Regulatory Policy

Fiction vs. Reality on Fossil-Fuel Subsidies

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Advancing the Left’s ideological agenda is hardly a sound basis for energy policy.

Some political targets are temporary, little more than props deployed in pursuit of a tactical advantage in the Beltway skirmish of the day. Others are permanent fixtures in the landscape, the foundations of an ideological worldview impervious to facts, reasoning, and the perverse outcomes that the attendant policy imperatives would engender.

Prominent among the latter is the long-standing opposition to fossil fuels, the companies that produce them, the people engaged in such economic activity, and the U.S. regions in which fossil fuels are concentrated. In terms of that ideological worldview, the attacks on the fossil-fuel sector have been driven precisely by the national wealth creation, freedom, and advancement of human well-being yielded by the availability of energy both abundant and efficient. Such availability is the antithesis of the long-term effort by the political Left to expand its power enormously while centralizing it in a metastasizing bureaucracy that is politically unaccountable and impervious to the popular will, driven instead by the whims, passions, and self-interest of elites and “experts.”

One manifestation of this worldview is the renewed effort in Congress to reduce or eliminate purported tax preferences and “subsidies” enjoyed by fossil-fuel producers. A piece of draft legislation unsubtly named the “End Polluter Welfare Act” contains a large number of provisions, the most important of which are as follows.

Increases the onshore royalty rate to 18.75 percent. The Mineral Leasing Act of 1920 established a royalty of 12.5 percent to be paid to the federal government by energy companies from the sale of oil, gas, or coal extracted from federal public lands. The proposed increase is a classic example of muddled Beltway thinking: It obviously would reduce the amount bid initially for the leases. Accordingly, there would be no increase in the expected present value of the lease bid plus the stream of royalty payments, but there would be a shift of risk from the fossil-fuel producers to federal taxpayers. If this royalty increase were to be imposed on existing leases, it would represent an ex post appropriation of private property, one result of which would be a further reduction in the amounts bid for future leases. Moreover, the increase might reduce production from existing leases, and thus actually could result in a decline in royalty payments. Is myopia a sound basis for policy formulation?

Rescinds and prohibits the use of funds appropriated by the U.S. to the World Bank and by U.S. government lending agencies for fossil-fuel projects. An increase in the supply of energy is one fundamental requirement for economic advancement in the less developed economies. Notwithstanding widespread assertions to the contrary, unconventional energy — wind and solar power are the central examples — simply is not competitive with fossil energy. Because all such funding is limited by definition, a prohibition on fossil-fuel projects means fewer energy resources for the world’s poor — even apart from the inherent unreliability of renewables — and therefore a condemnation to greater poverty than otherwise would be the case. Is the promotion of poverty a sound basis for policy formulation?

Imposes liability on financial institutions for the “environmental damage” caused by their investments in conventional energy. This is analogous 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 reinstate Operation Chokepoint, the illegal effort (eventually abandoned after strong criticism) by the Obama administration to cut off banking services to such disfavored industries as payday lenders, firearms manufacturers, and the fossil-fuel sector. Is a massive distortion of the capital market a sound basis for policy formulation?

Eliminates the percentage-depletion allowance. The major integrated fossil-fuel producers are already denied use of the percentage-depletion allowance, which is little more than a form of depreciation. The allowance is limited as a practical matter to small producers, as it is allowed for only the first 1,000 barrels per day of production and is limited to 65 percent of net income. Coal producers too would be denied use of the percentage-depletion allowance, even as it is allowed for all other extractive industries. This provision is little more than a punitive exercise aimed at an industry unpopular in specific ideological circles. Is such discrimination a sound basis for policy formulation?

Eliminates the partial expensing of intangible drilling and development costs. These are labor and other “intangible” costs (e.g., fuel) incurred when drilling a well. Strictly speaking, because the well is a capital asset, the costs of creating it should be depreciated rather than expensed. But the same is true for research-and-development costs in other industries, which under current law can be expensed fully; but beginning in 2022, such R&D costs must be amortized over a five-year period. The current expensing of intangible drilling costs for fossil corporations is limited to 70 percent, with the rest deducted over five years. The End Polluter Welfare Act would end expensing and require an amortization period of seven years for the fossil sector. Again: Is such discrimination a sound basis for policy formulation?

And on and on it goes, justified as an effort “to close tax loopholes and eliminate federal subsidies” for the fossil-fuel sector. Note that the Biden administration has made it clear that it intends to “remove subsidies for fossil fuel companies” but has not specified precisely which tax provisions it is considering for such elimination, even as it strives to increase “incentives” for unconventional energy production. Thus does the Biden plan classify tax preferences for conventional energy as “subsidies” while describing different preferences for “clean energy” (no, it is not) as “incentives,” a classic exercise of verbiage in the service of propaganda.

Let us compare tax incentives for fossil fuels and renewable energy, as summarized in the following table.

Regardless of what verbiage we choose, any defensible interpretation of the data would show that renewables receive vastly disproportionate taxpayer support. Because renewable energy is very far from “clean” — it entails massive heavy-metal pollution, noise, flicker effects, wildlife destruction, land use both unsightly and insane (in terms of acreage), landfill issues, and much more — the real welfare for “polluters” is not the purported “subsidies” for fossil-fuel producers but instead is the policy subventions for renewables. Perhaps Congress and the Biden administration should address that.

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