The Subsidies Circus in Paris

Rahm Emanuel, former chief of staff to President Obama, once quipped, “You never want a serious crisis to go to waste.” That advice hasn’t been forgotten in the Paris conference on climate change. Activist groups have leveraged fears over climate change to attack what they see as Public Enemy Number One: the energy industry. But they don’t stop with a call for uniform taxes on carbon emissions, an approach widely favored by economists and large US oil companies. Instead they call for a no-holds-barred fiscal attack on energy firms.

Ahead of the UN conference, Oil Change International released a report singling out the global fossil fuels industry for receiving massive subsidies from governments. Under the headline, “Start funding climate action, stop funding climate chaos,” the report proclaims the U.S. Government provides over $20 billion in subsidies to the fossil fuel industry annually. “We can shift the hundreds of billions of dollars in public support for fossil fuels and use it to support climate action,” proclaimed a senior official with the organization.

Such statements confuse American taxpayers into believing that the federal government is generously bankrolling oil and gas producers. This is simply not the case. Like many studies before it, the Oil Change International report conflates subsidies – payments made by the government to companies – with tax provisions that allow businesses to deduct legitimate costs, including depreciation on their investment, when they compute the base for assessing corporate income taxes.

The distinction between subsidies and deductions is important. Subsidies are an out-of-pocket expense for taxpayers. They are often used to promote a new industry. Wind and solar energy thus receive subsidies which, hopefully, will enable them to grow out of their “infant industry” status. The US oil and gas industry does not receive subsidies, and rightfully not. Over recent years it has ranked among the country’s strongest growth sectors and needs no public support to stand on its own.

On the other hand, tax deductions allow business firms to subtract legitimate expenses from revenue, including annual allowances for the depreciation of capital assets, when computing taxable profits. Organizations like Oil Change International often lump these expenses and allowances into the same category as subsidies, playing on the argument that the Treasury is somehow deprived of rightful taxes.

But that is disingenuous. Conflating tax deductions with subsidies is dangerous on several levels. All kinds of industries claim deductions when computing their income, from software to autos to textiles to pharmaceuticals. Selectively repealing deductions just for oil and gas producers would slow down an industry that is creating jobs and reinvesting in American infrastructure. Oil and gas development supports more than 9 million jobs in the United States and four of the top 10 companies plowing funds back into the country are energy producers, according to a Progressive Policy Institute study.

Domestic energy production has positioned the United States to serve as a leader on climate change issues. “We have invested in energy efficiency in every way imaginable,” President Obama said during his speech in Paris. “Advances we’ve made have helped drive our economic output to all-time highs, and drive our carbon pollution to its lowest levels in nearly two decades.” What he omits is that this remarkable turnaround largely occurred largely on the shoulders of shale development here at home.

To be sure, other governments such as China and Russia heavily subsidize their oil and gas industries. State-owned enterprises are recipients of huge subsidies as the Oil Change report points out. But lumping US tax deductions together with genuine subsidies is inaccurate at best.

This year, the United States unseated Russia as the world’s largest oil and natural gas producer, and US oil imports are forecast to fall from a record high in 2006 to less than 15 percent of consumption by 2020. As a result, the United States is less dependent on foreign suppliers; energy production and consumption is becoming more efficient; and, importantly, America is able to bring other nations to the table to seriously address climate issues.  America cannot address climate change with misguided tax policies that discourage US oil and gas production.

Hufbauer is the Reginald Jones senior fellow at the Peterson Institute for International Economics.

Morning Consult