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Biden's tax plan goes after the little fossil fuel subsidies, but not the big ones

Direct subsidies don't amount to much.

David Roberts
David Roberts
4 min read
Biden's tax plan goes after the little fossil fuel subsidies, but not the big ones

President Joe Biden has released the tax plan that is meant to pay for his $2-trillion-plus infrastructure plan.

You can read the New York Times for a full breakdown. The bulk of the revenue will come from a set of changes to corporate tax law, raising the corporate tax rate from 21 to 28 percent, imposing a minimum tax on global profits, and discouraging offshore tax havens.

All that stuff is great. I just want to say a few quick things about one of the provisions, which would roll back various fossil fuel subsidies in the tax code.

In one sense, this is cool, and a big deal if Democrats can actually do it — they’ve been trying for years to no end.

But in another sense, it reveals that the hue and cry over ending fossil fuel subsidies in the U.S. is somewhat of a tempest in a teapot, more a political symbol than a real source of revenue or decarbonization.

Direct U.S. fossil fuel subsidies aren’t that big in the grand scheme of things

The administration projects that closing oil and gas tax loopholes will raise $35 billion over the coming decade.

That amounts to 1.4 percent of Biden’s $2.5 trillion in tax-plan revenue.

A Treasury Department report from the administration says: “The main impact would be on oil and gas company profits. Research suggests little impact on gasoline or energy prices for U.S. consumers and little impact on our energy security.” (It cites this study.)

There are two reasons the changes would have “little impact on gasoline or energy prices.” The first is that oil is a globally traded commodity, with prices that are set globally — a U.S. company can’t raise its prices without losing out on the global market. So it eats any extra cost as slightly lower profits.

But the second is that $35 billion over 10 years just isn’t that much money. Even in 2020, a truly shitty year for U.S. oil companies, Exxon made revenue of $181 billion. That was down 31.5 percent from $265 billion in 2019. For companies with revenue in the hundreds of billions, experiencing market swings of $85 billion a year, an extra $3.5 billion a year spread out over the whole sector just isn’t going to register much.

Last year, a group of lawmakers including Rep. Ilhan Omar (D-Minn.) and Sen. Bernie Sanders (I-Vermont) introduced the End Polluter Welfare Act, which takes a much more expansive view of what counts as a fossil fuel subsidy and pulls together $15 billion a year in tax changes. That would be $150 billion over the next 10 years — 6 percent of the revenue Biden’s plan will raise.

(This even-more-aggressive study from Oil Change International identified $20 billion a year in subsidies, though the oil and gas industry hotly contests some of the categorical criteria it employed.)

The point is, to get to real revenue, you have to bring in indirect fossil fuel subsidies.

The big fossil fuel subsidies are the externalities

When Greenpeace says that U.S. fossil fuel companies get $62 billion a year in subsidies, it is referring to this study, which examines what it would take to “correct market failures brought about by climate change, adverse health effects from local pollution, and inefficient transportation.”

In other words, the study tallies up the oil and gas industry’s externalities, or the costs the industry imposes on society that are not reflected in market prices. (And it doesn’t even include the costs of defending the global oil supply, which are substantial.)

Whether it is fair or accurate to call these unpaid costs “subsidies” is largely a matter of semantics, or, worse, metaphysics, but it doesn’t really matter. Fossil fuel companies don’t pay the costs; other people do.

A 2017 International Monetary Fund study pegged the global value of direct and indirect fossil fuel subsidies at $5.2 trillion — that’s 6.4 percent of global GDP.

Of course, making fossil fuel companies pay those costs would involve more than modest tax-code tweaks. It would require a new carbon tax.

How much could that raise? A 2017 study by the Treasury Department modeled a carbon tax that starts at $49 per metric ton in 2019 and rises to $70 per metric ton in 2028 (not far out of line with some popular carbon tax proposals). Over the course of those 10 years, the tax would raise $2.2 trillion in revenue — just about enough to fund Biden’s infrastructure plan!

It’s a perfect match. It’s notable, then, that no one on either side of the aisle has proposed it, despite an ongoing hunt for revenue. Carbon-tax proponents are always saying it has bipartisan appeal, but in practice, it seems bipartisan in that both parties want nothing to do with it.

Anyway, Biden’s run at fossil fuel subsidies (the latest in a long line proposed by Dems) isn’t really about revenue.

This story is mostly about political power and social license

In every article you read about the portion of Biden’s plan that goes after fossil fuel subsidies, you will see some version of this: “Previous attempts to eliminate subsidies on oil and gas met with stiff industry and congressional opposition.”

Despite the fact that $35 billion over 10 years is relative chump change to the oil and gas industry, it fights any attempt to roll back these subsidies like a cornered polecat. It wants to protect its profits, but it also wants to establish that it still has clout in Congress. It has enjoyed these tax benefits for a long, long time, and giving them up would be a signal of its declining influence.

It’s good for Democratic presidents to keep thrusting this issue into the debate, if only to put Congress on record. It will probably fall out of this bill too, if the bill passes at all, but it will serve as something of a barometer on the pressure fossil fuel companies can mount, even in their battered state.

In the meantime, on this question as on all others, we await the judgment of our emperor and benefactor Joe Manchin, long may He reign.


This article was originally published at Volts.

Biden administration

David Roberts

David Roberts is editor-at-large at Canary Media. He writes about clean energy and politics at his newsletter, Volts. Previously, he covered the same subjects at Vox and Grist.