As the United States engages in the U.N. Climate Change Conference in Paris, activists here at home have ramped up pressure to repeal so-called “subsidies” for the oil and gas industry. A recent Oil Change International study proclaims that the United States provides more than $20 billion in national subsidies to the fossil fuels industry. A similar report by the International Monetary Fund (IMF) earlier this year puts the price tag at $5.3 trillion worldwide.
{mosads}There’s only one problem: American energy producers receive very few subsidies. What these advocate groups have done is consciously conflate subsidies — payments to companies financed by taxpayers — with tax deductions and other tax provisions meant to ensure businesses pay taxes only on their real income. The distinction between those two classifications is important, and when the line is blurred it moves the debate onto faulty ground.
Subsidies prop up businesses or industries with government funding. Often they are used to support causes policymakers deem a priority, but that aren’t able to make it on their own. Renewables like solar and wind, for example, are the beneficiaries of some of these subsidies. The purpose being to get those technologies to a place where they can operate independently, thereby expanding the country’s energy portfolio.
Tax deductions, on the other hand, allow companies to expense operating costs and investments to ensure they aren’t overpaying their share of taxes or getting taxed twice on revenue earned overseas. Many of these provisions aren’t unique to the oil and gas industry; they are employed by just about every sector of the economy. In fact, when all federal tax provisions for the energy sector are taken into account, $13.4 billion (57.4 percent) went to renewables in 2013, versus $4.8 billion (20.4 percent) for fossil fuels according to a 2015 Congressional Research Service report. The same year, fossil fuels were responsible for 78.5 percent of U.S. primary energy production, with renewables accounting for 11.4 percent. Yet, some want to selectively repeal them only for oil and natural gas producers. Make no mistake, doing so would discourage investment and slow down development of one of the country’s engines of growth.
In a similar manner, reports like those by Oil Change International and the IMF don’t provide much clarity about how they arrive at their calculations. The Oil Change International report’s methodology asserts that it uses the World Trade Organization’s definition of “national subsidy,” without further substantiation. The IMF report lumps energy consumers into the same category as energy producers, even though it is an important distinction. That kind of fuzzy math may be good for generating eye-popping numbers, but it doesn’t give an honest accounting. At the least, consumers deserve an analysis that does more than draw broad generalizations.
By misrepresenting standard tax provisions that a host of businesses — including energy producers — rely on, environmental groups risk putting the United States at a disadvantage during international negotiations. Numerous foreign competitors like Saudi Arabia, Russia and China do support their energy industries with heavy subsidies. If these foreign competitors cut back their heavy subsidies, they will be moving toward the conditions under which U.S. firms operate. If U.S. policymakers were to allow our legitimate business tax deductions to become synonymous with subsidies used by our competitors, they might get put on the table in Paris.
If government officials penalize American energy producers under the false premise that they benefit from subsidies, they will jeopardize investment in the country’s infrastructure. The Progressive Policy Institute’s “U.S. Investment Heroes” report, which ranks companies based on how much they spend back into our communities, identifies four oil and natural gas producers — Chevron, ConocoPhillips, ExxonMobil and Occidental Petroleum — among the top 10 companies who have invested in the country’s oil and gas production, which also supports various infrastructure and other investment. Ninety percent of energy development is done by companies with 500 or fewer employees. Those hardly seem like logical targets to penalize.
Over the past decade, the United States has emerged as the world’s energy leader. We can continue to hold that position and lead on climate change, but doing so will require an honest discussion of the differences between legitimate tax deductions and subsidies.
Wilber, Ph.D., is a senior economist at the American Council for Capital Formation, a nonprofit, nonpartisan organization advocating tax, energy and regulatory policies that facilitate saving and investment, economic growth and job creation.