The Economist, fossil fuel subsidies and climate disaster

By Andy May

I’ve been a subscriber to The Economist for years. It is one of the few mainstream media publications I still read. But, I found a very annoying article in the October 1, 2016 issue. The title and link are “Notes from the undergrowth.” It starts out with a false assertion that is easily debunked, but often stated:

Media myth #1

“DESPITE deluges in the South, droughts in the West and fires throughout national forests this year, the words “climate” and “change” have seldom been uttered together on the campaign trail.”

The UN World Meteorological Organization (WMO), Nature magazine, and the IPCC all have said extreme weather cannot be reliably linked to climate change.

From the WMO:

“There were fewer deaths, even while exposure to extreme events increased as populations grew and more people were living in disaster-prone areas. According to the 2011 Global Assessment Report, the average population exposed to flooding every year increased by 114 per cent globally between 1970 and 2010, a period in which the world’s population increased by 87 per cent from 3.7 billion to 6.9 billion. The number of people exposed to severe storms almost tripled in cyclone-prone areas, increasing by 192 per cent, in the same period.”

Yes, you read that correctly. There were fewer deaths, even though the number of people exposed to serious storms increased.

From the IPCC SREX report on climate change and extreme weather:

“Long-term trends in economic disaster losses adjusted for wealth and population increases have not been attributed to climate change, but a role for climate change has not been excluded…”

Hardly an endorsement for man-made extreme weather. Here is another quote from the same report:

“There is medium confidence that some regions of the world have experienced more intense and longer droughts, in particular in southern Europe and West Africa, but in some regions droughts have become less frequent, less intense, or shorter, for example, in central North America and northwestern Australia”

Finally, from the Nature editorial:

“Better models are needed before exceptional events can be reliably linked to global warming.”

So, pretty easy to completely destroy the initial statement of the article. But, we aren’t through yet, later in The Economist article we read the following:

Media myth #2

“An important step [toward lowering carbon dioxide emissions] was unveiled last year: The Clean Power Plan. This proposes the country’s first national standards to limit carbon dioxide emissions from power plants … Legal challenges from fossil fuel groups and two dozen mostly Republican-led states saw the Supreme Court put it on hold …”

This is almost true as written, but very slanted. There are only 50 states and 27 of them are against this plan by the President and the EPA, an agency that has no congressional oversight. Thus a majority of the states and the Supreme Court ruled against it. We are a republic with a division of powers. The Economist continues:

“Mrs. Clinton is vague about how she would pay for [green energy], but slashing fossil-fuel subsides could be part of the answer. Such handouts came to nearly $38 billion in 2014.”

There are very few, if any, fossil fuel specific subsidies in the United States. The most recent and well researched study of energy subsidies in the US is by the EIA, it was completed in 2015. According to this EIA report total federal energy subsides for energy in the US declined from $38B in 2010 to $29B in 2013. So The Economist mixed up total energy subsidies in 2010 with fossil fuel subsidies and got the date wrong. Of the $29B, the EIA claims 12% went to fossil fuels and 68% went to renewables, including hydropower, nuclear, solar and wind. The remaining 21% went to energy assistance for low income families, mainly through the LIHEAP (Low Income Home Energy Assistance) program. It is interesting that the EIA has computed that fossil fuels produced 84% of the energy consumed in the world in 2012. They forecast that in 2040, fossil fuels will still produce 78% of the world’s energy. In 2012, excluding nuclear, renewables (including biofuels which are mostly wood and dung) produced 12% of the world’s energy. Table 1 summarizes the subsidies discussed in the EIA report.

Table 1, 2013 energy subsidies according to the EIA

The so-called fossil fuel subsidies

Most of the fossil fuel “subsidies” listed by the EIA are not specific to the fossil fuel industry. They are not direct payments to the companies, government loans, industry specific tax “loopholes,” mandates to buy fossil fuel products, or tax deductions for purchasing fossil fuel products (except possibly the alternative fuel mixture deduction, which expired in 2013 anyway). The much larger subsides to wind, solar, and biofuel companies include all of the above. The EIA totals $3.4B in fossil fuel subsidies. The 2016 G20 US self-assessment of fossil fuels tabulates a total fossil fuel subsidy of $8.1B (page 16, Table 1). But, they include LIHEAP and the domestic manufacturing deduction which we consider invalid.

The EIA report only includes what they call “financial interventions and subsidies” that are provided by the federal government and targeted specifically at energy. This seems logical, fossil fuel subsidies or energy subsidies should not include general tax provisions like the domestic manufacturing deduction. This deduction, often listed as a fossil fuel subsidy, is for all manufacturing companies. Gasoline, diesel, ethylene, etc. are manufactured just like cars and televisions. They do not include this provision in this list and they shouldn’t. Also not included are accelerated depreciation (except for the 15-year natural gas pipeline rule), local infrastructure projects like highways, and state and local incentives to get businesses to move to a specific location.

There are other tax provisions often called subsidies, that the EIA wisely did not include. One is the foreign tax credit, especially the dual capacity rule. Another is the publicly traded partnership, used by pipeline companies, cable companies and real estate companies. These are available for all companies and are widely used outside the energy sector. These tax provisions are obviously not energy subsidies. They are large amounts, so they are often used to pad the headline subsidy number.

State and local incentives are not included either. These are mostly for renewable energy. A lot of the local incentives are conservation oriented.

Finally, often lumped in as a subsidy are various safety funds, like the Black Lung Disability Trust Fund, the Nuclear Waste fund, the oil spill liability trust fund, etc. The various funds listed here (there are more listed in EIA report) are funded by the affected industries and have no budgetary impact. Including them (as some do) is the same as taking the payments made by the energy sector and calling them subsidies. How does a company subsidize itself?

Arguing that the tax law favors oil and gas is a little silly because according to the New York Times corporate tax database (2007 to 2012) ExxonMobil, Chevron and ConocoPhillips paid the most taxes overall. The overall average tax rate for the S&P 500 is 29%, oil and gas companies pay 37%. They do not provide numbers for coal, unfortunately. You will see people twist and distort these numbers to fit any agenda they like. The NY Times database is pretty complete and includes all taxes actually paid, so I tend to believe it over other statistics I’ve seen. Some try and say taxes do not affect corporate decision making, which is total nonsense, the NY Times article also makes this point. Reading about this makes one see the wisdom of a flat income tax with no deductions at all.

Of the EIA total fossil fuel subsidy of $3.4B, $0.5B is from the IRS deduction for costs spread over the productive life of a well or mine. The percentage depletion deduction has been in the tax code since 1926. It is available to all mining companies (gold, copper, iron, etc.), small oil and gas companies and royalty owners of oil and gas properties. It is not available for large integrated oil and gas companies like ExxonMobil. Calling this general deduction, that large oil and gas companies are not permitted to use, a fossil fuel subsidy takes big cojones. Under some circumstances, the percentage depletion allowance can exceed the costs of a well or mine. This was deliberate on the part of Congress; they did not want small wells or mines shut down just because of our tax laws. Most wells and mines in the US have very low rates of production and would be closed if this tax provision were eliminated.

Another $0.5B is due to expensing of exploration and development costs, this includes intangible drilling costs (engineering, site preparation, research, etc.). These are legitimate business costs that every other business is allowed to deduct. This provision has been in the tax code since 1913. Again, as with the percentage depletion deduction, large oil and gas companies are specifically singled out to receive a reduced deduction. This is analogous to the development cost for a new drug. The pharmaceutical industry is allowed to deduct research and development costs. It is extremely difficult to call this a subsidy.

The credit for investment in clean coal costs the government $0.2B. This can reasonably be counted as a fossil fuel subsidy. It is specifically for the coal industry. It is the same as wind or solar subsidies, just much smaller.

Other so-called subsidies include treating natural gas pipelines as 15 year properties, amortizing geological and geophysical expenses over two years (equivalent to research, enjoyed by every company), treating coal royalties as capital gains (they aren’t?), and partial expensing of mine safety equipment. These total $0.3B. None sound like a subsidy.

My favorite fossil fuel subsidy is the “Alternative fuel mixture credit” of $0.4B. This applies to natural gas and hydrogen fueled vehicles. I guess it could be called a subsidy and part of it, probably the largest part, is for natural gas. This provision expired at the end of 2013.

In 2013 there was a temporary tax deduction still in effect that allowed 50% expensing of some refining equipment. That amounted to $0.6B. It expired at the end of 2013.

The tax provisions that are called coal subsidies are all related to deductions for installing pollution control equipment or enhancing mine safety. These add up to $0.8B. These are not provisions I would call subsidies, they are reasonable cost recovery for following government regulations.

The largest so-called fossil fuel “subsidy” is the Low-Income Home Energy Assistance (LIHEAP) welfare program. Obviously, in the northern United States winters energy is a life and death matter. When it is 40 degrees below zero outside you need heat to survive. If you live in the north, on the next windless cold night, think about that. I’m sure you will be in favor of fossil fuels then. This is worth $5.4B, more than all of the “subsidies” listed above. The EIA correctly did not call it a fossil-fuel subsidy, but many do. LIHEAP applies to all sources of energy, including renewables.

Conclusions

It’s sad when a major news publication writes an article containing “media myths” that are so easily proven wrong. Unfortunately, this is occurring with increasing frequency. Googling “climate change and extreme weather” on my computer resulted in 4,630,000 hits. Glancing through these shows that many of them state something imprecise, unfalsifiable and non-quantitative like “some extreme events seem to be increasing and this might be due to climate change.” Or, like the EPA, “climate change is increasing the odds…” Quantitative studies like Roger Pielke Jr’s, show that there is no data to support the idea that extreme weather has increased in frequency or severity. As he says, this media-myth of a connection between extreme weather and climate change is “Zombie science.”

These subsidy claims are actually an indictment against our tax laws. They have become so complex that they can be twisted to support any conclusion. This is the real problem and the tax laws are way overdue for reform. The bottom line is that fossil fuel companies (at least the oil and gas companies) pay more in taxes than the average S&P 500 company and they are getting few, if any, special tax breaks. The fossil fuel companies get no government loans, loan guarantees, guaranteed prices, or special tax breaks for any of their products. The only energy companies that get targeted subsidies are wind, solar, biofuel and other renewable energy companies.

October 8, 2016