Estimating U.S. Government Subsidies to Energy Sources 2002-2008

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The study U.S. Government Subsidies for Energy Sources 2002-2008 was released in September 2009 by the Environmental Law Institute. The report was authored by Adenike Adeyeye, James Barrett, Jordan Diamond, Lisa Goldman, John Pendergrass, and Daniel Schramm, and funded by the Energy Foundation.[1]

Major Conclusions

The study included the following major conclusions:

  • The vast majority of federal subsidies for fossil fuels and renewable energy supported energy sources that emit high levels of greenhouse gases when used as fuel.
  • The federal government provided substantially larger subsidies to fossil fuels than to renewables. Subsidies to fossil fuels—a mature, developed industry that has enjoyed government support for many years—totaled approximately $72 billion over the study period, representing a direct cost to taxpayers.
  • Subsidies for renewable fuels, a relatively young and developing industry, totaled $29 billion over the same period.
  • Subsidies to fossil fuels generally increased over the study period (though they decreased in 2008), while funding for renewables increased but saw a precipitous drop in 2006-07 (though they increased in 2008).
  • Most of the largest subsidies to fossil fuels were written into the U.S. Tax Code as permanent provisions. By comparison, many subsidies for renewables are time-limited initiatives implemented through energy bills, with expiration dates that limit their usefulness to the renewables industry.
  • The vast majority of subsidy dollars to fossil fuels can be attributed to just a handful of tax breaks, such as the Foreign Tax Credit ($15.3 billion) and the Credit for Production of Nonconventional Fuels ($14.1 billion). The largest of these, the Foreign Tax Credit, applies to the overseas production of oil through an obscure provision of the Tax Code, which allows energy companies to claim a tax credit for payments that would normally receive less-beneficial tax treatment.
  • Almost half of the subsidies for renewables are attributable to corn-based ethanol, the use of which, while decreasing American reliance on foreign oil, raises considerable questions about effects on climate.

Subsidies for Coal

The study singled out the following major subsidies benefiting the coal industry:

  • Credit for Production of Nonconventional Fuels (annual subsidy: $14 billion)- IRC Section 45K. This provision provides a tax credit for the production of certain fuels. Qualifying fuels include: oil from shale, tar sands; gas from geopressurized brine, Devonian shale, coal seams, tight formations, biomass, and coal-based synthetic fuels. This credit has historically primarily benefited coal producers.
  • Characterizing Coal Royalty Payments as Capital Gains (annual subsidy: $986 million) - IRC Section 631(c). Income from the sale of coal under royalty contract may be treated as a capital gain rather than ordinary income for qualifying individuals.
  • Exclusion of Benefit Payments to Disabled Miners (annual subsidy: $438 million) - 30 U.S.C. 922(c). Disability payments out of the Black Lung Disability Trust Fund are not treated as income to the recipients.
  • Exclusion of Alternative Fuels from Fuel Excise Tax (annual subsiy: $343 million) - IRC Section 6426(d). This section applies to liquified petroleum gas (LPG), P-series fuels (defined at 42 U.S.C. 13211(2)), compressed natural gas (CNG), liquefied natural gas (LNG), liquefied hydrogen,3 liquid coal, and liquid hydrocarbon from biomass.
  • Other-Fuel Exploration & Development Expensing (annual subsidy: $342 million) - IRC Section 617. Identical provisions as applied to oil and gas (above). Including, for example, the costs of surface stripping, and construction of shafts and tunnels.
  • Other-Fuel Excess of Percentage over Cost Depletion (annual subsidy: $323 million)- IRC Section 613. Taxpayers may deduct 10 percent of gross income from coal production.
  • Credit for Clean Coal Investment ($186 million)- IRC Sections 48A and 48B. Available for 20 percent of the basis of integrated gasification combined cycle property and 15 percent of the basis for other advanced coal-based generation technologies.
  • Special Rules for Mining Reclamation Reserves ($159) - IRC Section 468. This deduction is available for early payments into reserve trusts, with eligibility determined by the Surface Mining Control and Reclamation Act and the Solid Waste Management Act. The amounts attributable to mines rather than solid-waste facilities are conservatively assumed to be one-half of the total.

Full list of fossil fuel subisides

According to the report, fossil fuel subsidies fall roughly into two categories: (1) foregone revenues, such as a) provisions in the U.S. Tax Code that reduce the tax liabilities of particular entities, and b) lost government revenue from offshore leasing through the under-collection of royalty payments; as well as (2) direct spending, in the form of expenditures on research, development, and other programs.

Foregone revenues

Foregone revenues are taxes that could have been paid to the U.S. government, if not for provisions within the U.S. Tax Code allowing for special exemptions.

All fossil fuel tax breaks

The following represents a list of tax breaks to fossil fuel companies, the amount it cost U.S. taxpayers from 2002 – 2008, and its provision within the U.S. tax code:

  • Foreign Tax Credit ($15.3 billion) - IRC Section 901. Special rules under this provision allow royalty payments to overseas governments, such as oil-rich nations, to be considered as part of corporate income taxes, and thus deducted from taxes owed within the U.S.
  • Credit for Production of Nonconventional Fuels ($14 billion)- IRC Section 45K. This provision provides a tax credit for the production of certain fuels, such as oil from shale, tar sands; gas from geopressurized brine, Devonian shale, coal seams, tight formations, biomass, and coal-based synthetic fuels.
  • Oil and Gas Exploration & Development Expensing ($7.1 billion)- IRC Section 617. Intangible Drilling Costs, such as wages, costs of machinery, or unsalvageable materials, may be deducted as business expenses rather than amortized.
  • Oil and Gas Excess Percentage over Cost Depletion ($5.4 billion)- IRC Section 613. Allows independent producers and royalty owners to deduct 15 percent of gross income earned from qualifying oil, gas, and oil shale deposits.
  • Credit for Enhanced Oil Recovery Costs ($1.6 billion) - IRC Section 43. This tax credit is available for hydrocarbon-based tertiary injectant methods defined by IRC Section 193.
  • Characterizing Coal Royalty Payments as Capital Gains ($986 million) - IRC Section 631(c). Income from the sale of coal under royalty contract may be treated as a capital gain rather than ordinary income for qualifying individuals.
  • Exclusion of Benefit Payments to Disabled Miners ($438 million) - 30 U.S.C. 922(c). Disability payments out of the Black Lung Disability Trust Fund are not treated as income to the recipients.
  • Exclusion of Alternative Fuels from Fuel Excise Tax ($343 million) - IRC Section 6426(d). This section applies to liquified petroleum gas (LPG), P-series fuels (defined at 42 U.S.C. 13211(2)), compressed natural gas (CNG), liquefied natural gas (LNG), liquefied hydrogen,3 liquid coal, and liquid hydrocarbon from biomass.
  • Other-Fuel Exploration & Development Expensing ($342 million) - IRC Section 617. Identical provisions as applied to oil and gas (above). Including, for example, the costs of surface stripping, and construction of shafts and tunnels.
  • Other-Fuel Excess of Percentage over Cost Depletion ($323 million)- IRC Section 613. Taxpayers may deduct 10 percent of gross income from coal production.
  • Deduction for Clean Fuel Vehicles and Refueling Property-Fossil Fuels ($209 million) - IRC Section 179A. This deduction is equal to the cost of property with certain limitations. Qualifying fuels: natural gas, LNG, LPG, hydrogen, electric, E85, methanol, and other alcohol fuels. Amounts were prorated between fossil fuels and renewables.
  • Exception from Passive Loss Limitations for Oil and Gas ($190 million) - IRC Section 469(c)(3). Owners of working interests in oil and gas properties may aggregate negative taxable income from qualifying sources with all other income sources.
  • Credit for Clean Coal Investment ($186 million)- IRC Sections 48A and 48B. Available for 20 percent of the basis of integrated gasification combined cycle property and 15 percent of the basis for other advanced coal-based generation technologies.
  • Expensing Liquid Fuel Refineries ($164 million) - IRC Section 179C. This deduction is available to refiners of crude oil and other fuels defined at IRC Section 45K(c) (above).
  • Special Rules for Mining Reclamation Reserves ($159 million) - IRC Section 468. This deduction is available for early payments into reserve trusts, with eligibility determined by the Surface Mining Control and Reclamation Act and the Solid Waste Management Act. The amounts attributable to mines rather than solid-waste facilities are conservatively assumed to be one-half of the total.
  • Natural Gas Distribution Lines Treated as Fifteen-Year Modified Accelerated Cost Recovery System (MACRS) Property ($138 million) - IRC Section 168(e)(3)(E)(viii). The normally applicable depreciation period is shortened for qualifying natural gas distribution lines.
  • Sulfur Regulatory Compliance Incentives for Small Diesel Refiners (Combined) ($109 million)- IRC Sections 179B and 45H. This tax credit is available for fuel that complies with EPA Highway Diesel Fuel Sulfur Control Requirements. Small refiners may claim a current-year deduction in lieu of depreciation for up to 75 percent of associated capital costs.
  • 84-month Amortization Period for Coal Pollution Control ($102 million) - IRC Section 169(d)(5). Extends the amortization period used in calculating the deduction from the generally applicable 60-month period available for other types of pollution control facilities.
  • Expensing Advanced Mine Safety Equipment ($32 million) - IRC Section 179E. The costs of qualifying mine safety equipment may be expensed rather than recovered through depreciation.
  • Credit for Clean Fuel Vehicles and Refueling Property-Fossil Fuels ($14 million)- IRC Section 30C. This tax credit is available for up to 30 percent of the cost of the property. Qualifying fuels include: E85, natural gas, LNG, CNG, LPG, hydrogen, and 20 percent biodiesel. Amounts were prorated between fossil fuels and biofuels (above).
  • Natural Gas Gathering Lines Treated as Seven-year Property with Alternative Minimum Tax (AMT) Relief ($6 million) - IRC Section 168(e)(3)(C)(iv). Depreciation period shortened for qualifying natural gas gathering lines.
  • Natural Gas Arbitrage Exemption ($6 million) - IRC Section 148(b)(4). This provision excludes prepayments under qualified natural gas supply contracts from the definition of “investment-type property,” creating an exception to the general rule that tax-exempt bonds do not include bond issues used to obtain higher-yielding investments.
  • Amortization of Oil and Gas Geological and Geophysical Costs (-$145 million) - IRC Section 167(h). This provision allows a shortened depreciation period of two years for non-integrated oil companies and seven years for integrated companies.

Reduced Government Take from Federal Oil and Gas Leasing ($7 billion)

The federal government owns public land that it leases for extraction. “The laws governing federal leasing, such as the Federal Land Management Policy Act and the Outer Continental Shelf Lands Act, generally require the agencies that manage these lands to secure a “fair market value” return for the taxpayers who ultimately own them. Revenues come in the form of high bids from lease auctions, rents, bonuses, royalties, taxes, and other associated fees. These revenue streams are referred to collectively as the “government take” from the leases. Notwithstanding the general policy of obtaining fair market value, Congress has enacted a number of programs to promote production on federal leases, such as the Deep Water Royalty Act of 1995, that have the effect of reducing government revenues on those leases.”

The ELI estimated that from 2002 to 2008 the U.S. government secured about $7 billion below the “fair market value” that could have been collected from fossil fuels companies for extraction. ELI’s method for the calculation was similar to a 2007 Government Accountability Office (GAO) report. The GAO report “Oil and Gas Royalties: A Comparison of the Share of Revenue Received from Oil and Gas Production by the Federal Government and other Resource Owners” (GAO-07-676R, May 1, 2007) summarizes the findings of eight separate studies, conducted by the oil and gas industry, private consulting firms, and the government itself from 1997 to 2006, which each ranked the federal offshore leasing system near or at the bottom of every list for government take. The GAO has concluded that “the U.S. federal government receives one of the lowest government takes in the world,” and that the Gulf of Mexico, where most U.S. offshore drilling is located, is a particularly “favorable place to invest.” A full description of ELI’s method is on page 13 of the report.

Grants and Other Direct Payments ($18 billion)

This applies to direct federal government expenditures toward fossil fuel energy sources. Such grants include:

  • The Low Income Home Energy Assistance Program ($6.3 billion) - The main structure of the program is to provide low-income households with the means to make their utility payments, the vast majority of which is energy generated by fossil fuels. The U.S. Department of Health and Human Services has tabulated the percentage of households using fossil versus non-fossil heating fuels in 2001, and ELI used the percentage as a proxy for fossil versus non-fossil expenditures for 2002-2008.
  • Strategic Petroleum Reserve ($6.1 billion) - created in 1975 after the oil crises to protect the American economy from severe oil supply disruptions, however the SPR has increasingly functioned primarily as an “oil bank” for individual petroleum firms during minor supply disruptions.
  • Black Lung Disability Trust Fund ($1 billion) - pays health benefits to coal miners afflicted with pneumoconiosis, a long-term degenerative disease from constant inhalation of coal dust, also known as “black lung.” Created in 1978, it is funded through an excise tax on coal to support a trust fund covering health costs of affected workers, however the tax is not sufficient to cover all costs, and the BLDTF was given “indefinite authority to borrow” from the U.S. General Fund. By the end of FY 2008, the BLDTF had accrued nearly $13 billion in debt. In 2008, Congress partially “bailed out” the BLDTF, which ELI tabulated as a subsidy to coal.
  • Highway Trust Fund ($500 million) - supports highway, road, and other transportation projects throughout the country.
  • Northeast Home Heating Oil Reserve ($50 million) - intended to compensate for supply interruptions to home heating oil supplies, without distorting heating oil prices enough to alter consumer behavior.
  • Naval Petroleum and Oil Shale Reserves ($28 million) - once functioned as a Navy counterpart to the Strategic Petroleum Reserve, but only one reserve remains in operation. $28 million represents the difference between the costs of operating the reserve and the revenue generated by it, using figures obtained from the DOE congressional budget.

Contact Information

Articles and Resources

Sources

  1. Adenike Adeyeye, James Barrett, Jordan Diamond, Lisa Goldman, John Pendergrass, and Daniel Schramm, U.S. Government Subsidies to Energy Sources 2002-2008, Environmental Law Foundation, September 2009

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