The true cost of fossil fuel subsidies
Fossil fuel producers receive $62 billion in "indirect subsidies" per year, a new study finds. But the cost of providing those subsidies is far, far greater.
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Last week, President Joe Biden unveiled The American Jobs Plan: a $2 trillion jobs and infrastructure plan that, if signed into law, would double as one of the largest federal efforts ever to reduce U.S. greenhouse gas emissions.
It’s not marketed as a climate change plan. But that’s what it is. “This is the moment to reimagine and rebuild a new economy,” the White House fact sheet says. Anyone in U.S. politics who talks about a “new economy” is talking about clean energy. “The American Jobs Plan will invest in America in a way we have not invested since we built the interstate highways and won the Space Race.” Anyone in U.S. politics who makes a “Space Race” reference is talking about climate change.
But another (dumb) rule of U.S. politics is that you’re not supposed to talk about climate change when you’re talking about climate change. You have to disguise your effort to prevent widespread societal collapse as an effort to make jobs for Toyota, because we’re in a pandemic and it’s just Not The Right Time. So that’s where we are. It’s a climate plan, but like, totally not a climate plan.
Anyway! One of the key ways the American Jobs Plan tackles climate change is by wiping out taxpayer subsidies for fossil fuel companies. And that’s what I want to focus on today.
Because yesterday, a new paper exploring the annual handouts we provide fossil fuel companies was published in the Proceedings of the National Academy of Sciences. And it stands to become very useful in the upcoming political battle over The America Jobs Plan, which the fossil fuel industry is already gearing up to take down.
$62 billion in implicit subsidies every year for fossil fuels
Monday’s study, authored by Yale University economist Matthew Kotchen, explores “implicit subsidies,” which are different the traditionally thought-of government tax benefits provided directly to corporations. (Those are called “direct subsidies,” and fossil fuel companies get about $20 billion of those per year).
Implicit subsidies are financial benefits fossil fuel companies receive indirectly, because current U.S. policy does not make them pay for most of the externalized costs of their products: namely, “environmental damages, public health effects, and transportation-related costs.”
Those costs are absorbed by society. So instead of paying for the real cost of gasoline at the pump, we pay for it with the deterioration of our health, climate, and environment, and the costs associated with that collective deterioration.
“Fossil fuel companies benefit in a big way because prices currently do not reflect the environmental and social costs associated with the production and consumption of fossil fuels,’’ Kotchen said in a Yale press release. “A change would really affect their bottom lines, and this study estimates how much.”
Kotchen’s study found that the inefficient nature of current U.S. policy provides producers of coal, natural gas, gasoline, and diesel an extra $62 billion per year, on average. Petroleum producers receive the most overall: In 2018, for example, gasoline and diesel brought in a combined $45 billion from implicit subsidies, according to the study.
But implicit subsidies are the most important for the coal industry, which likely would not be able to exist without them. In 2018, for example, Kotchen found that the benefits from the subsidy for coal producers “exceeded net income for the majority of companies.”
Take the two largest U.S. coal companies, Peabody Energy and Arch Coal. In 2018, Kotchen found, they received annual implicit subsidies of $1.56 billion and $1.01 billion, respectively. In 2018, Peabody’s net income was $544 million. Arch Coal’s was $313 million.
These numbers help us understand why the fossil fuel industry is so threatened by The American Jobs Plan. Last week, the American Petroleum Institute released a statement claiming Biden’s proposal to mess with pricing schemes for fossil fuel producers would “undermine the nation’s economic recovery and jeopardize good-paying jobs.”
That statement, too, helps us understand how the fossil fuel industry and its supporters in Congress are going to fight Biden’s plan to eliminate subsidies: By claiming that they don’t actual receive any benefit from taxpayers at all.
“It’s important to note that our industry receives no special tax treatment, and we will continue to advocate for a tax code that supports a level playing field for all economic sectors along with policies that sustain and grow the billions of dollars in government revenue that we help generate,” the API’s statement said.
The overall cost of implicit subsidies: $568 billion every year
Kotchen said his study “helps clarify what the domestic fossil fuel industry has at stake financially when it comes to policies that seek to address climate change, adverse health effects from local pollution, and inefficient transportation.”
That’s true. But it also helps clarify what we have at stake financially when it comes to those same policies. Because even though we’re giving fossil fuel producers a $62 billion annual benefit from implicit subsidies, that’s not even close to how much they cost. According to Kotchen’s study, implicit subsidies cost society an average of $568 billion per year. That means they cost 89 percent more to provide than they do to accept.
So much for a level playing field.
It’s unclear how exactly Biden’s legislation will define fossil fuel subsidies—whether he’ll simply target direct subsidies, or if he will find some way to include indirect subsidies. Obviously, the easiest way to address indirect subsidies is by implementing a carbon tax on fossil fuel producers.
But we’re not there yet. For now, here’s the relevant section from the White House’s fact sheet, if you’d like to take a look:
Eliminate Tax Preferences for Fossil Fuels and Make Sure Polluting Industries Pay for Environmental Clean Up. The current tax code includes billions of dollars in subsidies, loopholes, and special foreign tax credits for the fossil fuel industry. As part of the President’s commitment to put the country on a path to net-zero emissions by 2050, his tax reform proposal will eliminate all these special preferences. The President is also proposing to restore payments from polluters into the Superfund Trust Fund so that polluting industries help fairly cover the cost of cleanups.
I’m sure this isn’t the end of this conversation.
Catch of the Day:
There is no level playing field in this house. Fish receives special treatment.
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In the footnotes of the appendix, $48/ton is listed as the current external/social cost of carbon used in the calculations. I think many analysts would say it should be higher ($100, $200), so maybe that $550 billion is low. But the calcs also add other pollution costs, though not methane leakage. I can't quite figure out how the "elasticity" factors are used, but I'm just a simple engineer.
It's interesting to translate varying external costs/ton CO2 into $/gallon or $/therm or $/kWh to see what a consumer might see. It starts to get steep for natural gas; $100/ton would increase most folks heating gas rates by 60%; accounting for associated methane gets to maybe 90%+ total. Though we survived inflation-adjusted gas prices like that in the past, it might not make the average voter happy, at least until their cold-climate HP is delivered.
I would quibble with the allocation of road costs to the underlying gasoline or diesel in the context of fuel switching or replacement to reduce CO2 emissions. Think about the limit. If all vehicles were magically powered by sustainable electricity, we'd still need to pay for road congestion, road damage (up a bit due to battery weight), premature deaths in collisions, pollution from tire dust, etc. with some other fee(s) or via some of the same old subsidies.
Oh well, good to sip a brew and see what our Ivy League economists get published in the National Academy of Sciences. Best get back to something fun like agri-voltaics in Australia. Lots of sheep enjoying shade.
After experiencing firsthand the infamous Texas Winter Storm in February and listening to the then-chair of ERCOT describe the disaster as 'our renewables let us down' ... I have thoughts. Behind the incredible deceit and fraud of OG toward their clients (oil & gas; is that the right abbreviation?) are businesses run much like those of our ex-president: poorly managed and failures without heavy financial gov't. [citizen] propping up. These companies knew about climate change and its implications decades ago and had all that time -- grifting and being subsidized along the way -- to re-tool their businesses to achieve success under the actual environmental, social, and political conditions we now confront. They chose overwhelmingly not to do so and now are whining about not-fair and job-losses and so on. I have zero sympathy. I suppose it's not too late for them to figure out how to get in on renewable energy and make their participation profitable as well as morally sound; but I'm not very hopeful they'll change course.