End Fossil Fuel Subsidies, Fund Clean Energy Innovation

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2012 marks the second year in a row that President Obama has used the state of the union address to call for cuts to fossil fuel subsidies. Specifically, the president has proposed cutting more than $40 billion in tax breaks for oil, gas, and coal producers over the next ten years – an amount roughly equivalent to the profits of the world’s six largest publicly traded oil companies in the first quarter of 2011 alone. As such companies clearly do not need the subsidies to survive, the money in question could be put to far better use in furthering the nation’s burgeoning clean energy innovation agenda.

Even members of the industry acknowledge the senselessness of continued fossil fuels subsidies. “I will tell you with $55 oil we don’t need incentives to the oil and gas companies to explore. There are plenty of incentives,” former president and oil businessman George W. Bush observed in 2005. “What we need is to put a strategy in place that will help this country over time become less dependent.” The former CEO of Shell Oil, John Hofmeister, echoed that sentiment last year, opining that large oil companies don’t need subsidies when the price of oil is at around $70 a barrel or higher: “The fear of low oil prices drives some companies to say that subsidies should be sustained. And my point of view is that with high oil prices such subsidies are not necessary.” To the points of misters Bush and Hofmeister: the Energy Information Administration’s data indicates that the price of a barrel of Cushing crude oil has been almost consistently over $70 since mid-2006, hitting record highs above $147 in July 2008. The price of such a barrel was $105.72 as of this writing, according to Bloomberg Energy.

To be sure, domestic oil, gas, and coal producers are very profitable and well-established – negating the need for preferential government treatment. In any case, the $4 billion a year in cuts that the president has suggested wouldn’t even come close to ending fossil fuel subsidies in their entirety. An Environmental Law Institute report identified $72.5 billion in federal subsidies for fossil fuels between the years 2002 and 2008, or a little more than $10 billion annually. Furthermore, beyond spending money on an already mature industry, the subsidies targeted by the Obama administration are particularly wasteful. For example, the corporate tax reform framework released by the Treasury Department on February 22, 2012 singles-out “percentage depletion for oil and natural gas wells” for repeal, a tax break “which allows certain oil producers and royalty owners to recover the cost of oil and gas wells based on a percentage of the income they earn from selling oil and gas from the property rather than on the exhaustion of the property.” As the framework goes on to note, “Percentage depletion allows deductions that can exceed the cost of the property.”

In a time when fiscal austerity is the political norm, it is important for federal programs to be justifiable – which is exactly the case for publicly-funded institutions like ARPA-E, Energy Innovation Hubs, Energy Frontier Research Centers, and the National Labs. By providing the clean energy industry with basic science, research, and development support, they are furthering the chances of breakthrough advances that create entirely new technologies and cost curves that will not require long-term subsidy to be successful. Similar support – not wasteful subsidies – helped develop what are now mature fossil fuel technologies and that is the approach we must take with clean energy moving forward. Reinvesting some of the money saved from the proposed subsidies repeal in existing governmental clean energy innovators can help further shift the government’s traditional role vis-à-vis the energy industry from financial benefactor to partner. That’s an energy agenda worth supporting.

Photo credit: Stefan Falke

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About the author

Clifton Yin is a Clean Energy Policy Analyst at the Information Technology and Innovation Foundation. Prior to joining ITIF, he earned a Master of Public Policy degree with a focus on environmental and regulatory policy from the Georgetown Public Policy Institute. His master’s thesis sought to use statistical analysis to evaluate the effectiveness of California’s Renewable Portfolio Standard on encouraging in-state renewable energy generation. While a graduate student, Clifton served as a policy fellow at Americans for Energy Leadership and interned at the Environmental Defense Fund and the American Enterprise Institute.