Despite a growing consensus that support for the oil and gas industry is unfair, inefficient and globally dangerous, there’s no actual implementation of plans to change it.
WASHINGTON – Global tax breaks, incentives, and various other consumption and production subsidies for the fossil fuel industry are likely topping $2 trillion each year, amounting to 2.5 percent of total gross domestic product for 2012.
After a dip in the immediate aftermath of the global financial recession, these figures have risen in recent years, according to a new report from Worldwatch, a Washington-based think tank. Incentives for renewable energy sources remain tiny by comparison, estimated at just $88 billion for 2011.
This disparity continues despite a growing consensus, both internationally and in the United States, that states support for the oil and gas industry is unfair, inefficient and globally dangerous. Indeed, there remains a stark disconnect between increasingly strident public pronouncements on the multifaceted undesirability of these supports and actual implementation of plans to roll them back.
In the U.S. context, this gap was on display on Tuesday evening. During his State of the Union address, President Barack Obama reiterated calls to do away with tax breaks and loopholes that critics say amount to an annual giveaways to one of the country’s most profitable sectors.
“Let’s continue … with a smarter tax policy that stops giving $4 billion a year to fossil fuel industries that don’t need it, so we can invest more in fuels of the future that do,” the president stated.
Hours later, the conservative Sen. Mike Lee, R-Utah, gave one of two rebuttals by lawmakers aligned with the tea party. In that speech, Lee likewise promoted legislation “to end all federal subsidies for the energy industry … so that business profits are won from customers, not through political connections. After all, if we’re going to reform welfare, we really should start with corporate welfare.”
In the United States, government incentives for the oil and gas industry are primarily in the form of tax breaks, many of which have been around for decades. Companies are allowed, for instance, to deduct a spectrum of drilling costs and payments to foreign governments and are even able to use a lucrative loophole intended to promote domestic manufacturing.
Less tangible are government moves to open federal lands to drilling or to relax certain environmental laws. Then, of course, there is the broad impact of these companies’ products on human and environmental health, as well as the rising costs of climate change. Economists refer to these costs as “externalities.”
“Externalities have so far not entered into the calculation of subsides, although the additional costs associated with increased resource scarcity, the environment, and human health are enormous,” the Worldwatch report, authored by Philipp Tagwerker, a research fellow at the institute, noted.
“Accelerating the phaseout of fossil fuel subsidies would reduce [carbon dioxide] emissions by 360 million tons in 2020, which is 12 percent of the emissions savings that are needed in order to keep the increase in global temperature to 2 degrees Celsius.”
Yet despite what would appear to be broad policy agreement between the administration and the far right in U.S. politics, the recently unveiled bipartisan budget deal failed to address these supports – some expectations otherwise notwithstanding.
“In the U.S., a lot of this is just lip service. The country is really not yet walking the walk,” Alexander Ochs, director of climate and energy at the Worldwatch Institute, told MintPress.
“Both nationally and internationally, we have not made any significant progress toward the goal of reducing subsidies, which was actually declared quite a long while ago. In my view, it’s outrageous that we’re not making any more progress.”
Consumption vs production
There are a host of rationales as to why the energy industry should receive preferential treatment. Lower energy prices touch on nearly all parts of a national economy, after all, and thus can often have a direct impact on both ends of the socioeconomic spectrum, lowering everything from the cost of food to the cost of doing business.
Low prices for both energy production and consumption have thus long been contextualized as important anti-poverty measures. Indeed, the potential impact on the poor is often at the forefront when governments discuss the pros and cons of rolling back energy subsidies.
Yet Worldwatch’s research notes that this is misleading, given that poor households in developing countries typically use only small amounts of the products that receive the largest subsidies, gasoline and liquefied petroleum gas. Worldwatch’s Tagwerker points to a study by the International Monetary Fund that “found that top-income households received on average six times more benefits than the supposed targeted group – the bottom one fifth of households.”
High-income groups, meanwhile, were found to accrue 20 times more benefits for subsidized gasoline and 14 times more for LPG.
Nonetheless, governments that have taken initial steps to weaken various state energy supports, including in Indonesia, Iran and Nigeria, have experienced significant political blowback. Worldwatch puts this down in part to inadequate preparations and in part to the powerful entrenched interests that typically are attached to energy production.
Thus far, much of the international attention to fossil fuel subsidies has focused on these consumption supports, aimed at easing consumer experience – the type of approach most often found in developing countries. On the other hand, developed countries, including the U.S., typically provide far more incentives for oil and gas production. The U.S. in particular offers some of the world’s highest production subsidies.
Some analysts say that weakening incentives around production, rather than around consumption, would be a far more effective approach.
“There is currently a lot of international discussion around consumption subsidies, when in fact there are still massive production subsidies going straight to corporations to incentivize their operations. That really needs to be eliminated first,” David Turnbull, campaigns director at Oil Change International, an advocacy group, told MintPress.
“Developed countries with major production subsidies can take the lead and eliminate those as a first step in the global effort to reform fossil fuel subsidies.”
Turnbull points to the “leaders summit” on climate change, called by U.N. Secretary-General Ban Ki-moon to take place in September, as a key opportunity for government leaders to make specific pledges on how they will start to implement the global pledges to replace fossil fuel subsidies.
‘Huge’ industry advantage
U.S. oil and gas companies push back on the contention that they receive favorable treatment, warning particularly that removal of related tax breaks would negatively impact on the economy.
“[T]he president called for increased taxes on the oil and natural gas industry he needs to close the income gap and create jobs,” Jack Gerard, the head of the American Petroleum Institute, a lobby group, stated following the State of the Union address on Tuesday.
“Punishing energy companies by raising taxes is not sound energy policy and could lead to less energy, less government revenue and fewer jobs. The oil and natural gas industry already contributes $85 million a day to the federal government – a larger contributor of government revenue than any other industry in the United States.”
Earlier in the month, Gerard pointedly stated that “The oil and gas industry gets no subsidies, zero, nothing. We get cost-recovery benefits, much like other industries.”
Yet there is already a hardening consensus, including from hard-nosed economists, that both developing and developed countries need to wind down their energy subsidies and related policies. The most significant initial step took place in 2009, when the Group of 20 industrialized countries agreed to phase out “inefficient fossil fuel subsidies that encourage wasteful consumption.” This stance was reiterated at the group’s most recent summit, last fall in Russia.
That decision was given prominent backing in early 2013. Taking an unusual foray into the policy debate around climate change, the IMF reported that the “post-tax” cost of oil and gas subsidies – wherein a government doesn’t charge enough to take into account the negative ramifications of energy consumption, including environmental impact – was around $1.9 trillion. The Fund called for “subsidy reform and carbon taxation”.
Over the past week, two prominent global leaders have likewise added their voices to these calls. On Jan. 23, Jim Kim, the head of the World Bank, the IMF’s sister institution, urged countries to “Act now. The $1.9 trillion in subsidies can be redirected to support investment in clean growth. This challenges the notion that responding to climate change is not affordable.”
The following day, Angel Gurria, the secretary-general of the Organization for Economic Cooperation and Development, a grouping of the world’s richest countries, put forward a three-point agenda for curbing global climate change.
“Urgent reform is needed in all countries to phase out fossil fuel subsidies that encourage carbon emissions,” Gurria wrote in a blog post. “While the subsidies are often used to fight poverty, their poor targeting makes them an inefficient way of achieving this goal. Fossil fuel already has a huge advantage as the energy resource of choice. It doesn’t need more help.”