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Obama Can Cut Fossil Fuel Subsidies and Save $39 Billion, But Will Congress Go Along?

The cuts were included in the last two budgets submitted to Congress, but were never implemented. Will GOP budget hawks now get on board?

By Elizabeth McGowan

Jan 14, 2011

“It’s not as simple as saying the industry may be buying people off,” he continued. “Every legislator knows that taking away these subsidies will cause industry to threaten to raise the price of gas. But nobody has the (gumption) to tell the oil industry that they’ve had record profits for years and years and years. Now, they’re going to make a little less of those astronomical profits.”

Recent rule changes announced by the new GOP-majority House have observers at the advocacy organization Friends of the Earth on edge.

Drifting away from pay-as-you-go as a guiding rule exposes the House as more interested in attacking government than reducing the deficit, Ben Schreiber, FOE’s climate and energy tax analyst, said in an interview.

“This had the potential to be a bipartisan issue but that slipped away,” Schreiber said. “Congress isn’t being serious now because they’re playing politics. There’s a lot of rhetoric about dealing with the financial crisis. When they get serious about dealing with the national debt, these tax giveaways to corporations and the fossil fuels industry are going to have to be part of it.”

Renewables Need Boost Worldwide

In an ideal world, purists say, all energy subsidies would be eliminated. But that doesn’t make sense, they point out, in a country where federal subsidies have been handed out to oil and gas since 1916 and to coal since 1932. Renewables need to be receiving hefty infusions if this country is intent on dropping carbon emissions 17 percent below 2005 levels by 2020.

“We’re not going to level this playing field quickly because it is incredibly tilted,” Kretzmann said. “We need to build the infrastructure so renewables have the chance to compete. In many places, wind is competitive with coal already and so is distributed solar.

“Fossil fuel technology has survived on trillions of dollars of government largesse over the years,” he continued. “This is about beginning to correct this historic imbalance.”

Environmental activists around the globe are often accused of lodging campaigns against the poor when they criticize regional and international development entities such as the World Bank, the U.S. Export-Import Bank, or the Overseas Private Investment Corporation for funding electricity infrastructure powered by fossil fuels in developing nations.

But that is a misunderstanding of their complaints, Kretzmann said.

“Fossil fuels are not an efficient way to deliver electricity,” he said. “We’re totally on board with the idea that electricity is a very important factor for development. The most efficient way to deliver electricity is through renewable sources and that’s why public dollars should be used to subsidize them.”

A 2009 joint analysis released by the IEA and the Organization for Economic Cooperation and Development revealed that ending fossil fuel subsidies in emerging economies and developing countries could reduce global greenhouse gas emissions 10 percent by 2050.

Production vs. Consumption Subsidies

Advocates for getting rid of tax breaks for fossil fuels are careful to distinguish between production and consumption subsidies.

Generally, the industrialized world’s subsidies are on the production side because the intent is to make costs cheaper for the energy industry. Consumption subsidies, which make access to energy and fuel cheaper for the poor, are more common.

Shrinking consumption subsidies in the developing world would do nothing but provoke backlash and ensure gridlock, Kretzmann explained. Instead, he argued, phased-out production subsidies from industrialized countries should be redirected toward clean energy infrastructure in poor countries.

Other Avenues for Obama to Pursue

During last year’s post-election lame-duck session, Friends of the Earth and other advocacy groups were highly disappointed to watch Congress restore $6 billion in annual subsidies to the corn ethanol industry that were set to expire in December.

To them, it was a signal about how difficult it is to wean wealthy and powerful industries from the subsidy trough.

FOE’s Schreiber complimented Obama for spelling out 12 specific subsidies that should disappear in his previous budget presentations.

This should not be an either-or-debate

Shrinking consumption subsidies in the developing world would do nothing but provoke backlash and ensure gridlock.

Not true, or at least not as a universal generalization. Shrinking consumption subsidies in the developing world will not always be easy, but an increasing number of developing countries know that such a change is necessary and inevitable -- especially the countries like Indonesia, which have gone from being net oil exporters to being net oil importers and are seeing precious government revenues being spent on consumption of something that is dirtying their atmosphere and not helping to develop their economy.

Even Iran has come to realize that it cannot afford to continue the current policies, so has embarked on a radical reform of its fuel-pricing policies, while instituting a cash-transfer program to help those poor most adversely affected.

In many countries that subsidize (suppress) prices of petroleum fuels or natural gas, it is not the poor who are the major beneficiaries, but the non-poor. And in countries like Saudi Arabia, the government is keeping prices of naptha and natural gas low in order to encourage the build-up of a petro-chemicals industry.

Politically, the developed countries need to do their own bit in eliminating subsidies to fossil fuels if they expect at the same time that developing countries should eliminate theirs. But let's concentrate on that without needlessly glossing over the real environmental and economic problems being caused by the practice of subsidizing fossil-fuel consumption in developing and emerging economies.

Small correction

Just one small correction to this otherwise excellent article - I didn't and woudn't say that removing subsidies will necessarily lead to an increase in gas prices - my point in linking it to record profits is that a removal of subsidies doesn't have to lead to an increase in gas price - it can instead simply lead to a reduction in the record level of profits that the industry enjoys.  Industry will always raise the spectre of higher gas prices as a way of stopping any effort aimed at subsidy removal - but the truth is that they're more interested in protecting their record profits than the price of gas.

End All Subsidies

Renewables are at a major disadvantage. Fossil fuels including gas, oil, and coal, get a total of $80 billion in tax breaks and direct spending subsidies every year. Renewables now get $29 billion, with $6 billion of it going to ethanol. So that means renewables are at a $51 billion subsidy disadvantage. By repealing all subsidies, it removes that huge disadvantage holding back renewables. Every time renewable subsidies are to be extended, fossil fuel subsidies always get tacked on. So it's actually better to repeal ALL subsidies.

Our government has always

Our government has always subsided oil...why?  Because Big Oil has used the subside to return a part of our tax money to the politicians for election campaigns.  Additionally, this money serves to keep the price of gasoline at the pump lower than it should be by assuring they have a floor of profit. 

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