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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

WASHINGTON—Lately, President Obama seems to be suffering from a case of laryngitis on the topic of shaving subsidies for the fossil fuel industry.

Thus, not too surprisingly, it appears Congress has been infected with the same bug.

Environmentalists and deficit hawks are eager for the president to find his voice again by using his 2012 federal budget to once again take a whack at propping up oil and coal. Last year, the idea he dangled of in such subsidies through 2020 went nowhere. It’s unclear if Obama might try to duplicate those savings when he unveils his latest budget proposal in mid-February.

David Goldwyn of the State Department made it clear during a talk in Washington this week that reining in fossil fuel subsidies worldwide would help to make a significant dent in greenhouse gas emissions. The Group of 20 has committed to doing so and the International Energy Agency will be keeping score, said Goldwyn, who is stepping down today from his position as coordinator for international energy affairs.

In the United States, he pointed out, reducing subsidies “will be a political battle.”

“The one piece you can lay at the Obama doorstep is a failure to push this issue,” Steve Kretzmann, executive director of the Washington-based nonprofit Oil Change International, told SolveClimate News in an interview. “He has put it in his budget the last two years and Congress didn’t pick up on it. A campaign from the White House about eliminating subsidies could do a lot.”

Subsidy Numbers Booming

Obama drew kudos from Kretzmann and others for his resolve in September 2009 at the G20 Pittsburgh Summit when he called on member nations to wean the fossil fuels industry of taxpayer-funded subsidies and outlined specifically how the United States would undertake such cuts. But nothing more than talk happened on either front yet.

For decades, tax breaks and federal incentives have been a boon to the U.S. fossil fuels industry. Numbers compiled by the Environmental Law Institute reveal that those figures totaled $72 billion between 2002 and 2008—about $10 billion annually. put annual U.S. subsidy figures to these mature technologies somewhere between $6 billion and $39 billion annually, depending on what is included in the count.

Graph of energy subsidies

The International Energy Agency (IEA) estimates that worldwide, countries spent $312 billion to subsidize fossil fuels in 2009. That figure casts a daunting shadow over the $43 billion to $46 billion governments provided to renewable energy, according to from the London-based research group, Bloomberg New Energy Finance. The latter came through tax credits, alternative energy credits and guaranteed electricity prices known as feed-in tariffs.

At $18.2 billion, the United States led the way with clean energy subsidies in 2009, according to New Energy Finance.

Opportunity Slipping Away at Congress?

After Republicans dominated the mid-term elections last fall, Capitol Hill trackers speculated that slicing away at fossil fuel subsidies could provide common ground for Democrats who are longtime advocates of taking such action and Republicans intent on righting the national deficit and debt crisis by whittling away at budget waste.

It wasn’t perceived as an issue confined to the extreme left or right. None other than the Bipartisan Policy Center, a levelheaded, Washington-based think tank, endorsed the paring of such subsidies.

Just a few weeks into the 112th Congress, however, observers are already doubting that such a harmonic convergence can occur.

“This is a chance for Congress to decide what’s more important, deficit reduction or the oil industry that pays for campaigns?” Kretzmann said. “It’s about principle rather than rhetoric.

“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.

But the prescription shouldn’t end there, he said, ticking off a list of stimulus grants and other expensive federal investments that support projects such as coal gasification projects, carbon sequestration and the country’s first liquid coal facility.

“This country is continuing to finance coal projects,” he said. “Obama isn’t calling them subsidies but they clearly are. Coal is not going to be clean no matter what you do.”

Hope Amidst the Frustration

“The American people need to make it clear to Congress they are concerned about our fiscal situation,” Schreiber said. “They need to tell them that we can’t give billons of dollars to corporations until we get rid of this debt.”

Kretzmann is rooting for leaders in Congress to make cutting subsidies to fossil fuels a priority soon.

“Unlike greenhouse gas emissions, this one plays well in the polls,” he said. “People don’t like the idea of their money going toward the most profitable industry in the country. This one is a winner for whomever wants to take it up. The job is open right now.”

Goldwyn, the energy specialist with the State Department, called for calm as the debate proceeds. He emphasized that it is destructive when opponents and proponents of particular energy decisions malign one another.

“As we try to strike this balance between energy and the environment, I would ask to approach this with humility,” he said. “Transformation of our energy use to low carbon is going to take a long time. If we don’t begin that transformation now, we’re never going to get there.”

Goldwyn is well aware that back-and-forths over “cleaner” and “cleanest” energy sources can turn ugly.

His advice to all involved?

“Keep an open mind, a patient ear and a civil tongue.”

(White House Photo by Pete Souza; Infographic by Tommy McCall, courtesy Environmental Law Institute)

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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