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Eliminating Fossil Fuel Subsidies 

Joseph E. Aldy

In this policy proposal — part of The Hamilton Project‘s 15 Ways to Rethink the Federal Budget — Joseph Aldy proposes eliminating twelve subsidies to help level the playing field among fossil fuel producers relative to other businesses, and lead to potentially lower global fuel prices by providing the United States with increased leverage in negotiations over eliminating fossil fuel subsides in the developing world.


IMPACT

Deficit Reduction (10-year): $41 billion

Broader Benefits: Levels the playing field among fossil fuel producers and relative to other business investments; leads to potentially lower global fuel prices by providing the United States with increased leverage in negotiations over eliminating fossil fuel subsidies in the developing world.


INTRODUCTION

The federal government has subsidized the production of fossil fuels through the tax code for a century. While such subsidies may have once supported incremental investment in what was a very risky economic activity—drilling that may not yield a productive hydrocarbon field—the advances in technology and the high prices for oil in recent years have significantly changed the risk–reward calculus for domestic hydrocarbon investment. Indeed, the impact of these tax preferences on investment decisions is dominated by factors driving world oil prices (e.g., Asian demand and political events in the Middle East) and by the technological improvements in drilling for shale gas and oil and tight oil. Today, the U.S. government effectively transfers by way of tax expenditures more than $4 billion annually from taxpayers to fossil fuel producers (primarily oil and gas firms) with very little to show for it.

This proposal calls for eliminating twelve tax provisions that subsidize the production of fossil fuels in the United States. Implementing this proposal will contribute to a leveling of the playing field among oil and gas companies, since independent producers enjoy greater tax benefits than the oil majors, and will promote the efficiency in allocating capital across the U.S. economy. Since these subsidies have a very small impact on production, their removal will not materially increase retail fuel prices, reduce employment, or weaken U.S. energy security. This proposal complements other proposals to simplify the corporate tax code, and thus could facilitate the political support necessary to enact a simpler, more efficient corporate tax code. In addition, removing U.S. fossil fuel subsidies would enable the U.S. government to make the case more effectively that large developing countries (such as China, India, and energy exporters) should phase out their fossil fuel consumption subsidies that contribute to higher oil prices in the United States.

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