Congress Should Follow Biden’s Lead on Fossil Fuel Subsidies

The United Nations sounded a strong alarm this week with the Intergovernmental Panel on Climate Change's latest report on the dangers of climate change. It is fossil fuel combustion and industrial processes that account for the largest share and growth of greenhouse gases. In fact, projected carbon emissions from existing fossil fuel infrastructure without additional abatement would exceed the remaining carbon budget to keep warming at 1.5 degrees Celsius. 

Yet every year, U.S. fossil fuel companies continue to benefit from billions in taxpayer giveaways. These subsidies, most of which have been in place for decades, distort the market in favor of dirty and outdated oil, gas, and coal production and keep us on a path of disastrous climate change. 

President Joe Biden is proposing to get rid of several of these fossil fuel freebies. In his new budget proposal to Congress, he recommends eliminating some of the most egregious, including two major subsidies that allow the industry to profit on the backs of taxpayers during the production phase.

The Intangible Drilling Costs subsidy in the U.S. tax code allows independent and integrated oil and gas producers to deduct much of the cost of drilling a well in the year the cost is incurred, whereas in most other industries, these costs must be deducted over the productive life of the asset. Costs eligible for deductions are those with no salvage value, such as hiring labor to conduct surveys for potential drill sites and clearing the ground to build the well. In oil and gas, intangible costs comprise 60 to 80 percent of the cost of drilling a well. Biden’s 2023 budget proposal estimated that this subsidy will cost U.S. taxpayers $13 billion between 2022 and 2032. 

The excess of percentage over cost depletion federal tax subsidy was created in 1926, when there was uncertainty over how long a well would pump oil. It allows independent oil and gas producers to reduce the taxable gross income of a well by 15 percent for a portion of its production. Unlike standard cost depletion, total deductions under percentage depletion can exceed the total investment in the property. Further, revenue losses are higher during periods of high oil and gas prices, which is also when industry profits are highest. The 2022 Budget of the U.S. Government estimated that this subsidy will cost U.S. taxpayers approximately $12.9 billion between 2022 and 2032. Unlike the majority of subsidies to renewables, this provision is a permanent part of the federal tax code, with no expiration date. 

Adding to President Biden’s call for the elimination of major fossil fuel subsidies, Representative Earl Blumenauer’s (OR-03) newly introduced End Oil and Gas Tax Subsidies Act of 2023 would eliminate a host of fossil fuel tax giveaways, including last-in, first-out accounting. This accounting loophole allows companies to artificially deflate their profits for tax purposes and escape paying their full tax bill in a given year.

Administration analysts estimate that getting rid of these fossil fuel subsidies would generate approximately $97 billion in taxpayer savings over the next 10 years. This revenue could be freed up and devoted to a host of other true public priorities; funding that is forward-looking and doesn’t tie the country to the dirty fuels of the past with all the harms and hazards they bring. Congress should heed the call of President Biden and Representative Blumenauer. It should heed the warnings from scientists around the world of the harm that climate change will continue to cause our communities. The time to end wasteful and destructive fossil fuel subsidies is past due.