalf said.

The International Energy Agency noted in a 2015 report that fossil fuel subsidies around the world on average subsidize carbon dioxide emissions to the tune of $115 per metric ton.

Given the Obama administration’s lack of success at removing subsidies for oil and gas, the prospects of changing these rules are dim. “It’s always hard to get tax breaks out of the tax code, but getting tax breaks out is the only way we can produce tax reform,” Metcalf said.