Ben Zycher on Subsidies to Fossil Fuels

By David Henderson. 

"Ben Zycher, an energy economist with the American Enterprise Institute and my predecessor as senior economist for energy with President Reagan’s Council of Economic Advisers, saw my recent post on subsidies to U.S. fossil fuel industries and sent me the following. I post it with his consent.

The often-criticized “subsidies” for fossil energy in my view are not “subsidies for fossil energy” properly defined. There is the percentage depletion allowance, which is just a form of depreciation; all extractive industries are allowed it, and the only exception is the major integrated oil companies, which are required to use standard cost-based depreciation. As a practical matter, it is limited to very small fossil fuel producers. There is the partial expensing of intangible drilling expenses (for the most part labor costs); because all R&D is treated that way, it not a “subsidy” for fossil energy. (It may be inappropriate in that the costs of creating a capital asset ought to be depreciated rather than expensed, but that is a separate question.) There used to be (until the Trump tax bill) the 9% (Section 199) credit for manufacturing output; all “manufacturing,” as defined by the wisdom of the IRS, received this, and so it was not a “subsidy for fossil energy.”  (I think that there actually is an Earl Thompson-type efficiency argument for it: The likelihood of price controls during a future emergency exceeds zero, and so there might be underinvestment in “manufacturing” beforehand.) The environmental left pretends that the absence of a tax or other constraints on fossil-fuel use in the context of GHG emissions is a “subsidy”; that is silly, as it assumes the answer to the climate policy question and, anyway, the absence of any tax can be construed as a “subsidy” if one assumes a sufficiently high number for the value of public services received by a given industry.  There is the further matter that substantial amounts of both federal and state highway fuel taxes (20 percent?) are used not for highways but instead for mass transit, bicycle lanes, and other programs not providing benefits for consumers of highway fuels.

There is the LIFO provision in the tax laws, which hardly is limited to fossil producers, even if we assume that it is inefficient simply for discussion purposes. (That assumption is very far from obviously correct.) Even if we ignore all this and assume that the “subsidies” for fossil energy indeed are “subsidies” properly defined, the Congressional Research Service analysis shows that fossil fuels are about 78 percent of energy output and about 26 percent of the “subsidies”; renewables (including hydropower), respectively, 13 percent and 65 percent; and nuclear, respectively 9.5 percent and 1.7 percent.  The major “subsidies” for fossil fuels are outside the U.S., taking the form of consumption subsidies (artificially low prices) in particular in less-developed economies, as a tool to support living standards/consumption and so protect social peace (or the tenures and perhaps the lives of the incumbent officials).

See this: https://www.nationalreview.com/2021/05/fiction-vs-reality-on-fossil-fuel-subsidies/"