With Oil Prices High, Taking Aim at Industry Tax Breaks

Tax breaks for Big Oil are in the spotlight in Washington, D.C., with top executives of the major energy companies scheduled to make a rare appearance on Capitol Hill to defend the government incentives that their highly profitable industry enjoys.

But the tax credits, deductions and royalty relief provisions that benefit the oil industry in the United States add up to only a fraction of the $312 billion in annual fossil fuel subsidies in place in nations around the world.

The proposal by Democrats in the U.S. House of Representatives would remove subsidies that add up to $31 billion over 10 years for the five biggest oil companies. But oil subsidies in just one country, Iran, added up to $30 billion in 2009, according to the International Energy Agency (IEA). Add in Iran’s subsidies for natural gas and for electricity produced by fossil fuels, and the total is close to $70 billion. (See graph on page 3 of IEA’s World Energy Outlook 2010 Summary [PDF file].)

Of course, fossil fuel subsidies look much different in Iran than they do in the United States. In Iran, subsidies mean consumers pay less for energy. In the United States, subsidies mean producers pay less in taxes. But both approaches are subsidies–“any government action that lowers the cost of energy production, raises the revenues of energy producers or lowers the price paid by energy consumers”—according to a report prepared for the G20 nations by IEA, the World Bank and the Organization for Economic Cooperation and Development.

The G20 nations pledged at their 2009 Pittsburgh summit to phase out these perverse incentives: “Inefficient fossil fuel subsidies encourage wasteful consumption, reduce our energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change.”

But coming up with a shared definition is only one of the problems faced by nations that try to change deeply entrenched fossil fuel policy. (The American Petroleum Institute, which has been fighting the effort in the U.S. Congress to repeal incentives, says the benefits should be called tax “treatment,” and not “subsidies.”) The greatest challenge is that consumers pay less for energy due to government fossil fuel subsidies, and it can be politically perilous to take that support away.

In Venezuela, where consumers pay the lowest price for gasoline in the world (8 cents per gallon/2 cents per liter), President Hugo Chavez gave a televised speech earlier this year urging the nation to reduce its oil consumption. But deadly riots broke out in 1989 during a government effort to remove the subsidies; few think Chavez would attempt to repeat that effort with an election looming next year.

In Siberia, the cost of home heating would cripple households without generous natural gas subsidies from the Russian government. The system is a legacy of Soviet planning, which encouraged large numbers of people to live in the coldest regions of the country where important mining and oil and gas operations were located.

(Related Quiz: “What You Don’t Know About Home Heating”)

Pakistan, which has been suffering severe electricity shortages because demand outstrips supply, last year delayed a program it had in place to raise its heavily subsidized electricity rates in phases. Although it had agreed to the measures to help curb its large governmental budget deficit as part of an $11.3 billion bailout package from the International Monetary Fund, Pakistan cited strong public opposition and economic troubles for delaying its plan to phase out the subsidies.

(Related: “To Keep Power On, Pakistan Tries Lights Out”)

And in the United States, even though the oil industry subsidies now under Congressional scrutiny do not directly reduce consumer prices at the gas pump, the debate over the issue surely will focus on the anticipated indirect impact on consumer prices. The reason Congress gave the oil industry tax breaks such as royalty relief for drilling in deepwater was to encourage the costly and risky energy development that, it was hoped, would increase domestic supplies enough to keep consumer prices in check.

As politically difficult as it is for nations to revisit their past decisions to support fossil fuel production and consumption, it’s impossible for the world to grapple with its future climate and energy woes without taking a serious look at subsidies. The World Bank’s Dan Kammen, an advisor to National Geographic’s Great Energy Challenge initiative, has blogged that this step is every bit as important as the much more widely debated proposals for carbon taxes or cap and trade.

(Related: “Reducing (Massive) Fossil Fuel Subsidies As Key As Carbon Price”)

The IEA/OECD/World Bank report calculated that a complete phase-out of fossil fuel subsidies around the world by 2020 would reduce global carbon emissions 5 percent in one fell swoop. That’s as much as the energy consumption of Japan, South Korea and New Zealand, combined.

(Related Quiz: “What You Don’t Know About Gas Prices”)