Even California has lots of fossil fuel subsidies; here's a review

California has a well-earned reputation as a clean energy leader, and indeed continues to make significant progress in many areas. In 2022, for example, the state generated more than 54 gigawatt-hours from wind and solar, comprising more than one quarter of in-state power generation. Including power imports, renewables comprised 45% of the state’s power mix.  The state has recently been making more investments in clean energy than any other.

And yet, even in the California there are scores of policies and programs with the potential to subsidize oil and gas exploration, production, refining, transport, and consumption. Earth Track reviewed the policy environment in the state to provide an initial roadmap of the many points of interaction between state and federal policy and the fossil fuel sector. The analysis evaluates these programs to differentiate those where subsidies to the sector seem likely to be significant from those where costs are either small or covered by user fees on industry.

We are grateful for the financial support provided by the Natural Resources Defense Council to help conduct this work.

Go to Report on Fossil Fuel Subsidies in California

What we evaluated

Type of subsidy. Too often, subsidies are viewed only as cash transfers such as grants to a favored industry. The reality of government interventions is far more complex, and opaque transfer mechanisms may actually be preferred both by recipients and their political supporters because less visible subsidies also reduce political and public relations risks. This review includes not only cash transfers, but also tax breaks, credit support, subsidized access to mineral resources, exemptions from standard regulatory requirements, and risk shifting. Data availability varies widely by subsidy type.

Subsidies at multiple levels of government. In addition to subsidies provided by the state government in California, federal policies benefitting the fossil fuel activity in the state are also included. Municipal or county-level supports may provide material support to the oil and gas sector as well, though gathering data from so many jurisdictions is complicated and was not within the scope of this analysis. Apart from Proposition 13, where some state-level assessments have already been done, the more local policies were not reviewed and are not included in the report. Subsidies from multiple different programs, and at different levels of governance, can often be taken concurrently (or “stacked”) even if they are supporting the same project or target outcome.

Policy specificity. Not every policy listed is just available to oil and gas. Some benefit all extractive mineral industries, though still disadvantage fuel-free energy technologies such as wind or solar. Other policies may be available to multiple economic sectors, such as property tax limitations under Proposition 13. For more general policies, it is important to evaluate whether they are structured or deployed in ways that are particularly supportive to the dominant industries in a region. Where the financial scale of a program is large, and fossil fuels comprise a significant industry in the state, reviewing these more general policies and who is getting the cash or tax breaks from them, is always prudent.

Building blocks. The review, including the table listing individual policies, should be viewed as (1) a starting point for further analysis, and (2) a repository to which additional policies can be added based on local knowledge from other organizations interested in transparency on this issue. We are also interested in up to five experts on CA policy who would like to partner on expanding and refining the data within the subsidy table. If you are interested in being one of them, please email dkoplow@earthtrack.net. Comments, suggested additional data sources, and suggested corrections are all welcomed and can be directed to that email as well.

Two side-notes: first, the initial version of this work was done in March of 2023, so data reflect information and reports available at that time; and second, policies that appeared in our screening not to be material have been left in the table as a guide to other researchers. Knowing what not to spend time on is also useful.

High leverage opportunities for reform

Some areas with significant opportunities from reform are highlighted below. They are also discussed in more detail in the memo and associated tables.

Asset retirement obligations. California has a large backlog of improperly closed oil and gas wells. Like many other producing states, the existing bonding levels on operating wells are far too low. Similarly, industry fees to fund abandoned well plugging are much lower than what is needed to address the task. California has recently started to tap general fund money to close them. Fuel cycle facilities are also a problem, with marine terminals and refineries that are both very old and appear inadequately funded for closure and post-closure liabilities. Further, available financial assurance is most often in the form of corporate guarantees, an instrument that does not perform well when companies go into distress. This structure increases the risk of “liability dumping” to taxpayers at the end of the service life of the facility or from a corporate bankruptcy.

Methane emissions. Multiple existing policies have the effect of subsidizing methane emissions in California. These include exemptions from federal fees on methane releases set to take effect in 2024; royalty-free streams of gas due to flaring or on-site use; and illegal methane releases that have historically been poorly tracked.

Lack of severance taxes and reduced property taxes on oil and gas reserves, equipment. California is one of only two fossil fuel producing states in the country with no severance or extraction taxes levied on oil and gas extraction (Pennsylvania is the other). Industry has argued that the state accomplishes the same end using property taxes instead, though many states have both and CA property taxes (particularly due to limits under Prop 13) do not appear sufficient to offset foregone extraction taxes.

Carbon capture, utilization, and storage (CCUS) including the Low Carbon Fuel Standard (LCFS). New subsidies to support CCUS, such as those included in the federal Inflation Reduction Act (IRA), look to be orders of magnitude larger than the estimates put forth by the Congressional Budget Office when the IRA was initially scored. California subsidies through the low carbon fuel standard may also start to flow to fossil fuels as well, since CCS is an eligible class of beneficiary fuels and can earn marketable LCFS credits. Both state and federal credits appear allowable on the same product. A potential outcome of concern is if the subsidies extend the life of carbon-intensive fossil fuel infrastructure and slow the shift to zero carbon alternatives.

Water use in oil and gas production. Inadequate water pricing is a well-known issue in California. This benefits oil and gas, though far less so than agriculture. However, increasing reuse of process water from oil and gas production on food crops likely confers substantial water treatment subsidies to the production companies using this approach and may trigger longer-term property damages and future reclamation costs on some of the farms.

Third-party liability coverage for wells located close to residential and commercial properties. The recently passed law to add buffer zones for new wells (SB1137) is on hold at least until November 2024 due to referendum activity by industry. Even with passage, emissions from existing wells remains a concern. Our efforts to determine whether well operations located next to homes and businesses have third-party liability coverage were unsuccessful. Better data on this issue, and implementation of insurance requirements if none now exist, would improve the price signals these wells face. Insurance requirements also create an additional set of evaluators on well operations and emissions (the insurance underwriters) and create a financial resource should parties living next to the wells be harmed by the activity.

Exemption of natural gas and power from state sales tax. Because energy consumption has associated environmental effects, there is little justification to have a blanket exemption from state sales taxes. Rather, policy goals such as basic access to energy for the poor, should be met in other ways. This initial review suggests that the cost savings to industry from the current exemption for electric and natural gas energy systems from the state sales and use tax is billions of dollars larger than what is collected from the sector via other fees. This likely underprices these energy resources relative to other goods and services in the state. Reform would affect all generation, but at present fossil generation still predominates.

Government funding for distributed electricity backup assets program and strategic reliability assets. To improve the resiliency of electrical supply in the state, these two programs will likely also provide billions of dollars in new subsidies to fossil-fuel fired infrastructure. While both programs also target non-fossil resources, most of the funding is likely to support incumbent infrastructure fueled by fossil fuels.