Katerina Swanson
Fossil fuel subsidies are a pressing global issue, with an estimated total of $7 trillion spent worldwide in 2022. This figure represents a $2 trillion increase since 2020, as governments continue to support consumers and businesses during the energy crisis. The United States, a significant contributor, spent $757 billion in 2022, including $3 billion in explicit subsidies and $754 billion in implicit subsidies. These subsidies are embedded within the tax code, with the federal government providing various incentives and funding for the fossil fuel industry. While the removal of subsidies is a complex issue, it is essential to consider the environmental and societal costs of burning fossil fuels, as well as the potential benefits of reallocating funds towards low-carbon technologies and social spending.
| Characteristics | Values |
|---|---|
| Fossil fuel subsidies in the US in 2022 | $757 billion |
| Explicit subsidies | $3 billion |
| Implicit subsidies | $754 billion |
| Federal tax subsidies for coal in 2022 | $590 million |
| Annual appropriations and grants | Direct subsidies |
| Fossil fuel extraction on federal land | Artificially low lease prices and royalty rates |
| Methane emission reductions | $1.55 billion |
| Tax credit for carbon dioxide sequestration | $85 per ton |
| Tax credit for carbon dioxide used for enhanced oil recovery | $60 per ton |
| Direct air capture projects | $180 per ton |
| Direct air capture projects | $130 per ton |
| Carbon capture, utilization, and storage | $12 billion |
| Fossil fuel tax breaks | $173 million |
| Fossil fuel subsidies as a percentage of GDP in Europe and North America | 3% |
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What You'll Learn
- Fossil fuel subsidies in the US totalled $757 billion in 2022
- The US government provides subsidies in the form of tax breaks and direct payments
- US fossil fuel subsidies are funded by the Department of Energy
- The Biden-Harris Administration's 2024 budget proposes eliminating 13 fossil fuel tax preferences
- The US could save $4.4 trillion by scrapping fossil fuel subsidies
Fossil fuel subsidies in the US totalled $757 billion in 2022
Fossil fuel subsidies in the US totaled $757 billion in 2022, according to the International Monetary Fund (IMF). This figure includes $3 billion in explicit subsidies and a substantial $754 billion in implicit subsidies. Implicit subsidies refer to the negative externalities or societal costs of burning fossil fuels, which are borne by society as a whole rather than producers. These include local air pollution, environmental degradation, and negative health impacts, which are not reflected in market prices.
The US federal government has provided various forms of financial support for the fossil fuel industry. This includes annual appropriations and grants, as well as funding for research and development projects, administered by the Department of Energy (DOE) through initiatives like the Office of Advanced Fossil Energy R&D and the Loan Guarantee Program. The US also provides tax breaks and tax credits for oil and gas companies, which have been criticized for being outdated and detrimental to the environment.
The Biden-Harris Administration's FY 2024 budget request includes proposals to eliminate 13 fossil fuel tax preferences and credits, modify taxation rules for the foreign income of US oil and gas companies, and reduce the federal deficit by almost $97 billion over ten years. Additionally, legislation proposed in the 118th Congress (2023-2024), such as the End Oil and Gas Tax Subsidies Act of 2023, aims to reduce or reform fossil fuel subsidies further.
The removal of fossil fuel subsidies in the US and globally has been a topic of discussion. According to the International Energy Agency (IEA), phasing out these subsidies would benefit energy markets, mitigate climate change, and improve government budgets. Removing subsidies could also reduce energy security concerns related to volatile fossil fuel supplies. However, it is essential to carefully design and implement reforms to avoid adverse effects on vulnerable households.
The estimated global fossil fuel subsidies reached a record $7 trillion in 2022, reflecting a $2 trillion increase since 2020. This surge in subsidies was attributed to governments supporting consumers and businesses during the energy price spike caused by geopolitical events and the economic recovery from the pandemic. While the US contributed to this global total, it is worth noting that North America's subsidies relative to regional GDP are the smallest at about 3 percent.
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The US government provides subsidies in the form of tax breaks and direct payments
The US government provides tax breaks for oil and gas exploration, which have been in place since the early 20th century. In addition, the federal government offers tax subsidies for coal, which decreased from $1.9 billion in fiscal year (FY) 2016 to $590 million in 2022. States also provide subsidies through measures like sales tax exemptions. The Office of Management and Budget estimated that repealing a tax deduction for coal and other hard mineral fossil fuels would have saved $173 million between 2012 and 2016. This subsidy was repealed by the Tax Cuts and Jobs Act starting in fiscal year 2018.
The fossil fuel industry also receives federal funding for research and development through the Department of Energy (DOE). Annual appropriations and grants directed towards the fossil fuel industry can be considered direct subsidies as they are meant to maintain the competitiveness of the industry. Efforts to make coal more economical and cleaner have been a particular focus of federal funding, as well as Carbon Capture and Storage (CCS) technologies. The Inflation Reduction Act (IRA) provides incentives for carbon dioxide sequestration, offering an $85 credit per ton of permanently stored carbon dioxide and a $60 credit per ton used for enhanced oil recovery.
The US government's support for the fossil fuel industry through subsidies has come under increasing scrutiny, especially as renewable energy technologies become more cost-competitive. The broader utility of fossil fuel subsidies is being questioned, given the negative externalities associated with fossil fuel use, such as greenhouse gas emissions and pollution, which have adverse environmental, climate, and public health impacts. Removing fossil fuel subsidies could prevent premature deaths, raise government revenues, and help meet global warming targets. However, it is important to carefully design and implement reforms to avoid negative impacts on vulnerable households.
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US fossil fuel subsidies are funded by the Department of Energy
Fossil fuel subsidies have been a widely discussed topic, especially in the context of the recent climate crisis. The US, along with other countries, has been spending billions in subsidies for fossil fuels, which include oil, coal, and natural gas. The total amount spent by the US on fossil fuel subsidies is hard to pinpoint, as the definition of subsidies can vary. However, it is estimated that the country's spending on these subsidies falls within the range of hundreds of billions of US dollars to $7 trillion. This large range is due to the different types of subsidies, which can be explicit or implicit.
Explicit subsidies refer to the classic definition of subsidies, where governments or organizations provide financial support to reduce the costs of producing goods or services, thereby keeping prices low for consumers. On the other hand, implicit subsidies refer to the societal costs associated with burning fossil fuels, such as local air pollution, climate change, road accidents, and congestion. These indirect costs are often not reflected in market prices.
The US federal funding for fossil fuels is primarily administered by the Department of Energy (DOE) through various initiatives and programs. The DOE provides funding for research and development projects, as well as project loans, grants, and guarantees from organizations like the Overseas Private Investment Corporation (OPIC) and the United States Export-Import Bank (EXIM). These sources of funding are intended to support investments in emerging markets, but they also contribute to subsidizing the already profitable fossil fuel industry.
One example of DOE's initiatives is the Loan Guarantee Program, which has designated $8 billion in loans for advanced fossil fuel projects focused on avoiding or sequestering greenhouse gases. Additionally, the American Recovery and Reinvestment Act of 2009 included $3.4 billion for fossil fuel research and development, specifically for carbon capture and storage technologies.
While the US has made efforts to transition to renewable energy, the continued funding of fossil fuel subsidies through the Department of Energy and other means highlights the complexities and challenges in phasing out these subsidies.
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The Biden-Harris Administration's 2024 budget proposes eliminating 13 fossil fuel tax preferences
The Biden-Harris Administration's 2024 budget proposal includes a plan to eliminate 13 fossil fuel tax preferences and credits. This proposal is part of a broader agenda to address climate change and promote renewable energy sources. The elimination of these tax preferences is expected to have a significant impact on the fossil fuel industry and government revenue.
The 13 tax preferences that the Biden-Harris Administration proposes to eliminate include:
- Tax credit for oil and natural gas extracted from marginal wells
- Treatment of coal royalties as long-term capital gains with lower tax rates
- Modifications to taxation rules for foreign income of US oil and gas companies
- Deductions for certain investments specific to the fossil fuel industry
- Percentage depletion allowance, which primarily benefits small-scale and family-owned oil and gas producers
- Research and development funding for the fossil fuel industry through the Department of Energy
- Project loans, grants, and guarantees from the Overseas Private Investment Corporation (OPIC) and the US Export-Import Bank
- Sales tax exemptions for fossil fuel products
- Any remaining preferences that benefit independent producers over integrated operations
By eliminating these tax preferences, the Biden-Harris Administration aims to reduce the federal deficit by almost $31 billion over ten years. Additionally, modifications to taxation rules for the foreign income of US oil and gas companies are expected to save $66 billion, bringing the total savings to $96.9 billion.
While the elimination of these tax preferences is a step towards reducing fossil fuel subsidies, it is important to recognize that fossil fuels continue to receive substantial support. The total amount of global fossil fuel subsidies has been estimated at $7 trillion, with annual payments of $1.2 to $1.5 trillion in direct subsidies. The United States has also committed over $1.8 billion to fossil fuel projects abroad in 2023.
To further reduce fossil fuel subsidies, additional measures can be considered, such as implementing a carbon tax or user fees on fossil fuel consumption, transitioning to clean energy technologies, and phasing out the use of coal. These actions are crucial in mitigating climate change and ensuring a sustainable future.
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The US could save $4.4 trillion by scrapping fossil fuel subsidies
Fossil fuel subsidies have been a topic of debate for many years, with economists, environmentalists, and policymakers weighing in on their impact and effectiveness. In 2022, fossil fuel subsidies in the United States totaled $757 billion, according to the International Monetary Fund (IMF). This included $3 billion in explicit subsidies and a significant $754 billion in implicit subsidies. While the US has taken steps to reduce its subsidies, the numbers remain high.
Explicit subsidies are direct payments made by the government or organizations to reduce the costs of producing fossil fuels or to make them cheaper for consumers. On the other hand, implicit subsidies refer to the societal costs of burning fossil fuels, such as local air pollution, climate change, road accidents, and congestion, which are often not reflected in market prices. These indirect costs are referred to as "externalities."
The US could potentially save $4.4 trillion by scrapping fossil fuel subsidies, according to estimates. This significant amount could be generated through full price reform, where fuel prices are raised to their fully efficient levels. This reform would not only result in substantial revenue gains but also help to reduce global fossil fuel CO2 emissions by 43% below baseline levels in 2030, bringing us closer to the Paris Agreement temperature goals.
The removal of fossil fuel subsidies would have a twofold impact. Firstly, it would benefit energy markets by promoting efficient allocation of resources and reducing energy security concerns related to volatile fossil fuel supplies. Secondly, it would positively impact the environment by reducing local air pollution, mitigating climate change, and preventing premature deaths caused by air pollution. According to the IMF, scrapping fossil fuel subsidies could prevent 1.6 million premature deaths annually.
While scrapping fossil fuel subsidies offers significant benefits, it is not without its challenges. Removing subsidies may lead to indirect price increases in other areas, such as food prices, which could impact vulnerable households. Therefore, a comprehensive policy package that addresses these challenges and communicates the benefits clearly is essential. Additionally, a portion of the increased revenues should be used to compensate vulnerable households for higher energy prices, while the remainder can be utilized for tax cuts and funding public goods like education, healthcare, and clean energy.
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Frequently asked questions
The US spends an estimated $20 billion on fossil fuel subsidies.
Fossil fuel subsidies are payments made by the government to reduce the costs of fossil fuels, thereby making them cheaper for consumers.
Fossil fuel subsidies are intended to protect consumers by keeping prices low. However, they come at a substantial cost, including sizable fiscal consequences, inefficient allocation of resources, and increased pollution.
