Head Shot image of Daniel Sullivan with Helmet by: Daniel Sullivan

blog post
by: Daniel Sullivan

The Truth About Fossil Fuel Subsidies

September 22, 2016

Widespread public attention over the past decade has highlighted the local and global impact that the oil and gas industry has had across the world and on our communities. Around the world, fossil fuels have been a foundational element of worldwide conflict over the past century. Locally, our utilities have used our reliance on them to profit at the expense of our environment, our personal finances and the health and safety of our communities.

Yet, despite these acts of injustice, fossil fuel corporations in the United States continue to be subsidized by more than $700 billion each year, according to the International Monetary Fund. This is equivalent to every American giving oil and gas corporations $2,180 annually in the form of taxes.

We should be outraged. Just last week, we honored workers and reflected on the value of work during Labor Day. According to the United States Department of Labor, the day is a “national tribute to the contributions workers have made to the strength, prosperity, and well-being of our country.” One of the most significant contributions workers make to support the well-being of this nation is through the revenue generated by their taxes. Yet, rather than use this revenue for positive social and economic improvements, much of it is being used to fund an industry responsible for catastrophic local and global impacts.

U.S. taxpayers are subsidizing the world's largest fossil fuel companies whose relentless desire for profit continues to incite global conflict and destruction in our local communities. This is not the American way.

Why Have Fossil Fuel Subsidies Continued?

But how has this been allowed to happen? How can oil and gas corporations continue to benefit from subsidies for fossil fuels despite their impact locally and globally?

There are a number of reasons why this is the case.

Firstly, there is not enough information or awareness on the situation. Even the term "subsidies" is a complex and often misunderstood concept. We are led to believe that fossil fuel subsidies have nothing to do with us when in fact, they have everything to do with us.

Despite the initial reasoning for subsidizing fossil fuels, the rationale for supporting them no longer makes sense and hasn’t for a long time, resulting in trillions of taxpayer dollars going to the most profitable industry in the world.

The fossil fuel industry has long provided billions of dollars of contributions to leaders at both the state and national level using their financial power to exert influence on energy policy.

Ultimately, the trillions of dollars that are spent on fossil fuel subsidies are a consequence of our reliance on the corporations and utilities that deliver our energy. Until we utilize alternative forms of energy and declare independence from these entities, the billions of dollars in taxes we pay each year will continue to flow to corporations and wealthy executives and not to the sectors and people of our society that need them the most.

What is a Fossil Fuel Subsidy?

A fossil fuel subsidy is any government action that ultimately increases the revenue received by fossil fuel corporations. There are a number of ways that fossil fuel corporations are supported, these actions can include:

• Giving fossil fuel corporations direct funding or tax breaks.

• Providing lower interest loans, guaranteed rates of return and price controls.

• Not holding corporations accountable for the billions of dollars in health costs that are a direct consequence of fossil fuel energy generation. This bill is instead picked up by taxpayers.

Subsidizing fossil fuel corporations billions of dollars each year means that productive public spending for our schools, hospitals and communities is neglected. The public services we need each and every day are not receiving adequate investment to support our nation because of the continued flow of public money to the oil and gas industry.

Why Do We Have Fossil Fuel Subsidies?

The justification for subsidizing fossil fuels is based on arguments that no longer have any foundation. Fossil fuel corporations threaten that removing such supports will result in increased economic costs, increased electricity prices and will affect those in underserved communities the most. However, in reality, fossil fuel subsidies are a mechanism used by corporations in the industry to sustain their excessive profits and the billions of dollars they receive are ultimately a consequence of our dependence and addiction to fossil fuels.

These misnomers are explained below.

To Minimize the Economic "Risks" of Oil and Gas

Fossil fuel subsidies were initially designed to support investment in what was once a high-risk economic activity more than 60 years ago. Drilling for fossil fuels did not guarantee the discovery of oil and gas reserves, while breaking into the energy industry presented many challenges. This is why the government intervened and brought in the Intangible Drilling Costs subsidy. However, since then significant technology advancements and increasing prices for fossil fuels have eliminated the risk involved for oil and gas corporations and these subsidies have instead become a bonus for some of the world's most profitable companies. The very nature of subsidies are to support emerging technology getting off the ground, but we have known how to generate electricity from oil, coal and gas for more than one hundred years, yet still continue to subsidize this industry. The emerging renewable energy industry receives just a fraction of the subsidies that fossil fuel industries obtain and this figure will continue to drop as solar, wind and wave technology continues to become even more cost effective and cost efficient.

To Keep Gas and Electricity Prices "Low"

Fossil fuel corporations argue that it is necessary they continue to receive subsidies so that they can keep prices at the pump and our electricity bills low. Yet this argument is flawed. Each year, gas and electricity prices continue to increase and this only tells half the story. If we factor in that in addition to the continuing increase in gas and electricity costs, we are paying on average over $2,000 in our taxes to fossil fuel industries, their argument of keeping prices "low" is entirely unsupported. Not only are consumers paying for electricity in their utility bills, they are also paying for electricity in their taxes.

To "Support" Low-Income Communities

The fossil fuel industry claims that fossil fuel subsidies support low-income households who need support. However, research has shown that this is a highly inefficient way to support families in underserved communities, as the majority of benefits are gained by wealthy households. The IMF has estimated that more than 40 percent of fuel price subsidies accrue to the richest 20 percent of households, while just seven percent of the benefits goes to the poorest 20 percent.

Political Donations of Fossil Fuel Industries

Most of the men and women in Congress who vote each year to continue subsidies have taken campaign donations from big energy companies. Between 2010 and 2014, the oil, coal, gas, utility and natural resource extraction industries spent $1.8 billion on lobbying, much of it in defense of maintaining subsidies. An investigation of three specific projects, run by Shell, ExxonMobil and Marathon Petroleum, revealed that subsidies were all granted by politicians who received significant campaign contributions from the fossil fuel industry.

• A proposed Shell petrochemical refinery in Pennsylvania was in line for $1.6 billion in state subsidy, according to a deal struck in 2012 when the company made an annual profit of $26.8 billion. In addition, Shell has spent $1.2 million on lobbying in the state since 2011.

• ExxonMobil’s upgrades to its Baton Rouge refinery in Louisiana are benefitting from $119 million of state subsidy, with the support starting in 2011 when the company made a $41 billion profit. ExxonMobil had spent over $1 million spread across 231 contributions to Louisiana elected officials.

• A subsidy scheme worth $78 million of public money to Marathon Petroleum in Ohio began in 2011 when the company made over $2.4 billion in profit.

The fossil fuel industry, the most profitable industry on Earth, should be made to pay its way. It is not fair or equitable that Shell and ExxonMobil benefit from excessive subsidies and tax breaks that are not afforded to other businesses across the country that work hard to benefit their local communities and economy.

The above factors highlight how fossil fuel subsidies have persisted over the past century and continue to do so at the expense of taxpayers and our vital public services. The reasoning behind fossil fuel subsidies may once have made sense, but it is now obvious that they do not keep gas and electricity prices low, do not serve low-income communities and ultimately are in return for billions of dollars of financial contributions.

How Much are Oil and Gas Corporations Subsidized?

Globally, oil and gas corporations are given $1 trillion each year in direct subsidies. This does not even account for the health, environmental and global conflict costs that these corporations do not pay for as a result of their actions. Recent research carried out by the International Monetary Fund highlighted that these corporations were benefitting from global subsidies of $5.3 trillion each year. This figure captured the environmental and health costs of fossil fuel energy, which is more than the total amount spent by governments worldwide on health. These figures would suggest that more value is placed on securing the profitability of fossil fuel corporations than on the health and welfare of our communities.

In the U.S. in 2014, taxpayers paid out almost $40 billion dollars in subsidies to the fossil fuel industry. When costs borne by U.S. communities related to the climate, local environment and health impacts of fossil fuels are factored in, corporations benefited from over $700 billion worth of subsidies.

Providing Fossil Fuel Industry Military Subsidies

Yet these costs do not factor in the additional military subsidies that are received by corporations for securing fossil fuel supplies. These subsidies are focused on protecting shipping lanes in the Middle East and defending oil pipelines. Princeton University research outlined that in the U.S., this costs over $500 billion annually. During the past three decades, it was found that more than $7.3 trillion dollars of U.S. finance were spent on security costs for Middle East oil. This not only represents a significant cost, but also highlights the American lives that are put at risk defending fossil fuels in the Middle East.

What is the Impact of Fossil Fuel Subsidies?

Even if direct fossil fuel subsidies were eliminated, oil and gas companies would still continue to have the "right" to pour their waste into the atmosphere for free. The pollution and health implications suffered in our communities as a direct consequence of the irresponsible activities of the oil and gas industry are not adequately factored in and as a result, obscures the real costs of fossil fuels.

• The IMF reported that fossil fuel subsidies are not only damaging the environment but causing more premature deaths through local air pollution and increasing greenhouse gas concentrations.

• The International Energy Agency outlined that energy production and use are by far the largest man-made sources of air pollutants with around 6.5 million premature deaths each year attributed to air pollution globally.

• The Harvard School of Public Health outlined that in the U.S. coal causes over $500 billion per year in health impacts, this highlights how fossil fuels are more than just an economic and environmental burden on our country. 

This is not to say that subsidizing is a bad thing, it is often necessary to subsidize elements that drive our society, economy and environment such as education, health and emerging businesses. Yet, it is not efficient or reasonable to support "dinosaur industries" that have been in operation for longer than a century and are intent on destroying our communities with the sole objective of generating profits for their shareholders and executives. This fact is not lost on our global leaders. In 2009, the Group of 20 major economies proposed that they would end inefficient fossil fuel subsidies. However, since then, fossil fuel subsidies have continued to flow to oil and gas corporations.

Preventing Fair Competition in the Energy Industry

Fossil fuel subsidies are obscuring the real costs of fossil fuels and consequently slowing down the progress on generating cleaner and more sustainable energy systems. The International Energy Agency chief economist Faith Birol spelled out the absurdity of fossil fuel subsidies, saying “the huge subsidies fossil fuels enjoy worldwide gives incentives to their consumption, which means that I’m paying you to pollute the world and use energy inefficiently.”

This is not just impacting our climate and environment. The solar industry is employing more workers than the coal industry and is creating jobs 12 times faster than the rest of the economy. Job creation will continue and grow should solar power and other emerging technologies are supported. Yet, in an analysis of Federal Expenditures for Energy Development, it was found that during the past 60 years, just 10 percent of all energy incentives were used to support renewables, with the remaining 90 percent used to support the fossil fuel industry. This highlights the inequality that renewable energy technology faces when trying to compete with the fossil fuel industry.

Using Public Money to Subsidize Profitable Corporations and Wealthy Executives

In 2014, a profit of more than $257 billion was made by U.S. and Canadian public companies operating in the fossil fuel industry. This figure does not include private fossil fuel companies that are not required to disclose their profits, such as the Koch Industries, who are a major refiner and trader of fossil fuels whose estimated annual revenues exceed $115 billion. Yet despite this massive profit, fossil fuel industries continue to seek subsidies from taxpayers and governments in order to maintain their lucrative position. Industries and companies that are in such a profitable position continue to generate billions of dollars of profit quite simply at the expense of the communities, regions and nations in which they operate. Fossil fuel subsidies essentially represent free cash for an industry already making historic profits.

Customers are Subsidizing Utilities

In addition to the subsidies outlined, utilities profit from a guaranteed rate of return on their investments due to legislation developed following the Binghamton Bridge Supreme Court case of 1865. In that landmark case, the court stated, “if you will embark, with your time, money, and skill, in an enterprise which will accommodate the public necessities, we will grant to you, for a limited time period or in perpetuity, privileges that will justify the expenditure of your money, and the employment of your time and skill.” Despite the fact that the energy system has revolutionized and become a competitive marketplace, utilities continue to receive these "privileges" more than 150 years later. Rather than paying for a product delivered efficiently and safely, customers are fundamentally subsidizing utilities continued profitability. 

Under a guaranteed rate of return, utilities generate their revenue based on the amount that is spent on project costs and not based on the efficiency and effectiveness of these projects. As a result, utilities are not motivated to operate efficiently with the best interests of their customers in mind. Instead, utilities benefit by investing in unnecessary infrastructure. In fact, having a guaranteed rate of return is discouraging utilities to keep expenses in check as these costs are passed through to the ratepayer with limited consequences for the utility should the project fail. Providing subsidies, in the form of a guaranteed rate of return, to a utility such as SDG&E that has more than 3.3 million customers who have no choice, is the epitome of poor public policy.

No other business or industry is guaranteed a rate of return comparable to the utilities. Other businesses and industries across the country are required to operate efficiently, honestly and with the best interest of their customers in mind. If they do not, they will fail and simply go out of business. However this does not hold true for utilities. Even more concerning is the health and safety implications for our communities and future generations as a result of tactless fossil fuel infrastructure.

The Emergence of a Revolution

Yet despite the explicit profits that are generated in the fossil fuel industry, a number of factors are collectively coming together which will ultimately spell the end of this industry's viability.  These factors are driven by societal, economic, political and technological revolution, such as:

• A growing awareness of how our dependence on fossil fuels is fueling violent conflict all over the world is inspiring communities to seek new ways to source energy.

• The realization of how utilities are actively destroying our local environment, damaging our economy and most distressingly putting the people of our communities at risk.

• Recognition that billions of dollars of hardworking American taxpayer money are squandered each year propping up the fossil fuel industry and their executives’ salaries.

• Relentless and inevitable increasing electricity prices are driving households across the nation to seek alternative sources of electricity and gain energy independence.

• Politically, national and international leaders are supporting the transition to a sustainable energy future by legislating against fossil fuels in response to the threat of climate change.

• The declining costs of emerging technology such as solar, wind and wave energy to generate sustainable and affordable energy for all communities.

The Solution

Continuing to subsidize fossil fuels is shortsighted and damaging our economy, society and environment. Undoubtedly, subsidy reform is required from our government and elected officials, but this is missing the point. We have been subject to the actions of fossil fuel corporations for the past century, be it their role in causing global conflict or destroying local communities. In addition, these corporations continue to benefit from excessive profits as a result of ever-increasing rates and a guaranteed return on investments whether a project fails or succeeds. Reaping trillions of dollars in taxpayer money is just one other way that these corporations exert their control over our communities. The solution lies in breaking free from the shackles of fossil fuels and this begins by declaring energy independence. As households, communities and entire regions generate their own energy, the political power and influence on energy policy of these corporations and utilities will diminish.

Research by The Brookings Institution highlighted that the removal of fossil fuel subsidies would not materially increase electricity prices, reduce employment or weaken U.S. energy security. In fact, removing fossil fuel subsidies would result in a number of important benefits. The International Energy Agency outlined that eliminating fossil fuel subsidies globally could raise government revenue by $2.9 trillion, cut global CO2 emissions by more than 20 percent and cut premature air pollution deaths by more than half. Subsidizing multi-billion dollar companies such as Shell and Exxon is even more worrying in this climate of budget cuts and governments deficits. The billions of dollars that support fossil fuel subsidies would be better spent on ensuring a sustainable future by addressing social inequalities, education, health and job creation.

However, as long as fossil fuel corporations continue to dictate our energy policy - and consequently our foreign policy – it will be the hardworking American taxpayer that is forced to subsidize a profitable oil and gas industry. Americans should not have to subsidize something we want less of. The transition to a new and better energy system is inevitable and is happening right now.

Now is the time that taxpayer’s money is put to better use. Propping up an industry is not the American way.

 

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