Does the Obama budget proposal really eliminate fossil fuel subsidies?

After my last post on the new subsidies to nuclear power, inquiries have started to come in on Obama's plan to end subsidies to fossil fuels.  A common question is whether his plan would really end subsidies to fossil fuels entirely. 

The simple answer is "no". 

Although implementing their proposed changes would save close to $4 billion per year, my past tallies (even ignoring the steady stream of new fossil fuel subsidies over the past five years or so) have been in the tens of billions of dollars per year.  Unfortunately, there are many subsidies that his reform plan ignores.  But before delving in to these important exclusions, it is useful to begin with the positives.

First, the Administration seems serious about ending a number of tax breaks that have been supporting fossil fuel extraction for nearly a century in some cases (percentage depletion was extended to oil and gas operations in the 1920s, for example).  They are trying to roll back a number of newer subsidies to the sector as well, including the rapid amortization of geological and geophysical expenses, and the eligibility for fossil fuels for the domestic manufacturing tax deduction.  They are also calling to a close the entitlement game that has followed the Abandoned Mine Lands fund, enabling states to spend the fees slated to clean up old coal sites on non-coal uses just because the fees were collected on coal operations in their state.  Tempers flare here, with Congress members in the affected states staking claim to AML funds as fiercely as a Bostonian claims his just-shoveled street parking spot.  Montana, for example, already uses the funds to clean up hard rock mine sites as well as coal mining, and wants to continue so.  I'd much prefer levying similar fees directly on sales of the hard-rock minerals such as silver, gold, and uranium that left a massive mess throughout the Western US to allowing unfettered use of coal cleanup fees.

Second, the Administration took a leadership position in moving the issue of fossil fuel subsidy reform to the G20 agenda.  The pledge (see paragraph 29) to strip these subsidies, issued in September 2009, is far too general to be operational yet.  However, it is among the most significant steps aimed at systematic fossil fuel subsidy reform that I've seen over my 20 years following the issue.  The institutions slated to examine the scale and scope of energy subsidies in paragraph 30 of the leader's statement really are doing so.  The IEA, OECD, World Bank, and OPEC are talking and trying to figure out the path forward.  In November 2009, APEC member countries endorsed the same subsidy phase-out goal.  True, these pledges remain mere words on paper, and will be fought fiercely by the beneficiaries of the current policies.  But the direction and intent is more clear than I have seen before.  A consensus that it makes little sense to both constrain greenhouse gases via climate change mitigation policies while concurrently subsidizing them is beginning to emerge.

So what's the problem?  A big one is that the Administration continues to have a paternalistic view of energy markets where their experts know which energy sources are naughty and which are nice, and they dole out the goodies accordingly.  Percentage depletion allowances for coal certaintly make no sense.  But neither do multi-billion dollar loan guarantees to "clean" coal plants; or tax credits or liability caps for carbon capture and sequestration technologies.  If carbon intensity is important, let energy prices reflect this, and direct investment and consumption patterns based on these more accurate price signals.

The Administration's end-goals sometimes get all mucked up.  If their budget is stripping fossil subsidies to save money, don't  undo all the savings by earmarking more than $50 billion in loan guarantees and direct loans to build privately-owned nuclear reactors, and billions more to coal plants. 

What about trying to remove subsidies to fossil fuels in order to improve the pricing of carbon emissions?  If that were true, why don't we see any subsidy reform dealing with land use change and growing subsidies to strip and burn all sorts of biomass?  Even in the coal sector, if coal -- despite being "clean" and with CCS -- has a higher carbon intensity per unit energy delivered than many other technologies; or takes longer; or has a higher risk of failing to deliver, why rig the contest?  And why is it the job of the US taxpayer to fund the transition from conventional coal to something better?  I don't pay for new microchip development, new pharmaceuticals, or improved sneakers unless the innovation works and I buy the resultant product.  The companies take the upfront risk and pay for it themselves -- though the stakes are often high.  Fortunes are won and lost in the process.  But (banking industry aside), they are not taxpayer fortunes.

In fact, as far as I've seen, the coal industry itself hasn't stepped up to the table with a research program commensurate with the an understanding that its carbon content may pose an existential threat.  Far from it.  A detailed compilation of coal industry financial performance versus investment in new technologies released by the Center for American Progress in mid-2009 found roughly 2 cents of every dollar of profit was reinvested in trying to develop the technical improvements that would allow coal to survive economically in a carbon-constrained world.  And even here, nearly all of the projects relied on substantial public co-funding.  Total quantified private funding on CCS projects was only $3.5 billion; total profits for the period 2003-08 were nearly $300 billion.  Surely if it isn't important enough for company executives and shareholders to put their cash on the line, how can one rightfully ask taxpayers to do it?

Well, maybe it's energy security that is the problem driving their subsidy reform selections.  If that were true, however, then why focus only on subsidies to domestic production while ignoring the large subsidies to international enegy extraction operations? 

No matter how the Administration ranks these end goals, we'd be far better off if they built a neutral policy framework within which the boosters of particular energy solutions would put their own capital at risk and be forced to compete against alternatives lower carbon, more secure, or most cost-effective solutions.

Subsidy reform is a good first step; but only if major things are not left out.  We're not quite there yet.  Here's my initial take at the  subsidies left out of the Obama budget proposal:

The Left-out List, a First Cut

The following programs provide substantial subsidies to domestic fossil fuels, yet are not addressed in the Obama budget proposal:

• Oil defense.  This includes costs to build, run, and finance oil stockpiles in the US Strategic Petroleum Reserve; and defense of key oil infrastructure, including pipelines and oil shipping lanes.
• Inadequate user fees to build and maintain inland waterway systems  (bulk coal and oil comprise more than 50% of the tonnage moved through that system); and related subsidies to coastal shipping.
• Foreign tax credits on foreign energy operations that are really disguised royalties (flagged as the largest oil subsidy in a recent ELI study).  
• Caps on oil spill liability below reasonable damage levels.
• Inadequate bonding for fossil fuel extraction on federal lands (there are related subsidies at the state level as well).
• Royalty reductions for selected offshore resources.
• Subsidies resulting from improper measurement or collection of royalties on federal leases.
• Tax credits (section 45Q) and liability caps for CCS.
• Loan guarantees for clean coal and other coal technologies.
• Credit subsidies to fossil-fired electricity generation through federal power marketing administrations, the Tennessee Valley Authority, or through programs run by the Rural Utilities Service.
• Accelerated depreciation (other than expensing, which is slated for elimination) for asset classes within the fossil fuel sector.
• Tax-exempt bonding for pollution control equipment, heavily used by coal-fired power plants.
• Subsidies to export of fossil-fuel related goods and services via Eximbank, OPIC, and US commitments to multi-lateral lending institutions such as the World Bank.
• Funding of energy-related environmental remediation or worker health (e.g., black lung) from general funds rather than from energy-specific user fees.
• Federal loan guarantees on the Alaska natural gas pipeline.