fossil fuel subsidies

The optimal position for your industry in any tax reform is to see general tax rates drop while also keeping all of your old subsidies.  The political lobbying on these bills is enormous, and given the scale of the energy sector in the US economy, and the need to transition towards lower carbon fuel sources, it seemed important to look at the tax reform proposals through the lens of energy.

When the Joint Committee on Taxation assesses the cost to Treasury from the proposal, they are focused on the new rules or repealed line items a particular bill may put forward.  But the economic impacts of a new tax regime is affected by three major threads:  whether general changes in tax rules disproportionately affect some energy resources relative to others; energy-specific line items being repealed, changed, or added; and whether political power among particular industry-subsectors has enabled them to have their cake and eat it too by keeping their old subsidies while also getting lower top tax rates.

This working paper is a first cut at doing this.  I've no illusions I've captured everything, or mapped out all of the interactions.  But even the first order effort to combine these three main threads is important in gauging winners and losers under the proposals.  This is a discussion draft, so email your comments, concerns or corrections if you've got them. 

To better see patterns, the tax line items have been grouped into three general energy categories:  conventional energy (mainly fossil); emerging resources; and mixed (which includes the grid and transport policy).  Both new and (apparently) surviving tax expenditures are included.

There's a great deal of detail in the full summary, but my key takeaways are below:

PJM Interconnection is a regional transmission operator (RTO) serving more than 60 million customers in 13 states and the District of Columbia.  The service region is centered in the mid-Atlantic region of the United States. Incumbent base load generators within PJM have complained that subsidies to renewable resources have been cutting their ability to win capacity market auctions, stripping them of revenue, and harming them competitively. They have been proposing adjustment factors that would improve their competitive position by adjusting bid prices to exclude the subsidy.

These proposals have been contentious, and PJM established the Capacity Construct/Senior Policy Task Force to work through them. From my perspective, two features of conventional generators are problematic for their case. The first is that while renewables play a growing role in energy markets, they are still quite small in capacity markets. Competitive pressures, such as from new gas plants, have been much more significant.

The second is that government subsidies to energy -- at all levels of government -- have been around for a very long time.  Indeed, many of these very same conventional energy resources have also received significant subsidies for their entire operating lives. For some, subsidies helped them to reduce plant construction costs. Others have reduced their cost of input fuels, a significant cost factor in fossil plants. Still others have shifted the long-term costs of fuel extraction or refining, accident risks, or managing toxic wastes from the power plant to taxpayers or plant neighbors.  Risk shifting is particularly important with regards to coal and nuclear.

To demonstrate the complexity of the situation, working with the Natural Resources Defense Council, I assembled an initial listing of state-level subsidies to conventional energy within PJM states. Data compiled by the OECD in Paris, and by Good Jobs First, an NGO, were extremely helpful inputs.

Although the timeline was short and it was impossible to capture everything, the listing is nonetheless long. The figures are sometimes quite big as well.  The unfunded cost to remediate abandoned coal mine sites within PJM states, for example, exceeds $8 billion and the region comprises nearly 80% of the national total.

The list is available here or on the PJM website (file in Excel).  If you know of big ones we are missing, please email me.

For more on the general issues before PJM, Jennifer Chen of NRDC has a blog post and statement before FERC that summarizes it well.  A recent paper by Amory Lovins at the Rocky Mountain Institute challenges some of the claims by coal and nuclear plants that they deserve special subsidies because of their provision of baseload dispatchable power. 

The PJM task force has proposed a structure to identify relevant subsidies to power markets in the region.  Since the most important subsidies to particular forms of energy can vary tremendously, unless one captures all categories the results can be highly skewed.  Part of the work for NRDC was to evaluate potential areas where PJM might miss important policies.  The results were summarized in the table below.

1) Earth Track congressional testimony.  Read Earth Track's testimony to the Subcommittee on Energy of the Committee on Energy and Commerce, U.S. House of Representatives: Federal Energy-Related Tax Policy and its Effects on Markets, Prices, and Consumers. 

2) New work on subsidies:  US public lands, European coal, Asian fossil fuels. 

• A review of subsidies to fossil fuel extraction on public lands released by Oil Change International.
• Coal subsidies in ten European countries released by the Overseas Development Institute.
• IEA's review of subsidies within APEC:  Tracking fossil fuel subsidies in APEC economies: toward a sustained subsidy reform

3)  Exelon fails to clear latest capacity auction with two of its reactors.  Exelon's Three Island Mile and Quad Cities nuclear facilities failed to clear the latest PJM auction.  Trade publication Utility Dive noted that Exelon said the loss "stemmed from 'the lack of federal or Pennsylvania energy policies that value zero-emissions nuclear energy,' and, in the case of Quad Cities, not falling under Illinois ZECs program." 

Reliability is the main selling point of baseload nukes facing increasing operating and maintenance costs.  Thus, it is notable that while nuclear blames renewables for its heartache, non-hydro renewables comprise a tiny portion of the PJM capacity market. 

A cynical view of the politics of nuclear power leads one to at least consider that perhaps Exelon is playing a bigger game.  The only way for the firm to extract multi-billion dollar subsidies to keep its aging fleet open is to present as realistic a case of distress as they possibly can.  Strategic losses in capacity auctions could be part of this.  Indeed, the firm's management may well decide that its highest return "new" line of business is extracting subsidies from taxpayers to prop up their old plants.  Here's Crain's, which has long tracked the political strategy of Exelon:

Fresh from winning subsidies in New York and Illinois, Exelon wants ratepayers in other states to pony up more to keep nuclear plants open... In an email, Exelon says only that it "continually evaluates strategic opportunities to add value for our shareholders and customers." Speaking generally of its desire to subsidize nuclear power beyond Illinois and New York, Exelon says, "Right now, active discussions on the economic and environmental advantages of nuclear power are occurring in Connecticut, Ohio, New Jersey and Pennsylvania."

And their strategy seems to be working.  According to Crain's:  "Exelon's stock has risen 36 percent since the Dec. 1 agreement in Illinois, well above the 20 percent increase for the Standard & Poor's 500 Utilities Index."  UPENN's Kleinman Center for Energy Policy noted in a recent blog post that it is quite difficult to ensure the subsidies flowing to old nuclear reactors (which are often part of a complicated corporate network) are actually needed rather than simply juicing corporate returns. 

4)  Sounds of silence: G7 and fossil fuel subsidy reform.  The G7's 2016 pledge to end harmful subsidies to fossil fuels by 2025 was not re-affirmed in their most recent meeting in Italy.  While it was agreed to in April, the issue was not included in the formal ministerial communique in May, an omission bleakly noted by fuel subsidy research NGO, Oil Change International.  These things aren't particularly binding, so the inability even to make clear statements of direction is troubling.

5)  The persistent areas of overlap between civilian and military nukes.  A sobering review of Japan's plutonium stockpile, its civilian origin, and the weapons proliferation risks going forward.

6)  Westinghouse bankruptcy: about that $8.3 billion they owe Uncle Sam...  Turns out the last sliver of the "nuclear renaissance" in the US is at risk due to poor management, fiscal distress, and the bankruptcy of one of the key vendors, Westinghouse.  Gee, if only somebody could have seen something like this coming.  In one of the finest moments of pretend finance in recent years, DOE flagged the risk of these massive loans (roughly sixteen Solyndra's) at zero. 

The bankruptcy affects nuclear projects in both SC and GA, though only the GA project (Plant Vogtle) is receiving federal subsidized loans.  The big question is how much of the DOE loans will end up in the lap of taxpayers.  As of now, Vogtle hobbles on, with Southern Company -- the largest investor in the project -- taking over the lead from Westinghouse.  Whether or not the Vogtle reactors are completed, there are billions in costs to be covered by some combination of customers, taxpayers, and utilities.  Here's the Atlanta Journal-Constitution's summary:

The Plant Vogtle project was backed by $8.3 billion in loan guarantees from the U.S. Department of Energy – during the Obama administration...[T]he Congressional Research Service noted that those loan guarantees came with this price: “If the Vogtle project is terminated, the borrowers must repay the entire outstanding loan amount in five years.”

But the CRS also said that the secretary of energy has the power “to modify the loan agreement terms and take other steps upon a default.”

This battle will not be resolved soon.  Good thing Southern Company CEO Thomas Fanning sold most of his shares in the company back on 2014.

Update, June 3rd:  a key deadline in the continued financing of Vogtle has been missed, and analysts predict litigation.

In yesterday's confirmation hearings for Rex Tillerson, the former ExxonMobil CEO stated that

'I'm not aware of anything the fossil fuel industry gets that I would characterize as a subsidy... Rather it is just the way the tax code applies to this particular industry.'

You can review the relevant testimony, and commentary on it by Oil Change International, here.

Denying there are Subsidies Seems a Bedrock Strategy of the US O&G Industry

That Tillerson frames industry subsidies as non-existent is no surprise.  In the nearly 30 years I've been working on fossil fuel subsidy issues, denial that government provisions provide them with special support has been a bedrock part of the industry's strategy to keep them. 

This is most commonly expressed by their trade association, the American Petroleum Institute (API) -- which spent more than a quarter of a billion dollars in 2014 to defend the interests of its members.  Here's how Stephen Comstock, API's tax lead, spun the issue in a 2014 blog post:

Since its inception, the U.S. tax code has allowed corporate taxpayers the ability to recover costs. These cost-recovery mechanisms, also known in policy circles as “tax expenditures,” should in no way be confused with “subsidies” – direct government spending or “tax loopholes.”

Comstock's spin is nearly identical to two decades earlier when API's Rayola Dougher authored a hit piece on a this detailed study on US oil subsidies I co-wrote with Aaron Martin back in 1995.  A bit of hand-waving to pick a definition of subsidies they like, dismiss supports to oil sector receives as irrelevant or baseline, and suddenly, as with Tillerson, API concludes if subsidies are above zero, they are so small as to be immaterial. Problem solved. 

When other industries get government supports, they are subsidies.  Oil & gas?  Nah -- just part of the standard way the miraculous thing we call our tax system happens to play out in the oil sector. Of course that system is even-handed across all taxpayers, and not-at-all influenced by the lobbying of special interests. 

Other industries need to treat "soft costs" like surveying, engineering, architectural, legal, site preparation, fuel and labor -- critical in the completion of a multi-year asset, though with little or no salvage value -- as part of their investment cost that must be recovered over the useful life of that asset.  But if oil and gas investors can write them off immediately as "intangible drilling expenses" -- a huge benefit to their financial returns -- it must again just the way the tax system "applies to this particular industry." 

Other industries can deduct from their taxable income only the costs they've actually incurred in the making of their goods and services.  Oil and gas get to deduct the market value of their fuel via percentage depletion if it gives them more tax savings -- a subsidy that actually rises when prices for fossil fuels are the highest and any economic case for industry support is at its weakest.  It's hard to envision how Tillerson thinks this is normal treatment.  For more discussion on the provisions the industry claims aren't subsidies but are, go here.

Subsidies to renewable energy (and yes, even the wind and solar guys acknowledge they are subsidies) are configured to expire frequently so as to prevent them from becoming an entitlement.  But if oil and gas subsidies are hardwired into our tax code so they never expire, and have been there for nearly a century in some cases, it must once again be another of those mysterious coincidences of a neutral tax code interacting with the oil and gas sector. 

Tillerson's "See No Subsidies" View is Not Reflected by Government Agencies

Despite Tillerson's view that O&G gets no special treatment, this is not a gray area for most federal and international agencies.  It never has been.

In a striking example, the Joint Committee on Taxation -- which we rely on to this day to estimate the scale of current tax breaks and provide input to Congressional Members on the expected cost of their proposed ones -- has been flagging the percentage depletion allowance subsidy since the 1920s.  The extract below if from a report they published in 1927.

-US Joint Committee on Taxation, Division of Investigation, 1927

Here's a quick comparison of estimates for the US I put together for a conference late last year that shows (a) other groups believe there are subsidies to oil and gas; (b) the range continues to be contested; and (c) API is a huge outlier in its denial these exist. 

Rex's Reading List on US Fossil Fuel Subsidies

There's a fairly long list of organizations that disagree with Tillerson's conjecture that subsidies to O&G don't exist.  I thought it might be useful to put together a reading list so he can brush up on the topic.  Although many NGOs have done detailed work on this area as well, I know Tillerson will discount that work.  Thus, I've limited this list to government agencies. 

US Federal Government

• US Office of Management Budget.  Analytical Perspectives, Budget of the United States Government, Fiscal Year 2017 - tax expenditures section.
• US Treasury. United States Self-Review of Fossil Fuel Subsidies, Submitted December 2015 to the G-20 Peer Reviewers.
• US Joint Committee on Taxation.  Estimates Of Federal Tax Expenditures For Fiscal Years 2015-2019.
• US Department of Energy.  US Energy Information Administration, Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2013.  And for the many things EIA leaves out that result in artificially low estimates for fossil fuels, see my paper: EIA Energy Subsidy Estimates: A Review of Assumptions and Omissions.
• US Congressional Research Service. Energy Tax Policy: Issues in the 114th Congress, June 2016.

International Agencies

• Organisation for Economic Cooperation and Development.  Inventory of Support Measures for Fossil Fuels 2015, US Data. Notes on US Data.
• World Trade Organisation.  Overview of the WTO's definition of subsidies.

The mysterious Q Division in the James Bond movie franchise was always on hand with inane, though coldly effective, inventions that would save Bond and defeat even the most diabolical enemy.  In the magic of the movies, a bit of public money directed towards the R&D staff of the British Secret Service always seemed to save the day.

Subsidizing CCS:  Good intentions aren't enough

Perhaps it was Bond fans in Congress who lobbied for the creation of Section 45Q of the Internal Revenue Code (IRC).  For those of you who don't read the tax code over breakfast, 45Q provides a $20 per ton tax credit ($21.85 for 2015, after inflation adustments) for capturing CO2 from industrial operations and injecting it into the ground. And while this posting focuses on 45Q, the provision is but one of a fairly long list of federal and state subsidies to carbon capture and sequestration that shift liability, directly subsidize CCS projects and storage, and guarantee purchases from plants capturing carbon.  While the stated justification may be to wean society from too much carbon pollution, the effect of these subsidies is to prop-up carbon intensive industries such as oil and gas extraction while undermining the competitive position of low-carbon alternatives.

CO2 already has some market value.  It is often captured at oil and gas well sites and reinjected into the ground as part of enhanced oil recovery (EOR) techniques.  And though the country can't seem to get its act in order to restrict carbon emissions, EOR has long had its own tax break.  The injections boost well pressure, facilitating extraction of additional valuable hydrocarbons.  Section 45Q combines this existing practice with industrial capture:  so long as one is collecting CO2 from industrial sources rather than as a byproduct from oil and gas drilling, you can still get a tax credit (albeit a lower one) for directing that carbon into existing oil and gas fields.

The IRC refers to this as "recycled carbon dioxide," and injecting it for EOR generates a tax credit of $10 per mt ($10.92 in 2015 after inflation adjustments).  Under present law, the tax credits apply to the first 75 million mt of CO2 sequestered from eligible facilities -- about half of which have now been used up.

Biggering the subsidy trough

Industry and other groups have argued that burdensome provisions of 45Q have slowed the uptake of the subsidy, and that the lead time on new projects results in the current tax break being effectively expired since qualified credits will largely be gone when new projects come on line. 

The National Enhanced Oil Recovery Initiative (NEORI), convened by the Center for Climate and Energy Solutions (C2ES) and Great Plains Institute, has become a major coordinating body for expanding federal subsidies to CCS.  For the past few years, NEORI has advocated changes to the law that would:

• Increase the ability for firms to tap into the tax credit.
• Increase the subsidy per mt of CO2 captured.
• Increase the number of tons eligible to claim the credit. 

In combination, the changes would greatly increase the subsidy to CCS.  NEORI has framed the changes as generating net revenue increases.  However, the assumptions they used to reach this outcome are a bit problematic -- largely that you'd get enough new oil and gas on which to charge taxes and royalties to offset the CCS subsidies; and that somehow that extra O&G wouldn't be incremental to existing demand, but rather would offset fuel streams even higher in carbon.

As residual capacity under the existing rules wanes, industry has begun posturing for more support.  They argue that many more subsidized projects are needed before CCS can stand on its own.  A handful of legislators are listening, though not surprisingly this group includes members from states that will benefit immensely from increased EOR and EOR-related subsidies.  They have proposed new legislation to extend and expand the CCS support.

The Conaway Bill (R-TX), HR 4622, would make the subsidy permanent; give as much credit to EOR as to permanent storage; and sharply increase the value per ton (from $20 to $30/mt for underground sequestration and from $10 to $30/mt for EOR).  A proposal by Reps. Heitkamp (D-ND) and Whitehouse (D-RI) would reward non-permanent sequestration such as EOR at a lower rate, but in absolute terms would boost the tax subsidies sharply to both categories:  to $50/mt for permanent sequestration and $35/mt for EOR or other "utilization" strategies such as growing algae for biofuels using waste CO2. 

NEORI's Brad Crabtree seems open to anything that provides more subsidies to the NEORI constituency.  Bigger, longer tax breaks are on the list of course.  But so is allowing CCS enterprises to use the Master Limited Partnership structures that have been so valuable to oil and gas companies by eliminating their corporate income tax burden.  He advocates using tax exempt private activity bonds for CCS endeavors as well, and even government intervention in oil markets to provide price stabilization (expensive CCS becomes an economic nightmare when fossil fuel prices fall). 

Given that the firms NEORI hopes to bolster are often massive, with perfectly good access to capital markets all on their own, this entire push seems a bit odd to me.  Occidental Petroleum, the owner of the largest current CCS project in the US (the Century Plant in TX) had a market cap of $60b  as of August 2016 -- despite suffering from the decline in oil prices in recent years.  If it had to pay a tax on all of its CO2 emissions, you can be sure they would invest appropriately in CCS; taxpayers don't need to do it for them.

Subsidizing pollution abatement: a noble objective with harmful side-effects

The debate over subsidizing pollution abatement is a long-standing one.Indeed, this is a debate I remember having with former NEORI co-convener Judi Greenwald more than 15 years ago, when she was at the Pew Center on Global Climate Change.  If the government is subsidizing something that reduces ghg emissions, should it be counted as a subsidy to fossil fuels, or as a "beneficial" subsidy to a green economy as one might look at tax breaks for insulating ones home? 

Should one measure impact within a narrow set of options (e.g., conventional coal versus more efficient coal combustion techniques) or against the whole range of options that exists within an economy over time (e.g., coal versus energy efficiency, or a new long-lived coal plant today versus energy options ten or twenty years out)?  The duration matters because many subsidies lock in public support for an extended period of time (NEORI's 2012 proposals would award each project ten years of eligibility, and continue to provide subsidies to new CCS projects at late as 2040; some pending legislation would make the subsidies permanent) for capital that lasts even longer.  In contrast, the certainty of predicting any technical improvements gets markedly worse the further into the future one goes.

Those supporting large subsidies to abatement, including NEORI, generally frame their argument as a necessary evil.  The ghg problem is so big, and CCS so central to any viable solution, that the government simply must step in to help things along.  There's no time for taxpayers to dither on bringing this technology forward (though usually the lack of investment by the firms themselves is overlooked).  The final element of this argument a claim that, in reality, the public investment needed won't really be very big.  There will be job gains, multipliers, royalties on the new EOR, and so on.  Supporting evidence may be thin.

Yes, any spending will generate some economic activity, and it is frustrating to see a problem that needs attention but to have politicians and firms do little.  But overall, the "necessary evil" approach misses more than it captures. 

While dynamism in the pace of government-subsidized CCS technology breakthroughs is assumed and promoted, subsidy proponents underplay both the downsides of the subsidies and the dynamism of alternatives:

• The negative effects of CCS subsidies on competing sectors are understated.
• Too much of the assumed positive effects are attributed to the CCS subsidy program, rather than shifts that would have happened anyway.[fn]The NEORI review includes a sensitivity run of "additionality" in which they assume only 90% of the increase in EOR is due to the tax credit, rather than 100%. Not much of a range considering that carbon constraints could well be part of the policy mix during the next 10-20 years and coal is already losing market share in the US at a rapid clip.[/fn]
• Political economy is ignored and governments are assumed to be both efficient and objective.
• Solution pathways are defined too narrowly.

As a result, these assessments tend to dramatically underestimate the benefits of a broader-based, price-signal-led response to the challenge of reducing greenhouse gases.  Political earmarks relative to price signals become ever less effective as the number of ghg-reduction pathways grows, the subsidy duration increases, and the complexity of the system (i.e., our economy) rises. 

A better path to lower carbon

The counter-argument to subsidizing ghg abatement, which I strongly support, goes as follows:

1)  No silver bullet.  There are many pathways to address greenhouse gas emissions, and elected officials (particularly elected officials subject to fierce lobbying) are unlikely to have any solid basis to know which pathway is best over a short-time frame, let alone one that runs for decades.  Further, even a technical review of options currently available has a fairly high probability of being wrong as new information, innovations, or deployment and scale-up challenges come to the fore.

2)  Polluter should pay, and the price of pollution-intensive products should rise.  The industries triggering most of the problems ought to be feeling the most economic risk from changing business circumstances that could put them out of business.  This pressure is one of the only ways to get them to invest at an appropriate scale to modify their operations.  Further, the market pressure adeptly forces disciplined deployment of capital in ways governments struggle to achieve, accelerating the development and uptake of new approaches.  

As of a couple of years ago, and despite surging profits, the US coal industry had largely punted on spending its own money to secure its own future.  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.

With coal industry profits way down since, and many of the large firms in or near bankruptcy, spending on CCS is unlikely to have improved.  But if the problem isn't important enough for company executives and shareholders to put their cash on the line in order to save their companies, how can one rightfully ask taxpayers to do it?

3)  Pollution control costs should almost never be subsidized.  Except in the case of acute and severe risks to human health and the environment (e.g., toxic spills, nuclear accidents), governments ought not subsidize emissions or emissions controls.  Rather, they should constrain emissions robustly and consistently, forcing the cost of controlling that pollution into the price of the related goods and services. Even in the case of acute events, payments should be collected retroactively from the polluter if at all possible.

What is surprising is how often politicians and presidents want to replace the Polluter Pays Principle with a policy of PCGS: 'Powerful Constituents Get Subsidies.'

This framework is hardly path breaking: according to one paper, the polluter pays principle (or PPP, which is essentially the approach I advocate) entered the economics literature in the 1920s.  It was adopted by the Organisation for Economic Cooperation and Development (now a global leader in tracking fossil fuel subsidies) in the early 1970s.  What is surprising is how often politicians and presidents want to replace the PPP with a policy of PCGS ("Powerful Constituents Get Subsidies").

Polluter Pays Principle ignored in NEORI push for more subsidies to CCS

I accept NEORI's argument that right now the economics of CCS in large industries and power plants don't support massive investments into capture and CO2 pipelines.  But this point is secondary (and easily fixed by constraining carbon).  My core concern is that NEORI is mis-framing the carbon problem and who should be responsible for fixing it. 

If a lead smelter emits pollutants into the air, these damage human health and the environment and we restrict the emissions.  The result?  Emissions drop and the cost of lead rises.  Plants invest in better pollution control; markets shift away from lead where they can -- some in the short term and more over time as technology evolves; lead recycling may rise; and some facilities that are too old to justify large new investments simply go out of business.   Yet for some reason when the pollutant is carbon we're supposed to treat emitters as supplicants rather than as businesses that need to clean up their act.    

From a narrow, static view of markets, subsidizing carbon capture and sequestration may seem like a promising transition policy.  Proponents argue that it helps firms get on the right path and provides an impetus to develop new technologies.  They argue that building the infrastructure to capture and move CO2 is expensive, and that even if subsidized CO2 is being used to extract more CO2-containing oil and gas, the technical learning is worth it.

Yet for some reason when the pollutant is carbon we're supposed to treat emitters as supplicants rather than as businesses that need to clean up their act.

These same arguments were used to justify billions in subsidies to corn ethanol, though the support did more to crowd out more advanced but more complicated cellulosic fuels than usher them in.   CCS appears at risk of a similar fate:  Table 1 below shows that virtually every project in the US is for EOR, not permanent sequestration; no wonder the oil state legislators like CCS subsidies..  

And because there are many options to achieve the end-goal of lower carbon across our diverse economy, tax breaks such as 45Q end up subsidizing carbon-intensive fuels and industries -- and large scale operations at that, since small emitters can't generate enough credits to finance the collection and transportation infrastructure.  By harming the competitiveness of much lower carbon strategies and technologies, the subsidies actually prolong the service life of the carbon-wasting production systems.   

Sure, coal with CCS is better ghg-wise than conventional coal plants; but it is still much worse than wind, solar, or nuclear from a carbon-perspective (and existing coal projects with CCS aren't exactly going well).   It would be better simply to force carbon prices into the market prices of carbon-intensive goods and services, leveraging the competitive position of low carbon substitutes instead of undermining it as the tax credits do. 

If ghg reductions are cheaper in one sector than another, we ought not to care -- buy the cheapest ones first.  Instead, proposals such as NEORI put forth a couple of years ago establish carve outs for reductions by sector, ensuring that high cost sectors get bigger subsidies. 

When subsidies to CCS span decades, cost billions of dollars, and occur in a world where residual CO2 emissions remain free, potential arguments that they are mere demonstration projects cease to be relevant.  Virtually every economist, and, indeed, most elected officials, recognize that broad-based carbon constraints are the most efficient way to bring down greenhouse gas emissions.  If elected officials are too weak or afraid to implement such constraints, that does not mean we ought to sign on to subsidizing pollution control costs for major industrial plants. 

Table 1:
CCS Projects in the US:  It's Really all About the Oil

Global CCS Institute, accessed 8 August 2016, https://www.globalccsinstitute.com/projects/large-scale-ccs-projects#map

Subsidizing carbon capture to boost carbon emissions from existing (subsidized) oil fields

Let's move back from general principle that we shouldn't subsidize pollution control to the specifics of 45Q that does just this.  Consider that the feds are providing nearly $11/ton in tax credits to reinject captured CO2 into oil and gas wells because it ostensibly removes the greenhouse gas from circulation.

Yet the clear purpose of EOR is to free up more oil and natural gas from the ground, which in turn is burned to release more unregulated greenhouse gases for free.  Even proponents of large new subsidies to CCS for reinjection don't see this policy as a slam-dunk.  In fact, they say that climate sees a a net gain only if

EOR [enhanced oil recovery from injecting the captured CO2] is replacing 'dirtier' barrels of oil.  If the United States used one more barrel of oil from EOR, and one less barrel of oil from a more energy-intensive source such as oil sands, these experts [Judi Greenwald, who formally ran the National Enhanced Oil Recovery Initiative and Sean McCoy at the IEA] reckon, there is a net benefit to the climate.  They caution that these kinds of estimates are very difficult to pin down.

NEORI's 2012 proposal did not seem to stipulate lower subsidies for CO2 flows used in EOR versus direct sequestration.  It also offered credits under an auction approach that they estimated could hit $37 per mt. 

Recent legislative proposals are even more generous.  The bill introduced in the house by Reps. Heitkamp and Whitehouse would more than triple the current credit to EOR, as well as making the same $35/mt tax credit available to other CO2 uses such as growing algae that also result in associated carbon emissions later.  The $50/mt granted to permanent sequestration in 2025 is pretty much in line with EPA's social cost of carbon estimates for that time period, underscoring the ability to incentivize similar market behavior by growing a political spine and taxing carbon.

Net ghg reductions likely elusive.  In the real world -- where oil extracted anywhere gets burned somewhere, I would suggest that the purported net ghg reductions will be elusive indeed.  Despite sharp declines in oil prices and raging wildfires in Alberta, tar sands production is down but still substantial.  A team at the Pacific Northwest National Laboratory evaluating the EOR issue for the US Department of Energy was equally skeptical, also noting that special tax breaks for enhanced oil recovery had already provided subsidies of close to $2 billion for injecting CO2 into oil wells. Indeed, Jennie Stephens of Clark University argues that CCS subsidies are an impediment to dealing with climate change because they slow higher value investments into carbon abatement.

Main beneficiaries on the industry side also in fossil fuel industry.  Who benefits from the subsidy is also important to look at.  We know that oil and gas extraction activities will benefit from larger volumes of less expensive CO2 to inject.  But what types of industrial sites are producing so much CO2 from their operations that it will be economic for them to capture the CO2 and a build pipeline to move that CO2 to where it can be injected for fun and profit? 

Economies of scale in recovery suggest that larger emitters would be the most likely beneficiaries anyway; but the current statute actually requires this.  26 USC 45Q(c) defines a qualified facility in part as one "which captures not less than 500,000 metric tons of carbon dioxide during the taxable year." By definition, these are firms for which 45Q helps to subsidize compliance with carbon constraints.

Table 2 below summarizes the main potential winners from an expanded 45Q based on US EPA data on ghg emissions from large facilities in 2014.  One should not be surprised that the biggest industrial winners are power plants (they by far dominate the large facility emitters as well as the largest average emissions per facility) and refineries (second highest emissions per facility).  It's a twofer:  the same subsidy benefits not only oil and gas extraction sites, but large downstream industries in the coal and oil sectors as well.  EPA emissions data allows sorting by facility, so one can actually generate a list of the roughly 950 or so large emitters that meet the 500,000 mt/year CO2 cut-off.

Petroleum and natural gas systems, though large emitters per EPA data, would likely not be eligible for tax credits under the current terms of 45Q.

Table 2:
Coal Power Plants and Petroleum Refineries are Largest Beneficiaries of CCS Subsidies

Here's hoping that 21 will be the magic number, and there will be real progress on a global agreement to constrain greenhouse gas emissions at COP21 meetings now underway in Paris. 

Removing subsidies to fossil fuels are now well recognized as a central element to getting energy prices right, and the topic is evident in the COP21 agenda and side events.  For people interested in getting up to speed on what subsidies are and recent assessments of their magnitude, I've assembled a list of resources on in this posting.  As a testament to the growing recognition of the important role of subsidy reform, it is notable that many of these analysis have been produced during 2015.

1)  Fossil Fuel Subsidy Events at CoP21 

Thanks to Laura Merrill at the Global Subsidies Initiative (GSI) for pulling together a listing of the many events at the Paris meetings focused on fossil fuel subsidy reform. 

2)  What are subsidies, how are they measured, and why do they matter?

These resources are helpful for people looking to gain a general understanding of how energy subsidies work and why they are a problem.

• Subsidies to Energy Industries (2015).  This is one of my papers, recently updated for Elsevier and re-released.  It provides an overview of generic subsidies to energy fuel cycles, along with some background information on the different ways that people have measured subsidies over time. 
• An animated introduction to fossil fuel subsidies done by the GSI in 2014.  It's an entertaining and understandable way to learn about this complicated topic.
• If you want to dig in to more details, I'd also highly recommend this comprehensive Subsidy Primer written for GSI by Ron Steenblik.  
• Why do subidy estimates vary across studies?  Fossil Fuel Subsidies: Approaches and Valuation is an (admittedly technical) overview that I wrote with Masami Kojima of the World Bank.  For detail on what the commonly-used price gap approach captures and does not capture, this paper prepared for the GSI may also be helpful.

3)  How big are fossil fuel subsidies globally?

• Fossil Fuel Subsidy Reform: From Rhetoric to Reality (2015).  Working paper by Shelagh Whitley and Laurie van der Burg for the New Climate Economy (itself a very interesting initiative).  Summarizes global data on fossil fuel subsidies, their detrimental impacts on economies, and strategies for reform.  See also their review of fossil fuel subsidy reform in sub-Saharan Africa.
• OECD Inventory of Support Measures for Fossil Fuels, 2015.  The latest installment of OECD's detailed policy-level review of subsidies to fossil fuels within the OECD and BRIIC countries.  Jehan Sauvage, project manager; Franck Jésus and Ronald Steenblik, project supervisors.  See also my blog post on the analysis.
• Empty promises: G20 subsidies to oil, gas and coal production (2015).  Detailed review of production subsidies to fossil fuels in the context of carbon lock-in jointly released by Oil Change International and the Overseas Development Institute.  Presents country-specific data that includes distortionary patterns of support through export credit agencies and state-owned enterprises (SOEs).  Although only gross flows through credit and SOEs could be quantified, the analysis demonstrates the importance of these interventions, underscoring the need for much greater visibility on the terms of credit and state support to SOEs going forward.   Elizabeth Bast, Alex Doukas, Sam Pickard, Laurie van der Burg and Shelagh Whitley. 
• See also OCI's joint report with WWF on the role of OECD financing of coal infrastructure on human health.  Hidden Costs: Pollution from Coal Power Financed by OECD Countries (2015).  Written by Michael Westphal, Sebastien Godinot, and Alex Doukas
• IEA's updated data on price gap subsidies (2015).  IEA's most recent World Energy Outlook (unfortunately not accessible for free) again contains comprehensive updates to their multi-year effort to track price gap subsidies to fossil fuels in the world's major fossil fuel producing and consuming nations.  As in past years, this section was overseen by Amos Bromhead of IEA.  Subsidy data from WEO 2014 is accessible here; and there is some discussion of more recent data starting on page 90 of this IEA special report.  However, the full dataset used in WEO 2015 does not appear to have been posted yet.
• The International Monetary Fund also has a variety of assessments of fossil fuel subsidies released in 2014 and 2015.  Their assessments incorporate imputed taxes and externalities in addition to other forms of government support, and as a result report significantly larger global tallies.  In addition to their publications, the Fund is providing access to some of their core data so other researchers can build upon the work. 

4)  How big are energy subsidies in the United States?

The good news is that multiple parts of the US federal government have taken up the issue of subsidies to energy.  The less-good news is that the "official" analyses tend to use a fairly narrow definition of subsidies, often primarily driven by a sub-set of the available tax breaks.  Credit support, subsidized insurance, embedded subsidies within state-owned enterprises (yes, these exist even within the United States), market price support, and other more opaque subsidy transfer mechanisms are generally included only in part or not at all.  Like the parable of the blind men and the elephant, if you examine only part of the beast, you can come up with an inaccurate assessment of what the full animal really looks like.

• Federal Support for the Development, Production, and Use of Fuels and Energy Technologies (2015).  U.S. Congressional Budget Office.  Good coverage of common tax expenditures and federal energy R&D.  Analysis includes renewables and nuclear as well as fossil fuels, though valuation challenges on credit subsidies and missing subsidy types make the nuclear figures unrepresentative of actual government support to the sector.  Interesting metrics of subsidy cost-effectiveness (see page 11), a topic that should get much more attention.  Philip Webre and Terry Dinan prepared this report in collaboration with Mark Booth.
• Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2013 (2015).  US Energy Information Administration.  One of EIA's periodic reviews of domestic energy subsidies to all fuels (their first one was in the early 1990s).  Good detail in many areas, but also with some systemic gaps that tend to dramatically understate federal support to the nuclear fuel cycle and also understate subsidies to fossil fuels.  For more details on core EIA assumptions and omissions and how they affect EIA's estimates, see this review I did a few years ago.  EIA's 2015 report is the first time the Administration has even acknowledged this criticism publicly, which is at least a step in the right direction.
• Assessments outside of government have tended to come up with larger subsidy values.  Cashing in on All of the Above: U.S. Fossil Fuel Production Subsidies under Obama, produced by Oil Change International in 2014 is a good example.  This analysis includes a broader array of support instruments, though focuses only on the production side of the oil and gas fuel cycle. 

Do you have a favorite study or resource on the subsidy issue that I've missed?  Email it to me.