Finance

A new study by the International Monetary Fund puts the total cost of fossil fuel subsidies at approximately $10 million a minute globally, when health costs and environmental degradation are included, never mind the effects of a destabilized climate in future centuries.

The most perverse of these subsidies are aimed at finding new reserves of oil, gas and coal, even though it is generally understood that these must be left in the ground if we are to avoid catastrophic irreversible climate change.

When drilling for oil was a start-up industry in the 1890s, it cost today’s equivalent of $500 a barrel to get it out of the ground, according to UC San Diego’s James Hamilton in his study Oil Prices, Exhaustible Resources, and Economic Growth.

The first federal tax break for the oil and gas industry came within its very first years. The Intangible Drilling Costs (IDC) still allows the industry to write off most drilling costs, like the tertiary injectants deduction, in full, immediately, rather than at normal business depreciation rates.

Enacted in 1926, the Percentage Depletion Tax Credit actually increases when prices go up, as it allows companies to deduct a flat percentage of income received from oil or gas wells, frequently resulting in tax deductions in excess of investment.

The Independent Petroleum Association of America describes the tax credit this way: “This deduction is a standard part of the American tax code that supports the development of U.S. oil and natural gas that would otherwise be uneconomic to produce.”

When coal was a start-up industry (in the U.S.) in the late 1700s, it was given tax-free status, smelting was given incentives, and competing old world coal imports were taxed at 10 percent. Four centuries later, coal is still receiving $5 billion in incentives a year. The result is coal-fired electricity at about US $0.04 per kilowatt-hour (when burned in power plants that are already built, the costs of which have already been passed along to ratepayers).

“There are dozens and dozens of tax credits for conventional energy,” said SolarReserve CEO Kevin Smith, based on the knowledge he gained in 30 years of building natural gas plants.  “For example, if the Keystone pipeline goes ahead; the refineries who refine that type of alternative fuel get a 50 percent ITC. There are depreciation allowances for wells as they start to degrade, there are just a long list of tax advantages. And all of them are a permanent part of the tax codes.”

These and other oil and gas subsidies total about $7 billion a year in the U.S., according to Taxpayers for Common Sense Understanding Oil and Gas Tax Subsidies.

For centuries, the U.S. Congress has made these sorts of federal investments in each new form of fossil energy.

Permitting, Leasing Show Inequities, Too

State-level policies increase expenses for renewable energy project developers by making permitting onerous for new projects. In California for example, permitting has historically been almost nonexistent for fossil fuels, but has set a much higher bar for renewable energy.

Permitting solar farms in California can be a three-year multi-million-dollar process. Fossil fuel companies can simply declare on a one page form their intentions to drill next Friday. Further, land leasing costs are higher for solar and wind than for fossil fuels. Land leases for oil and gas were still at 1920s prices in 2009, when the BLM was setting market rates for the renewable industry.

The coal industry pays land rents for natural resource extraction on land that has been undervalued since the 1800s. In the last 30 years, the treasury has lost nearly $30 billion in revenue by undervaluing public lands in Wyoming and Montana where Powder River coal is mined, according to Tom Sanzillo, Finance Director at the Institute for Energy Economics and Financial Analysis (IEEFA).

Make Renewable Subsidies Permanent

It is almost impossible to reverse permanent subsidies in the tax code. It has never happened in the U.S., so some advocates believe that a more practical solution would be: if you can’t beat them, join them.

The coal industry’s PTC for producing refined coal is $6.71 a ton — in 2015. The wind industry’s $0.023 per kWh PTC keeps flickering out every few years. Renewables have been stymied by stop/start subsidies that almost seem designed to scare off investors, because none are permanently in the tax code the way fossil fuel subsidies are.

Uncertainty alone makes subsidies less effective. If the ITC and PTC were permanent, renewable investment would be more predictable, so supplying equipment for projects and capital cost would be less, bringing generation costs down. While some investors are able to stomach the risk of buying into renewables projects without knowing whether the tax credits will still be there when their projects reach fruition, most cannot.

Because subsidies for fossil fuels are permanent, the effect is much greater, because permanence provides a stable and predictable investment environment not given to renewables.

One way to create a level playing field with fossil fuels would be make the subsidies for wind and solar just as permanent as those for fossil fuels. Either that, or remove all subsidies for all forms of fuel, something very unlikely to happen.