Regan Brown
Natural gas is a fossil fuel that is less polluting than coal and other road fuels. However, it still contributes to global warming and climate change. The fossil fuel industry, including natural gas, receives government subsidies and tax breaks that promote cheap energy. These subsidies are inconsistent with the policy goal of reducing fossil fuel use to counter climate change. The Biden administration has targeted fossil fuel producers with nearly $97 billion in tax increases over the next decade. The efficacy of these taxes in reducing greenhouse gas emissions depends on the response of domestic producers.
| Characteristics | Values |
|---|---|
| Fossil fuel tax subsidies | The US government provides tax subsidies to the fossil fuel industry to encourage domestic energy production. |
| Fossil fuel industries | Coal, oil, and natural gas |
| US direct subsidies to the fossil fuel industry | $20 billion per year (20% to coal and 80% to natural gas and crude oil) |
| EU subsidies | 55 billion euros annually |
| Federal funding for fossil fuels | Department of Energy (DOE) through the Office of Advanced Fossil Energy R&D, the Loan Guarantee Program, and the National Energy Technology Lab |
| DOE LPO loans to advanced fossil fuel projects | $8 billion |
| Largest subsidies | Excess of percentage over cost depletion ($3.3 billion), exceptions for publicly traded partnerships ($2.7 billion), pollution control ($2.5 billion), and expensing of exploration and development costs ($2.4 billion) |
| Alternative Fuel Vehicle Refueling Property Credit | Available for qualified AFV fueling property installed in qualified locations from January 1, 2023, to December 31, 2032 |
| Tax credits for inflation | Starting January 1, 2025 |
| Fossil fuel subsidies in 2022 | $7 trillion or 7.1% of GDP globally |
| Fossil fuel CO2 emissions reduction by 2030 | 43% below baseline levels or 34% below 2019 emissions |
| US fossil fuel tax increases over the next decade | $97 billion |
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What You'll Learn
Natural gas is rarely taxed
Natural gas is indeed subject to some taxation in the United States. However, it is often argued that natural gas and other fossil fuels are not taxed heavily enough, considering the environmental impact of their production and consumption.
The US federal government provides various tax subsidies and incentives for the fossil fuel industry, including natural gas. These subsidies are intended to encourage domestic energy production and reduce the cost of fossil fuel production. Conservative estimates put US direct subsidies to the fossil fuel industry at around $20 billion per year, with 80% allocated to natural gas and crude oil. These subsidies include tax breaks for corporations, such as the expensing of exploration and development costs, and smaller incentives for the production and distribution of natural gas. Additionally, the US has a long history of government intervention in energy markets, including providing subsidies for over a century to promote cheap energy sources like fossil fuels.
While natural gas is subject to some taxation, there are also incentives and credits available for its use in certain contexts. For example, the Alternative Fuel Vehicle Refuelling Property Credit is available for qualified alternative fuel vehicles (AFVs) that use natural gas. This credit provides a tax incentive for businesses to install refuelling properties for alternative fuels. Additionally, the US Environmental Protection Agency's (EPA) Clean School Bus Program provides funding for the replacement of existing school buses with clean, alternative fuel school buses, which can include those that use natural gas.
In terms of direct taxes on natural gas, the US federal excise tax on gasoline and diesel fuel is well-known, and these taxes have been in place since the early 1900s. However, natural gas itself is not subject to the same excise tax structure as gasoline and diesel. Instead, natural gas taxes may be included in the broader category of energy taxes or environmental taxes, which can vary by state.
Overall, while natural gas is subject to some taxation, the specific taxes and incentives related to its production, distribution, and consumption are complex and vary across different levels of government. The discussion around taxing natural gas and other fossil fuels is ongoing, with some arguing for increased taxes to fund infrastructure and reduce consumption, while others highlight the potential impact on energy prices and the economy.
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Fossil fuel tax subsidies
In the United States, the federal government provides direct and indirect subsidies to the fossil fuel industry, including tax benefits and direct funding for research and development. Conservative estimates suggest that US subsidies to the fossil fuel industry amount to approximately $20 billion per year, with 80% allocated to natural gas and crude oil. These subsidies have been in place for decades, contributing to the country's economic growth by ensuring cheap energy. However, critics argue that these subsidies are now outdated, especially with the availability of competitive renewable energy alternatives.
One example of a direct subsidy is the Department of Energy's (DOE) Loan Programs Office (DOE LPO), which offers loans to advanced fossil fuel projects focused on avoiding or sequestering greenhouse gases. The first fossil award made by the LPO was a $2 billion commitment to the Lake Charles Methanol Project.
Indirect subsidies are found in provisions of the federal income tax that benefit the fossil fuel industry. These include the expensing of exploration and development costs, the use of percentage depletion to recover drilling and development costs, and various incentives for the production and distribution of oil, coal, and natural gas. The three largest subsidies are for excess of percentage over cost depletion ($3.3 billion), exceptions for publicly traded partnerships ($2.7 billion), and pollution control ($2.5 billion).
Additionally, there are smaller tax incentives such as publicly traded partnerships, which allow oil and gas companies to publicly list their shares, and accelerated depreciation of natural gas infrastructure. The European Union's subsidies for the fossil fuel industry are estimated to total €55 billion annually.
The justification for subsidies is often to protect consumers by keeping prices low. However, critics argue that subsidies have significant fiscal consequences, hinder economic growth, encourage pollution, and disproportionately benefit higher-income households. Removing fossil fuel subsidies and reinvesting the revenue in targeted social spending and sustainable investments can promote more equitable and environmentally friendly outcomes.
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Tax credits for alternative fuels
The fossil fuel industry receives significant government funding and support through tax subsidies, grants, and loans. These subsidies are intended to promote domestic energy production and reduce the cost of fossil fuel production. However, they are inconsistent with policy goals aimed at reducing fossil fuel use to mitigate climate change. As a result, these subsidies have come under scrutiny from lawmakers and the public.
To promote the adoption of alternative fuels, various tax credits are available for individuals and businesses. The Alternative Fuel Vehicle Refueling Property Credit is a tax credit available to individuals and businesses that install qualified alternative refueling property, such as electric vehicle charging equipment or clean-burning fuel storage, in eligible locations. This credit is also available to tax-exempt entities, including state and local governments, through IRS elective pay provisions. Consumers who purchase qualified alternative fueling equipment for installation in their principal residence in qualified locations may receive a tax credit of up to 30% of the cost, up to $1,000.
The Alternative Fuel Excise Tax Credit is another incentive offered by the Alternative Fuels Data Center. This tax credit is available for alternative fuels sold for use or used as motor vehicle fuel. Eligible fuels include natural gas, propane, P-Series fuel, liquid fuel derived from coal through the Fischer-Tropsch process, and compressed or liquefied gas derived from biomass. The credit amount is $0.50 per gallon, and it is based on the gasoline gallon equivalent (GGE) or diesel gallon equivalent (DGE) for propane and natural gas sold after December 31, 2015.
The Alternative Fuel Infrastructure Tax Credit is available for alternative fuel vehicle (AFV) infrastructure placed in service before January 1, 2023. This credit applies to each charging port or fuel dispenser, as well as energy storage properties for electricity, hydrogen, natural gas, propane, E85, or biodiesel blends of at least 20%. Businesses are eligible for a tax credit of 6% of depreciable costs up to $100,000 per item, or 30% of depreciable costs up to $100,000 per item if the installation meets certain requirements.
Other initiatives promoting alternative fuels include the U.S. Department of Energy (DOE) Communities Local Energy Action Program (LEAP) Pilot, which supports community-wide economic and environmental benefits through clean energy deployment in low-income, energy-burdened communities. The U.S. Environmental Protection Agency's (EPA) Clean School Bus program also provides funding for the replacement of existing school buses with clean, alternative fuel or zero-emission school buses.
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Tax incentives for fossil fuel production
The United States provides numerous tax subsidies to the fossil fuel industry to encourage domestic energy production. Conservative estimates put the direct subsidies to the fossil fuel industry at around $20 billion per year, with 20% going to coal and the remaining 80% to natural gas and crude oil. These subsidies are embedded in the tax code and have been around for a century, with the aim of lowering the cost of fossil fuel production and incentivizing new domestic energy sources.
There are several tax incentives for fossil fuel production, including:
- Direct subsidies to corporations
- Tax benefits to the fossil fuel industry
- Expensing of exploration, development, and intangible drilling costs
- Use of percentage depletion instead of cost depletion to recover drilling and development costs of oil and gas wells and coal mines
- Smaller incentives for production and distribution of oil, coal, and natural gas
- Publicly traded partnerships, which allow pass-through oil and gas partnerships to publicly list their shares
- Amortization of geological and geophysical expenditures associated with oil and gas exploration
- Accelerated depreciation of natural gas infrastructure
- Investment credits for clean coal facilities
- Energy production credits for coal
The Department of Energy (DOE) also provides funding for fossil fuels through three initiatives: the Office of Advanced Fossil Energy R&D, the Loan Guarantee Program, and the National Energy Technology Lab. The DOE's Loan Programs Office (DOE LPO) offers loans to advanced fossil fuel projects that aim to avoid or sequester greenhouse gases.
While these tax incentives have historically promoted cheap energy and encouraged new energy sources, they are now facing scrutiny due to their inconsistency with policy goals of reducing fossil fuel use and mitigating climate change. Additionally, the true price of carbon and other pollutants is often overlooked in the process of incentivizing fossil fuel production, leading to societal, environmental, and health costs that disproportionately affect vulnerable communities.
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Taxing carbon emissions
The fossil fuel industry receives significant government funding and support through various tax subsidies and initiatives. These subsidies are intended to promote domestic energy production and have been in place for decades. While they have contributed to economic growth, concerns have been raised about their continued suitability given the availability of renewable alternatives and the need to reduce greenhouse gas emissions.
To address these concerns, there has been a growing focus on taxing carbon emissions, also known as a carbon tax. A carbon tax is a form of pollution tax that aims to reduce greenhouse gas emissions by increasing the prices of fossil fuels. This tax can be levied at any point in the energy supply chain, from upstream suppliers of coal and natural gas processing facilities to downstream energy-using industries and households. The simplest approach administratively is to collect the tax upstream, where it can be imposed on the carbon dioxide content of fossil fuels.
The purpose of a carbon tax is to decrease demand for high-emission goods and services and incentivize the adoption of less carbon-intensive alternatives. It differs from traditional command-and-control regulations that explicitly limit or prohibit emissions. Instead, it allows market forces to determine the most efficient way to reduce pollution. The tax rate should be set equal to the social cost of carbon and should increase over time to reflect the growing damage expected from climate change.
In addition to creating incentives for energy conservation, a carbon tax can generate significant revenue. However, it is important to consider its impact on lower-income households, who spend a larger share of their income on energy. To address this, some revenue from the carbon tax can be directed towards low-income households to compensate for increased energy costs.
Several countries, including Singapore, Canada, and South Africa, are strengthening their carbon tax policies, and the use of carbon taxes is growing. However, current fossil fuel prices are still considered insufficient to reflect their environmental impacts. Carbon credit trading mechanisms also play a role in mitigating GHGs, allowing project developers to receive carbon credits that can be sold to buyers seeking to offset their emissions.
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Frequently asked questions
Fossil fuel tax subsidies apply to natural gas.
Fossil fuel tax subsidies are a form of government intervention in energy markets. They are special provisions in federal income tax that subsidize the domestic production of fossil fuels.
The fossil fuel tax works by providing tax subsidies to the fossil fuel industry to encourage domestic energy production. These include direct subsidies to corporations and other tax benefits.
Examples of fossil fuel tax subsidies include the expensing of exploration, development, and intangible drilling costs, the use of percentage depletion to recover drilling and development costs of gas wells, and tax credits for alternative fuel vehicle (AFV) infrastructure.
The purpose of the fossil fuel tax is to promote domestic energy production and lower the cost of fossil fuel production. However, these subsidies are inconsistent with policy goals of reducing fossil fuel use and global climate change.
