Rajan Wilcox
The US government's investment in fossil fuels is a complex and multifaceted issue. While the government receives significant revenue from the fossil fuel industry, estimated at $138 billion annually between 2015 and 2020, there is also a substantial flow of money from the government to the industry in the form of subsidies and tax benefits. These subsidies have been estimated at $7 trillion globally, with the US contributing up to $757 billion. This support comes in the form of direct subsidies for production, consumption subsidies to help consumers with costs, and tax breaks for fossil fuel companies. The US government also provides federal funding for research and development in the fossil fuel industry, administered through the Department of Energy. Additionally, the political influence of the fossil fuel industry cannot be understated, with the industry spending $219 million to influence the election of the new US government. The industry utilizes various avenues to influence politics, including direct donations, political action committees, and dark money to spread misinformation and influence lawmakers.
| Characteristics | Values |
|---|---|
| Fossil fuel subsidies in the US | $757 billion |
| Global fossil fuel subsidies | $7 trillion |
| Annual global fossil fuel subsidies | $1.2 to $1.5 trillion |
| Fossil fuel election spending | $219 million |
| US revenues from fossil fuels | $138 billion |
| Fossil fuel companies structured as Master Limited Partnerships (MLPs) | 75% |
| OPIC financing for renewable energy projects between 2010 and 2015 | $6 billion |
| OPIC loan for the Palagua oil field project in Colombia | $3.8 million |
| OPIC commitment for a natural gas project in Jordan | $250 million |
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What You'll Learn
Fossil fuel subsidies
In 2022, global explicit subsidies for fossil fuels were around $1.5 trillion, equivalent to about 1.5% of global gross domestic product (GDP). This amount is vast and can be redirected to fund low-carbon technologies. However, it is challenging to reallocate this funding immediately due to the complex nature of subsidies. While $1.2 to $1.5 trillion is given directly to fossil fuel production and consumption annually, the remaining amount is embedded in various sectors of the economy.
The United States, along with other countries, has provided fossil fuel subsidies to support consumers and businesses during the surge in energy prices caused by the Russia-Ukraine conflict and the economic recovery from the pandemic. These subsidies have prevented vulnerable households from experiencing higher energy prices. However, fossil fuel subsidies have significant societal costs. They contribute to increased greenhouse gas emissions, leading to global warming and climate change. Additionally, they result in higher taxes, inefficient allocation of resources, and adverse health impacts, causing approximately 1.6 million premature deaths annually.
The removal of fossil fuel subsidies is crucial for mitigating climate change and improving public health. However, it must be carefully implemented to avoid adverse effects on vulnerable households. Governments should accompany the removal of subsidies with comprehensive policy packages that address the potential negative consequences. Additionally, the development of cheap and accessible alternative energy sources, such as solar, wind, and electric vehicles, can help reduce the reliance on fossil fuels and ease the transition to cleaner energy.
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Federal funding for fossil fuels
Fossil fuels receive substantial government funding in the form of federal subsidies, tax breaks, and other incentives. In 2022, fossil fuel subsidies in the United States were estimated to total $757 billion. This includes both direct subsidies for fossil fuel production and subsidies for consumption. According to Oil Change International, the US federal government provides around $14.7 billion in subsidies, with an additional $5.8 billion in state-level incentives. These subsidies often take the form of tax deductions, exemptions, and loopholes that significantly benefit fossil fuel producers.
The US government also provides funding for research and development in the fossil fuel industry. This funding is administered by the Department of Energy (DOE) through initiatives such as the Office of Advanced Fossil Energy R&D, the Loan Guarantee Program, and the National Energy Technology Lab. Annual appropriations and grants directed towards the industry further bolster its competitiveness. Additionally, the Overseas Private Investment Corporation (OPIC) and the United States Export-Import Bank (EXIM) provide project loans, grants, and guarantees to support American fossil fuel businesses in emerging markets overseas.
One example of OPIC's involvement is the revitalization of the Palagua oil field in Colombia. In 2004, OPIC provided a $3.8 million loan to Joshi Technologies, enabling the company to extract 4,000 barrels of oil per day for over a decade. Despite increasing its funding for renewable energy projects, OPIC continues to support fossil fuel initiatives. Similarly, the US Export-Import Bank has provided financing for natural gas projects, such as a $250 million commitment in 2017 for a project in Jordan that is expected to emit 617,000 tons of carbon dioxide annually.
The structure of many oil and gas companies as Master Limited Partnerships (MLPs) further enhances their tax advantages. MLPs combine the investment benefits of publicly traded corporations with the tax benefits of partnerships. While shareholders pay personal income tax, the MLP itself is exempt from corporate income taxes. This provision is not available to renewable energy companies, creating an uneven playing field.
The continuation of federal funding and subsidies for fossil fuels has significant implications for the environment and society. Removing these subsidies could prevent 1.6 million premature deaths annually, raise government revenues, and help achieve global warming targets. However, the removal of subsidies can be complex, requiring careful policy design and implementation to ensure a just transition for vulnerable households and communities that depend on the fossil fuel industry.
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Fossil fuel tax breaks
Fossil fuel subsidies have been a topic of discussion and concern for many years, and they have come under even greater scrutiny in recent times due to the urgency of addressing climate change. In 2020, a report found that fossil fuels received a substantial $5.9 trillion in subsidies globally, with the United States being one of the top five contributors. This figure surged to a record $7 trillion in 2023, highlighting the ongoing challenge of reducing fossil fuel subsidies.
The US government has provided various tax breaks and incentives that contribute to fossil fuel subsidies. These include:
- Intangible Drilling Costs Deduction: Companies can deduct a significant portion of the costs incurred from drilling new wells domestically.
- Percentage Depletion: This method allows businesses to deduct a certain amount from their taxable income to account for declining production from a reserve over time.
- Master Limited Partnerships: Many oil and gas companies structure themselves as Master Limited Partnerships (MLPs), which offer tax benefits such as exemption from corporate income taxes.
- Domestic Manufacturing Deduction: Implemented in 2004, this subsidy lowered the effective corporate tax rate for a range of companies, including fossil fuel producers.
- Tax Breaks for Independent Oil and Gas Producers: Independent oil and gas producers can deduct exploration and development costs, including labour and materials, from their income in the year incurred, even though returns may be realised over many years.
- Publicly Traded Partnerships: These partnerships allow pass-through oil and gas partnerships to publicly list their shares, a privilege typically reserved for higher-taxed C-corporations.
- Carbon Capture Technology Subsidies: While relatively small, there are subsidies offered for investment in carbon capture technologies, which aim to mitigate the environmental impact of US energy consumption.
The total impact of these tax breaks is significant. For example, the Joint Committee on Taxation estimated that eliminating tax breaks for intangible drilling costs alone would generate $1.59 billion in revenue in 2017 and $13 billion over the next ten years. Additionally, tax subsidies for oil, gas, and coal development are expected to reduce federal revenue by $12.9 billion from 2022 to 2026.
While supporters of these tax incentives argue that they reduce US dependence on imported oil, critics highlight the inconsistency with policy goals aimed at reducing fossil fuel use to combat climate change. The adverse effects of these incentives on climate change are significant, and the broader utility of fossil fuel subsidies is increasingly being questioned as renewable energy technology becomes more cost-competitive.
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Fossil fuel industry influence
Fossil fuel subsidies have surged to a record $7 trillion, with global explicit subsidies for fossil fuels amounting to around $1.5 trillion in 2022. The US government provides numerous subsidies, both direct and indirect, to the fossil fuel industry. Direct subsidies include special provisions in the US tax code designed to specifically support and reward domestic fossil fuel-related production. Indirect subsidies include other provisions in the tax code aimed at businesses in general, which are not exclusive to the fossil fuels industry.
The fossil fuel industry also receives substantial government funding for research and development. Federal funding for fossil fuels is largely administered by the Department of Energy (DOE) through three initiatives: the Office of Advanced Fossil Energy R&D, the Loan Guarantee Program, and the National Energy Technology Lab. Annual appropriations and grants directed toward the fossil fuel industry can also be considered direct subsidies, as they are directly related to maintaining the competitiveness of the industry. Efforts to make coal more economical and cleaner have been a particular focus of the federal government’s funding, as has Carbon Capture and Storage (CCS).
In addition to federal funding, the fossil fuel industry also wields significant influence through lobbying and political contributions. The fossil fuel lobby includes paid representatives of corporations involved in the fossil fuel industry and related industries such as chemicals, plastics, aviation, and transportation. These lobbies have the capacity and money to exert outsized influence on governmental policy, particularly in obstructing policies related to environmental protection, environmental health, and climate action. The fossil fuel industry spent $219 million to influence the election of the new US government, with Republicans receiving four times more contributions than Democrats. The industry also spends over $100 million each year lobbying politicians to enact favourable legislation, such as voting against climate policy, slowing the adoption of cleaner energy, and imposing strict punishments on peaceful protests.
The influence of the fossil fuel lobby extends beyond campaign contributions and lobbying. The presence of major fossil fuel companies at global forums for decision-making, such as the Intergovernmental Panel on Climate Change and the Paris Climate Agreement negotiations, has been criticised. The lobby has been known to exploit international crises, such as the COVID-19 pandemic and the 2022 Russian invasion of Ukraine, to roll back existing regulations or justify new fossil fuel development. Additionally, the fossil fuel industry has been accused of spreading misinformation and attempting to sway the courts.
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Fossil fuel revenue
Fossil fuels provide a significant source of revenue for the US government, with an estimated annual value of $138 billion between 2015 and 2020. This income is generated through various levels of government, including federal, state, local, and tribal sources. However, as the market share of fossil fuels decreases and clean energy gains popularity, a decline in these revenue streams is anticipated. This shift presents a challenge, particularly for communities heavily reliant on income from fossil fuels, such as Wyoming, North Dakota, Alaska, and New Mexico, where more than 14% of state and local revenues originate from this industry.
To address this impending revenue gap, policymakers are encouraged to proactively implement smart tax policies and diversify their investments. By adopting new tax strategies, governments can adapt to the changing energy landscape and support the transition to clean energy sources. Additionally, investing existing revenues into savings funds and new economic sectors, such as clean energy, can help cushion the financial impact of the transition.
Despite the anticipated decline in fossil fuel revenues, the US government continues to provide substantial subsidies to the industry. These subsidies are estimated to total $757 billion in 2022 or around $20.5 billion annually, including federal and state-level incentives. This support takes various forms, such as tax deductions, exemptions, and loopholes, resulting in significant cost avoidance for fossil fuel producers. In contrast, direct subsidies for renewable energy sources are significantly lower, and developers in this sector often face challenges in accessing comparable tax breaks.
The substantial subsidies enjoyed by the fossil fuel industry have contributed to delays in the transition to clean energy. Removing these subsidies could accelerate the shift towards cleaner alternatives. However, it is important to recognize that a sudden removal of subsidies may impact vulnerable households that rely on affordable energy sources. Therefore, a carefully planned and communicated set of reforms is necessary to ensure a smooth transition and compensate vulnerable groups for any resulting higher energy prices.
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Frequently asked questions
The US government provides substantial funding to the fossil fuel industry, with federal funding largely administered by the Department of Energy. While there is no exact figure, it is estimated that the US government invests between $1.2 and $1.5 trillion annually in direct subsidies for fossil fuel production and consumption.
The US government provides various forms of support to the fossil fuel industry, including:
- Federal funding for research and development projects through the Department of Energy.
- Project loans, grants, and guarantees from organizations like the Overseas Private Investment Corporation (OPIC) and the United States Export-Import Bank (EXIM).
- Tax breaks and incentives, such as the Domestic Manufacturing Deduction, which allows oil producers to claim tax breaks.
- Political campaign contributions, with the fossil fuel industry spending $219 million to elect the new US government in 2025.
The US government's investments in fossil fuels are often justified by economic and energy security concerns. Fossil fuels provide substantial revenue to the US federal government and many states, tribes, and localities, totaling an estimated $138 billion annually between 2015 and 2020. Additionally, the US government may support the fossil fuel industry to maintain energy affordability for households and businesses, especially during periods of high energy prices.
The US government's investments in fossil fuels have several implications, including:
- Environmental concerns: Subsidizing fossil fuels contributes to increased greenhouse gas emissions and delays the transition to clean energy, hindering progress towards global warming targets.
- Fiscal implications: As the energy landscape shifts towards clean energy, government revenues from fossil fuels are expected to decline, impacting communities that rely heavily on this industry.
- Social impacts: Removing fossil fuel subsidies can impact vulnerable households by increasing energy prices, while maintaining subsidies benefits richer households more than poorer ones.
