Elon Will Not be Happy

The programming runs deep on the left.

To lead global subsidy reforms, the United States will have to strengthen these commitments by actively dismantling its own substantial production subsidies. The Environmental and Energy Study Institute reported that direct subsidies to the fossil fuel industry totaled $20 billion per year, with 80% going toward oil and gas. In addition, from 2019 to 2023, tax subsidies are expected to reduce federal revenue by around $11.5 billion. Considering that production subsidies grew 28% between 2017 and 2019, the United States will be under a lot of scrutiny from other countries wanting to see evidence of reform before making their own commitments.

This is a challenging task for the United States because production subsidies are embedded in the tax code and promote fossil fuels in a variety of ways. For example, producers can deduct a fixed percentage of gross revenue instead of their actual costs as capital expenses, deduct exploration and development costs, amortize geological and geophysical expenditures, and benefit from accelerated depreciation of natural gas infrastructure. Oil and gas companies are also permitted to use the Last In, First Out (LIFO) accounting method to sell their most recent and expensive reserves first, thereby reducing the value of their inventory. Other incentives include foreign tax credits and energy production credits.

The actual list of direct and indirect subsidies is far more expansive and illustrates the high level of support that fossil fuels have received for years. In the past, this was justifiable to some extent. Without any alternatives, scaling up domestic fossil fuel production was part of the United States’ aggressive push for energy security following the OPEC oil embargo in 1973. But having moved past the crisis, that line of reasoning is becoming more difficult to justify; today, continuing production subsidies is not a judicious use of public finances.

Accordingly, since 2012 there have been several efforts in Congress to address tax breaks and benefits for fossil fuel production in the United States. This is necessary because key production subsidies are embedded in legislation, namely the tax code. Representatives have sponsored bills aiming to eliminate a variety of deductions that oil and gas producers could claim, remove production credits, and address other issues such as coal mining in the Powder River Basin and the Black Lung Disability Trust Fund. However, none of the bills made it past Senate, and several of them are still pending with various House or Senate committees for consideration.