Katerina Swanson
Despite the urgent need to curb human-induced climate change, governments continue to spend substantial amounts of money on fossil fuel facilities. In 2022, global fossil fuel subsidies reached a record $7 trillion, reflecting a $2 trillion increase since 2020. This amount exceeds what governments spend annually on education and is about two-thirds of what they spend on healthcare. The largest subsidizers are China, the United States, and Russia. The United States, for example, spent $757 billion on fossil fuel subsidies in 2022, including $3 billion in explicit subsidies and $754 billion in implicit subsidies. These subsidies take various forms, including tax breaks, financial incentives, and government support, all of which lower production costs and shield the oil and gas industry from market risks.
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What You'll Learn
Fossil fuel subsidies
In 2022, fossil fuel subsidies in the United States totalled $757 billion, according to the International Monetary Fund. This includes $3 billion in explicit subsidies and $754 billion in implicit subsidies, which include negative externalities such as health and environmental costs that are borne by society at large rather than producers. Federal tax subsidies for coal decreased from $1.9 billion in fiscal year 2016 to $590 million in 2022. In 2023, Congress allocated $890 million to the Department of Energy's Fossil Energy and Carbon Management (FECM) office, a 7.9% increase. The FY 2024 budget has requested $905 million for FECM.
The true price of carbon and other pollutants is often not reflected in the actual cost of fossil fuels and fossil-derived products. This discrepancy is referred to as an externality by economists. Fossil fuel externalities, including societal, environmental, and health costs, are largely overlooked in the process of incentivizing fossil fuel production through policy mechanisms. Vulnerable communities, such as minority and low-income populations, are disproportionately affected by the health and environmental impacts of fossil fuel combustion and extraction.
There have been recent attempts to alter fossil fuel subsidies, including in the Biden-Harris Administration's FY 2024 budget request, the Inflation Reduction Act (IRA), the Infrastructure Investment and Jobs Act (IIJA), and current Congressional proposals. The Biden-Harris Administration's FY 2024 budget request would eliminate 13 fossil fuel tax preferences and credits, such as the tax credit for oil and natural gas extracted from marginal wells. Over ten years, these proposed changes would reduce the federal deficit by almost $31 billion. The IRA subsidizes fossil fuel companies, providing $1.55 billion for methane emission reductions and extending and modifying the 45Q tax credit for carbon dioxide sequestration. The IIJA included $12 billion for carbon capture, utilization, and storage, which generally occur at large point sources.
Removing fossil fuel subsidies would reduce the health risks of air pollution and greatly reduce global carbon emissions, thus helping to limit climate change. According to the International Monetary Fund, removing fuel subsidies can be tricky, and governments must design, communicate, and implement reforms clearly and carefully as part of a comprehensive policy package. A portion of the increased revenues should be used to compensate vulnerable households for higher energy prices.
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Research and development
The fossil fuel industry receives significant government funding for research and development (R&D). In the United States, federal funding for fossil fuels is primarily distributed 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.
In FY 2022, the US federal government spent $121 million on R&D for natural gas and petroleum liquids, and $280 million on coal R&D. This represents an increase from previous years, with $105 million and $107 million spent on natural gas and petroleum liquids R&D in FY 2021 and 2020, respectively, while coal R&D received $500 million in 2021 and $338 million in 2020. For the FY 2024 budget, the Biden-Harris Administration requested $905 million for the Department of Energy's Fossil Energy and Carbon Management (FECM) office, which includes oil, gas, and coal research.
The US government also provides funding for fossil fuel projects overseas. The United States Export-Import Bank (EXIM) has lent or granted billions of dollars to fossil fuel projects over the past decade. For example, EXIM provided $14.8 billion for 78 projects in the petroleum sector from 2001 to 2018. Additionally, the US International Development Finance Corporation (DFC) committed over $1.8 billion to fossil fuel projects abroad in 2023, despite pledging to cease funding new fossil fuel projects in 2021.
According to the International Renewable Energy Agency, in 2017, fossil fuels received 70% of global energy subsidies, while only 20% went to renewables. However, in the US, half of the federal money spent on energy subsidies from 2016 to 2022 went to renewables, with less than 15% going to oil, gas, and coal. This shift towards supporting renewable energy sources is also reflected in the growing number of investors who are considering the risks associated with climate change in their investment choices.
While there have been calls from organisations like the G20, the International Energy Agency, and the Organization for Economic Cooperation and Development (OECD) to phase out fossil fuel subsidies, they continue to increase. Fossil fuel subsidies surged to a record $7 trillion in 2022, accounting for 7.1% of global GDP. The largest subsidisers are China, the United States, and Russia. These subsidies have significant environmental and fiscal impacts, contributing to climate change, hindering economic growth, and benefiting higher-income households. Removing fossil fuel subsidies could prevent premature deaths, increase government revenues, and help achieve global warming targets.
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Environmental costs
Fossil fuel subsidies have risen to a record-high $7 trillion, a $2 trillion increase since 2020. This figure includes both explicit subsidies (direct payments) and implicit subsidies (societal costs). The majority of these subsidies are implicit, as environmental costs are often not reflected in prices for fossil fuels, especially for coal and diesel. Consumers did not pay for over $5 trillion of environmental costs last year.
The environmental costs of fossil fuels are significant and wide-ranging. Fossil fuel combustion is the leading contributor to global warming, which poses a significant threat to the environment and humanity. The increased severity of storms and rising sea levels put cities like New York, Miami, and New Orleans at greater risk of storm damage. For example, a 2008 study estimated that high-intensity hurricanes could cause up to $422 billion in damages in Atlantic and Gulf Coast states between 2025 and 2100.
The production and transport of fossil fuels also result in routine pollution and occasional catastrophic accidents. For instance, the 2008 collapse of a coal ash pond outside a Tennessee Valley Authority power plant led to an estimated $825 million in cleanup costs. Between 1990 and 2006, 51 large oil spills in the United States resulted in expenditures of between $860 million and $1.1 billion in removal costs and compensation for damages.
Additionally, the health costs of fossil fuel-driven climate change and air pollution are substantial. A report by the Natural Resources Defense Council estimated these costs to exceed $820 billion annually in the United States alone. These costs include hospitalizations, injuries, mental health ailments, lost wages, and missed days of work. Vulnerable and disadvantaged communities, particularly minority and low-income populations living near polluting facilities, bear the brunt of these health costs.
The true price of carbon and other pollutants is often not reflected in the cost of fossil fuels. Removing fossil fuel subsidies and increasing fuel prices to efficient levels could significantly reduce global CO2 emissions and bring numerous benefits, including cleaner air, improved public health, reduced premature deaths, and progress towards global warming targets.
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Tax breaks
Fossil fuel subsidies, including tax breaks, have been a significant point of discussion in recent years, with governments and organisations attempting to address their impact on the environment and society. These subsidies are projected to have surged to a record $7 trillion in 2022, according to the International Monetary Fund (IMF), with $5 trillion of that being environmental costs that consumers did not pay for. This is a half-trillion-dollar increase since 2015, with the largest subsidisers being China, the United States, and Russia. In 2022, fossil fuel subsidies in the United States totalled $757 billion, including $3 billion in explicit subsidies and a staggering $754 billion in implicit subsidies. These implicit subsidies are costs like negative health and environmental impacts that are borne by society as a whole rather than the producers.
The true price of carbon and other pollutants is often not reflected in the actual cost of fossil fuels, which economists refer to as externalities. Fossil fuel externalities, including societal, environmental, and health costs, are largely overlooked in the process of incentivising fossil fuel production through policy mechanisms. These externalities disproportionately affect vulnerable communities, particularly minority and low-income populations living near highly polluting facilities such as airports, highways, and petrochemical refineries. Addressing these externalities and removing fossil fuel subsidies could save taxpayers billions of dollars and improve the health and quality of life for many people.
Various tax breaks and incentives have encouraged energy production from fossil fuels. Federal income tax provisions that subsidise domestic fossil fuel production include the expensing of exploration, development, and intangible drilling costs. The Intangible Drilling Costs Deduction (26 U.S. Code § 263) allows companies to deduct most costs incurred from drilling new wells domestically. The Joint Committee on Taxation estimated that eliminating this tax break would generate $1.59 billion in revenue in 2017 or $13 billion over ten years. Percentage depletion (26 U.S. Code § 613) is an accounting method that allows businesses to deduct a certain amount from their taxable income as a reflection of declining production from a reserve over time. Independent oil and gas producers can deduct exploration and development costs from income in the year incurred, even though returns may be realised over many years. Integrated oil and gas companies can deduct 70% of these costs in the first year and recover the remaining 30% over the next five years.
Other tax subsidies for fossil fuels include publicly traded partnerships, amortisation of geological and geophysical expenditures associated with oil and gas exploration, accelerated depreciation of natural gas infrastructure, investment credits for clean coal facilities, and energy production credits for coal. The Domestic Manufacturing Deduction (IRC §199), in place from 2004 until 2018, supported fossil fuel companies by decreasing their effective corporate tax rate. The Office of Management and Budget estimated that repealing this deduction for coal and other hard mineral fossil fuels would have saved $173 million between 2012 and 2016. Additionally, the IRA has provided subsidies to fossil fuel companies, including $1.55 billion for methane emission reductions and tax credits for carbon dioxide sequestration.
While there have been proposals to reduce fossil fuel subsidies, such as the End Oil and Gas Tax Subsidies Act of 2023, and the Biden-Harris Administration's FY 2024 budget request to eliminate 13 fossil fuel tax preferences, the reality is that these subsidies are increasing. Removing fuel subsidies is a complex issue, as governments must carefully design and implement reforms while considering the potential impact on vulnerable households. However, doing so could bring significant benefits, including reducing global carbon dioxide emissions, improving air quality, and generating additional government revenues.
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Government funding
Firstly, it is essential to understand the distinction between explicit and implicit subsidies provided by governments. Explicit subsidies refer to instances where the retail price of fossil fuels is below the supply cost. These subsidies are prevalent in regions like the Middle East, North Africa, Europe, Commonwealth of Independent States, and East Asia. On the other hand, implicit subsidies refer to the undercharging for environmental and health costs associated with fossil fuel usage. These implicit subsidies are considered a "license to pollute for free" and have a significant impact on vulnerable communities, particularly minority and low-income populations living near highly polluting facilities.
The funding for fossil fuel facilities comes from various government sources. At the federal level, the United States government has provided substantial funding for research and development in the fossil fuel industry. For example, in 2022, the federal government spent $121 million on research and development for natural gas and petroleum liquids. Additionally, federal funding for coal research and development totaled $280 million in the same year. The Department of Energy's Fossil Energy and Carbon Management (FECM) office also received significant funding, with an allocated budget of $890 million in 2023 and a requested budget of $905 million for 2024.
State governments also play a role in subsidizing fossil fuels. For instance, states provide support through sales tax exemptions and other financial incentives. Texas and Louisiana, for example, offer property tax exemptions for liquefied natural gas (LNG) plants, which can amount to billions of dollars over ten years. These exemptions contribute to the overall funding available for fossil fuel facilities.
Internationally, the United States has a complex history of funding fossil fuel projects abroad. While there have been pledges to cease funding new fossil fuel projects overseas, the U.S. International Development Finance Corporation (DFC) and the U.S. Export-Import Bank have committed substantial funds. For example, the DFC and the Export-Import Bank provided over $1.8 billion to fossil fuel projects abroad in 2023. The Export-Import Bank, in particular, has a history of lending or issuing billions in grants to fossil fuel projects globally, including significant funding for the coal and petroleum sectors.
The total amount of government funding for fossil fuel facilities is substantial. According to the International Monetary Fund, fossil fuel subsidies in the United States totaled $757 billion in 2022, including explicit and implicit subsidies. Globally, fossil fuel subsidies reached a record $7 trillion in 2022, reflecting a $2 trillion increase since 2020. This surge in subsidies can be attributed to government support during the global spike in energy prices caused by geopolitical events and the economic recovery from the pandemic.
In conclusion, government funding for fossil fuel facilities involves a combination of federal, state, and international financial support. While there have been efforts to reduce or eliminate fossil fuel subsidies, they continue to play a significant role in energy policy. The complex interplay of economic, political, and social factors influences the level of government funding allocated to the fossil fuel industry.
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Frequently asked questions
Fossil fuel subsidies amounted to a record-high of $7 trillion in 2022, according to the International Monetary Fund (IMF). This is equivalent to around 7% of global GDP.
Fossil fuel subsidies in the United States totalled $757 billion in 2022, according to the International Monetary Fund. This includes $3 billion in explicit subsidies and $754 billion in implicit subsidies.
In FY 2022, the federal government spent $121 million on research and development (R&D) for natural gas and petroleum liquids. Federal funding for coal R&D totaled $280 million in FY 2022.
The Inflation Reduction Act (IRA) provides $1.55 billion for methane emission reductions and extends and modifies tax credits for carbon dioxide sequestration. The Infrastructure Investment and Jobs Act (IIJA) includes $12 billion for carbon capture, utilization, and storage.
Governments provide subsidies to fossil fuel companies to support consumers and businesses during spikes in energy prices. Removing subsidies can be tricky as it may lead to higher energy prices for vulnerable households.
