Fossil Fuel Subsidies: Overview

Introduction

Since the early days of the United States, state and federal governments have given financial support to a host of industries and businesses deemed critical to the nation’s ongoing economic development. Among the major recipients of such support, commonly referred to as “subsidies,” were the fossil fuel industries, which developed in large part over the nineteenth and twentieth centuries. During that period, domestic coal, oil, and natural gas became key sources of energy for American businesses and consumers. Federal support for the domestic fossil fuel industries took a variety of forms over the decades, including protective tariffs, tax deductions, and royalty-free land leases. By the second half of the twentieth century, however, debate arose surrounding the federal government’s practice of subsidizing the fossil fuel industries, with some politicians and others arguing that such financial benefits were no longer appropriate and should be eliminated.

The debate about fossil fuel subsidies continued into the twenty-first century, propelled in large part by growing concerns about the role fossil fuel consumption plays in climate change. Opponents of fossil fuel subsidies argued that the government should no longer offer such benefits and should instead focus on supporting renewable energy efforts. They particularly argued that eliminating the subsidies would decrease harmful carbon dioxide emissions and limit the excessive financial burden the fossil fuel industries place on the government and taxpayers. Supporters of the subsidies, on the other hand, asserted that eliminating the subsidies would not significantly decrease emissions and could instead actually increase them. They likewise highlighted the importance of certain government subsidies, including those designed to provide low-income Americans with adequate heating oil and other fuels.

Understanding the Discussion

Climate change: Changes to the earth’s climate and weather patterns that are linked to the emissions of heat-trapping gases, such as carbon dioxide and methane, into the atmosphere.

Fossil fuels: Fuels derived from the decomposition of ancient plants, animals, and other organisms; refers to fuels including petroleum, coal, natural gas, and others derived from such substances.

Group of 7 (G7): A forum for seven of the world’s largest industrialized economies; members include the United States, Canada, France, Germany, Italy, Japan, and the United Kingdom, and the European Union as an uncounted member.

Group of 20 (G20): A forum for the world’s twenty largest industrialized economies, including Argentina, Australia, Brazil, Canada, China, the European Union, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, and the United States.

Low Income Home Energy Assistance Program (LIHEAP): A federal program established in 1981 that helps American households whose income falls below a set threshold to pay for home heating and cooling costs and, in some states, can be used toward weatherization.

Renewable energy: An umbrella term for energy derived from sources such as wind, the sun (solar), the earth (geothermal), and water (hydropower).

Subsidies: Financial benefits, such as deductions, credits, exemptions, grants, leases, or tariff protections, made available by a government to a company or sector of business.

History

State and federal efforts to support specific sectors of the US economy through financial benefits and incentives date back as far as the 1780s, when the government funded developing industries through efforts such as land grants and protective tariffs encouraging the purchase of domestic goods. Initially applying to industries such as timber, subsidies soon became a significant facet of the developing fossil fuel industry, a subset of the energy sector that deals with fuels derived from the decomposition of plants, animals, and other organisms that died millions of years ago. Fossil fuels include petroleum, coal, natural gas, and fuels derived from such substances. The earliest fossil fuel to rise to prominence in the United States was coal, domestic mining of which began in the late eighteenth century. To encourage the mining and use of domestic coal, state governments created financial incentives, including tax exemptions. Over the centuries, the US government introduced and maintained other financial benefits for coal producers, including low lease costs for coal producers mining coal under federally owned land.

Further fossil fuel subsidies developed during the twentieth century as the petroleum and natural gas industries became a major economic and political force in the United States. Such financial benefits include intangible costs, which apply to dry holes as well as any costs associated with drilling, and the percentage depletion, a deduction that initially enabled oil and gas companies to deduct 27.5 percent of their gross revenues when paying taxes. Although Presidents Franklin D. Roosevelt and Harry S. Truman sought to eliminate the percentage depletion, it remained in place in its original state from 1926 until 1969, when the percentage of deductible revenue was decreased to 23 percent. That deduction underwent further changes in 1975, when the federal government limited it to small producers only.

In the late twentieth and early twenty-first centuries, what constituted a fossil fuel subsidy became subject to debate, with some advocacy groups arguing that any financial policy that benefits the fossil fuel industries, including tax deductions that apply to a range of industries, should be considered a direct subsidy. At its broadest definition, direct subsidies involve various stages of fossil fuel’s life cycle. Some subsidies deal with production, providing financial support to companies working to find new sources of fossil fuels as well as to extract and process those fuels. Such subsidies included tax breaks, such as the percentage depletion deduction and the manufacturer’s tax deduction, which, until its repeal in 2017, enabled businesses to deduct a portion of their income derived from domestic production activities. Similarly, certain laws favored fossil fuel industry activities; for instance, the Outer Continental Shelf Deep Water Royalty Relief Act of 1995, passed by the administration of President Bill Clinton, enabled some petroleum companies to engage in royalty-free deepwater drilling in federally owned waters. Other programs that some considered subsidies included those intended to lower the cost of fossil fuels such as oil and natural gas for consumers, particularly those in low-income households. In addition to subsidies that directly affect the production and consumption of fossil fuels, some international organizations, including the International Monetary Fund (IMF), called attention to indirect energy subsidies. These included government funds spent to address side effects of fossil fuel use, such as environmental damage and the health ramifications of pollution. For 2015, the IMF estimated that total energy subsidies—including both direct and indirect subsidies—amounted to US$5.3 trillion worldwide, some $699 billion of which came from the United States.

Alongside the development and continuing use of fossil fuel subsidies, debate arose surrounding whether it was appropriate for the US government to provide financial support to the fossil fuel industries. Much of that debate was related to increasingly widespread concerns about climate change—disruptions to the earth’s climate and weather patterns that are caused by the emissions of gases such as carbon dioxide and methane, often known as “greenhouse gases.” After being emitted into the air, such gases trap heat in the atmosphere, which raises the average global temperature and has been linked to a host of related environmental effects, including the melting of glaciers and sea ice. Such concerns prompted both governmental and nongovernmental bodies to focus on reducing emissions, and in 1997, the Kyoto Protocol to the United Nations Framework Convention on Climate Change urged the parties to the agreement to reduce or eliminate subsidies, tax breaks, and other financial incentives that benefit industries responsible for emitting greenhouse gases.

Efforts to reduce or eliminate fossil fuel subsidies on the global level accelerated in the first decades of the twenty-first century, building upon previous efforts such as the Kyoto Protocol. Beginning in 2009, the Group of 20 (G20) countries committed to eliminating fossil fuel subsidies gradually. The Group of 7 (G7) countries later reaffirmed that commitment and in 2016 set a target date of 2025 for the elimination of fossil fuel subsidies. International efforts to phase out subsidies were driven in part by global efforts to address climate change, such as the 2015 Paris Agreement, which set national emissions targets with the goal of preventing the average global temperature from increasing 1.5 degrees Celsius (2.7 degrees Fahrenheit) above preindustrial levels.

Despite the G7’s expressed commitment, the G7 Fossil Fuel Subsidy Scorecard, a 2018 policy brief published by the Overseas Development Institute think tank, found that the seven countries provided more than $100 billion in support to the fossil fuel industries in 2015 and 2016, more than $25 billion of which came from the United States. The report also ranked the United States sixth of seven in ending support for oil and gas production and last in ending support for coal mining. The US government under President Donald Trump remained supportive of fossil fuel subsidies, particularly as the Trump administration sought to withdraw the United States from the Paris Agreement and dismantle emissions regulations established under President Barack Obama. Such actions added further fuel to the debate surrounding federal subsidies, propelling the issue increasingly into the public eye.

Fossil Fuel Subsidies Today

By 2022, global fossil fuel subsidies had increased to a record $7 trillion, or 7.1 percent of global gross domestic product (GDP), according to the International Monetary Fund (IMF) in 2023. IMF researchers noted that energy prices had increased sharply as a result of Russia's invasion of Ukraine and as the global economy recovered from the effects of the global COVID-19 pandemic, and that this in turn had prompted national governments to increase their fossil fuel subsidies to support individuals and business.

Global fossil fuel subsidies include explicit subsidies, which keep retail prices below supply costs, and implicit subsidies, in which retail prices do not reflect the cost of fossil-fuel usage's negative impacts on climate, the environment, human health, and society. In 2023, IMF researchers reported that reforming global fossil fuel pricing so that retail prices reflected the true costs of supplying and using fossil fuels would reduce global carbon dioxide emissions sufficiently by 2030 to align with keeping global warming within the 1.5-to-2-degree-Celsius range. At the same time, such pricing reforms would increase revenues by 3.6 percent of global GDP and prevent 1.6 million deaths due to local air pollution annually.

Other researchers have argued against banning all fossil fuel subsidies. For example, they argue, the 400 million–plus households around the world that use biomass fuels for cooking are often unable to access and/or afford cleaner fossil fuel dependent energy sources, such as gas. In such cases, the researchers wrote, governments should subsidize gas for cooking even though it is a fossil fuel because it causes much less damage to the climate and human health than biomass fuels do.

These essays and any opinions, information, or representations contained therein are the creation of the particular author and do not necessarily reflect the opinion of EBSCO Information Services.

Bibliography

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