Issue Brief | Fossil Fuel Subsidies: A Closer Look at Tax Breaks and Societal Costs

Executive Summary

Government intervention in energy markets has a long history. Policies in a number of forms promote or subsidize the production of energy, though consensus on the suitability, scale and effectiveness of these policies is rare. Direct subsidies, in this context, refer to spending on research and development and other programs. They receive a great deal of scrutiny and are often subject to annual appropriations or active review. Indirect subsidies refer to foregone government revenue, or tax expenditures. Their scale outnumbers that of their direct subsidy counterparts by three to one, and can remain in effect indefinitely, without re-examination.

Numerous energy subsidies exist in the U.S. tax code and have been there for up to a century. In certain cases the circumstances relevant at the time of implementation may no longer exist. Today, for example, the domestic fossil fuel industries (coal, oil, natural gas) are mature and highly profitable, and numerous other energy resources that do not create the negative health and environmental effects associated with the extraction and burning of fossil fuels are available. One example is the far-reaching negative effects that mining and burning coal will have on air and water quality across the United States. There is a risk that indirect subsidies like tax breaks or favorable accounting treatments, once implemented, do not react to changes in circumstances and, therefore, persist far longer than appropriate or necessary. As such, insufficient attention to indirect subsidies should be even more concerning to the public. This concern is heightened by the scale of the issue. The indirect subsidies examined in this paper alone most likely will amount to nearly $50 billion over the next decade, and represent just a select number of subsidies offered to the fossil fuel industry. In fact, the National Academy of Sciences indicates the cost of externalities of fossil fuel usage may be greater than $1 trillion over a ten-year period, in addition to any climate-related costs, which are not included in the scope of this paper.

In recent years, major international institutions such as the G20, International Energy Agency, and the Organization of Economic Cooperation and Development (OECD) have called for the phase-out of fossil fuel subsidies. Given the ever increasing policymaker focus on the widening federal deficit, energy security, and the dangers associated with climate change, it is useful to re-examine the array of indirect federal subsidies available to fossil fuels. Policymakers should determine whether their existence is still justified at this time, what the impacts of such subsidies are, and whether Congress should consider repealing or modifying these subsidies. But if a given subsidy is justified as an essential part of the government’s role in the energy markets, it should be consistent with an overarching, coordinated, and well-organized energy policy. Otherwise, those federal funds (which are significant) could skew the market.

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