Katerina Swanson
The topic of government funding for fossil fuels is a highly debated and complex issue. Fossil fuel subsidies, provided by governments worldwide, have been estimated at hundreds of billions of dollars annually, and potentially over a trillion. These subsidies are intended to protect consumers by maintaining affordable energy prices, but they have significant fiscal, environmental, and societal implications. The funds could be reallocated to accelerate the transition to clean energy and reduce global warming. Removing subsidies can be challenging due to potential social unrest and the need to compensate vulnerable households. However, the recent surge in fossil fuel subsidies, totaling $7 trillion in 2022, underscores the urgent need to address climate change and curb emissions.
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What You'll Learn
Fossil fuel subsidies in the US
Fossil fuel subsidies are financial incentives and tax breaks provided by governments to oil, gas, and coal industries. These subsidies lower production costs, making fossil fuels appear cheaper, while taxpayers bear the burden. In the United States, fossil fuel subsidies are significant and come in various forms, including direct and indirect support.
Direct subsidies to the fossil fuel industry in the US are substantial. The federal government provides funding for research and development, administered primarily by the Department of Energy (DOE) through initiatives like the Office of Advanced Fossil Energy R&D and the Loan Guarantee Program. Annual appropriations and grants directed towards the industry also constitute direct subsidies, aiming to maintain its competitiveness. Additionally, the US government provides tax breaks and favourable financing to fossil fuel companies, reducing their tax burden and shielding them from market forces. The Biden-Harris Administration's FY 2024 budget request proposed eliminating 13 fossil fuel tax preferences and credits, reflecting a recognition of the need to reduce these subsidies.
Indirect subsidies to the US fossil fuel industry are also prevalent. The Overseas Private Investment Corporation (OPIC) and the United States Export-Import Bank (EXIM) provide financing and support for American businesses in emerging markets, including fossil fuel projects. While OPIC has increased its funding for renewable energy, it continues to support fossil energy as well. EXIM has lent or granted billions to fossil fuel projects, including $14.8 billion for 78 projects in the petroleum sector between 2001 and 2018.
The total value of fossil fuel subsidies in the United States is substantial. While estimates vary, the International Monetary Fund (IMF) reported that US fossil fuel subsidies totalled $757 billion in 2022, including $3 billion in explicit subsidies and a significant $754 billion in implicit subsidies. Another estimate placed the figure at $760 billion annually, with direct government subsidies accounting for $10 to $52 billion per year. These subsidies have negative consequences, including hindering the transition to cleaner energy, contributing to climate change, and benefiting higher-income households.
Efforts to phase out fossil fuel subsidies in the US have been proposed and partially implemented. The End Oil and Gas Tax Subsidies Act of 2023 aims to repeal fossil fuel tax breaks. Additionally, President Biden's Executive Order 14008 led the US International Development Finance Corporation (DFC) to set a goal of reaching net-zero emissions from its investments by 2040. However, the DFC and EXIM have continued to commit significant funding to fossil fuel projects abroad.
In conclusion, the US government provides substantial subsidies to the fossil fuel industry, both directly and indirectly. These subsidies have economic, environmental, and social impacts, and there are ongoing efforts to reform them. However, the complexity of the subsidy system and the potential for social unrest due to rising energy prices present challenges in transitioning away from fossil fuel dependence.
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Government funding for research and development
The fossil fuel industry receives significant government funding for research and development. While there are proposals to reduce fossil fuel subsidies, the funding allocated for fossil fuel research and development remains substantial.
In the United States, government funding for fossil fuel research and development is primarily administered by the Department of Energy (DOE) through various initiatives and programs. The DOE's spending programs received funding totaling $3.5 billion, which accounted for about 15% of the total energy-related tax preferences. While the share of fossil fuels in total energy-related tax incentives has decreased over the years, the absolute amount of funding remains significant.
The American Recovery and Reinvestment Act of 2009 included $3.4 billion for fossil fuel research and development between 2009 and 2011, with a focus on carbon capture and storage technologies. Additionally, the DOE's Loan Programs Office (LPO) has designated $8 billion in loans for advanced fossil fuel projects, including those aimed at avoiding or sequestering greenhouse gases.
In recent years, the federal government's spending on research and development for natural gas and petroleum liquids has increased. In FY 2022, the federal government spent $121 million, compared to $105 million in FY 2021 and $107 million in FY 2020. Similarly, federal funding for coal research and development totaled $280 million in FY 2022.
The International Monetary Fund (IMF) estimated that global fossil fuel subsidies reached $7 trillion or 7.1% of global GDP in 2022. This includes explicit and implicit subsidies, with the latter accounting for the majority of the total. While there have been calls from various institutions, including the G20 and the International Energy Agency, to phase out fossil fuel subsidies, the funding for fossil fuel research and development continues to be a significant aspect of government spending.
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Federal funding for fossil fuels
Fossil fuel subsidies are intended to protect consumers by keeping prices low. However, they have significant fiscal consequences, such as higher taxes, increased borrowing, or reduced spending. They also promote inefficient resource allocation, hindering economic growth, and contribute to climate change and premature deaths from local air pollution.
In 2022, global fossil fuel subsidies reached a record $7 trillion, a $2 trillion increase since 2020, due to government efforts to support surging energy prices. This amount is more than four times the previous estimate of $1.5 trillion and is equivalent to $13 million per minute. It exceeds global government spending on education and accounts for about two-thirds of healthcare expenditures. The largest contributors to global fossil fuel subsidies are underpricing for local air pollution costs and climate damage, accounting for approximately 30% each.
In the United States, fossil fuel subsidies totalled $757 billion in 2022, including $3 billion in explicit subsidies and $754 billion in implicit subsidies. Federal funding for fossil fuels is primarily administered by the Department of Energy (DOE) through initiatives like the Office of Advanced Fossil Energy R&D, the Loan Guarantee Program, and the National Energy Technology Lab. The federal government spent $121 million on research and development (R&D) for natural gas and petroleum liquids in 2022, with funding for coal R&D totalling $280 million. Additionally, Congress allocated $890 million to the Department of Energy's Fossil Energy and Carbon Management (FECM) office in 2023, a 7.9% increase.
Despite efforts to phase out fossil fuel subsidies, they remain prevalent. The United States pledged to cease funding new fossil fuel projects abroad in 2021, but committed over $1.8 billion to such projects in 2023 through the DFC and the U.S. Export-Import Bank. The Inflation Reduction Act (IRA) and the Infrastructure Investment and Jobs Act (IIJA) have also provided subsidies to fossil fuel companies, including incentives for carbon capture and sequestration projects.
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$12.49
US government's development finance institution
The United States International Development Finance Corporation (DFC) is the US government's development finance institution. DFC is an independent agency formed on December 20, 2019, by merging the Overseas Private Investment Corporation (OPIC) with the Development Credit Authority (DCA) of the United States Agency for International Development (USAID), along with several other smaller offices and funds. DFC's lending capacity is used to provide loans, loan guarantees, direct equity investments, and political risk insurance for private-sector-led development projects, feasibility studies, and technical assistance.
DFC invests in development projects primarily in lower and middle-income countries, across sectors such as energy, healthcare, critical infrastructure, and technology. DFC's stated investment priorities include innovation, sustainable jobs, workers' protection, women's economic empowerment, and bolstering global supply chains. Specific initiatives of the DFC include the 2X Women's Initiative, which focuses on women-owned businesses and products and services designed to empower women.
The Center for Strategic and International Studies (CSIS) has proposed doubling DFC's spending cap to $120 billion to provide more independence to the institution. DFC's total spending cap is currently $60 billion, compared to OPIC's $29 billion.
Regarding fossil fuel funding, the US government provides substantial funding to the fossil fuel industry through various initiatives and organizations. The Department of Energy (DOE) administers federal funding for fossil fuels through 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 fossil fuel industry can be considered direct subsidies, maintaining the industry's competitiveness. 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 US government has also provided funding to the fossil fuel industry through project loans, grants, and guarantees from OPIC and the United States Export-Import Bank (EXIM). Over the past 15 years, EXIM has lent or issued billions in grants to fossil fuel projects, including $14.8 billion for 78 projects in the petroleum sector from 2001 to 2018.
According to various reports and estimates, the US government's subsidies to the fossil fuel industry are significant. The International Monetary Fund (IMF) estimated that the US spent $649 billion on fossil fuel subsidies in 2017, contributing to a global total of $5.2 trillion. Other estimates suggest that US taxpayers pay about $20 billion to the fossil fuel industry annually.
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Fossil fuel tax breaks
Fossil fuel subsidies have surged to a record $7 trillion, reflecting a $2 trillion increase since 2020 due to government support during the global spike in energy prices. This amount is more than governments spend annually on education and about two-thirds of what they spend on healthcare. Fossil fuel subsidies are expected to decline in the near term as energy price support policies are unwound and international prices fall. However, they are then expected to rise to $8.2 trillion by 2030 as the share of fuel consumption in emerging markets continues to climb.
The United States is a major contributor to these subsidies, providing a number of tax breaks and subsidies to the fossil fuel industry. Conservative estimates put US direct subsidies to the fossil fuel industry at roughly $20 billion per year, with 20% currently allocated to coal and 80% to natural gas and crude oil. Some of these subsidies have been part of the United States tax code for over a century. The oil and gas industry already enjoys at least $35 billion in annual tax breaks.
There are several specific examples of US fossil fuel tax breaks and subsidies:
- The US Export-Import Bank (EXIM) has lent or issued billions in grants to fossil fuel projects.
- The Intangible Drilling Costs Deduction provision allows companies to deduct most of the costs incurred from drilling new wells domestically.
- The Domestic Manufacturing Deduction, in place from 2004 to 2018, supported a range of companies by decreasing their effective corporate tax rate.
- Publicly traded partnerships allow pass-through oil and gas partnerships to publicly list their shares, a privilege usually reserved for higher-taxed C-corporations.
- 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.
While these tax breaks and subsidies are intended to provide capital and fiscal security for investments, they often serve to subsidize the expansion of the mature and highly profitable fossil fuel industry. This results in increased greenhouse gas emissions and hinders the transition to cleaner and more renewable energy sources.
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Frequently asked questions
Fossil fuel subsidies surged to a record $7 trillion in 2022. This includes $1.2 to $1.5 trillion in annual payments given directly to fossil fuel production and consumption.
Funding is distributed through various government bodies and departments. In the US, the Department of Energy (DOE) administers funding through the Office of Advanced Fossil Energy R&D, the Loan Guarantee Program, and the National Energy Technology Lab. Other bodies include the Overseas Private Investment Corporation (OPIC) and the United States Export-Import Bank (EXIM).
Subsidies are intended to protect consumers by keeping prices low and preventing financial crises or civil unrest. They also provide capital and fiscal security for investments in emerging markets overseas.
Subsidies lead to higher taxes or borrowing, inefficient allocation of resources, increased pollution, and do not benefit poor households. They also result in more burning of fossil fuels and the climate pollution they create, contributing to global warming.
