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Monday, March 11, 2013

Eliminate $4 billion in annual fossil fuel subsidies

As part of a series of papers on 15 Ways to Rethink the Federal Budget issued by The Hamilton Project, Joseph E. Aldy, Assistant Professor of Public Policy at Harvard University's John F. Kennedy School of Government has published a simple, direct, and provocative paper Eliminating Fossil Fuel Subsidies that is essential reading. 

Aldy writes that the federal government has subsidized the production of fossil fuels through the tax code for a century – originally to support investment in what was a very risky economic activity. But technology and global economic forces have radically changed that original calculus, and today, the U.S. government “effectively transfers by way of tax expenditures more than $4 billion annually from taxpayers to fossil fuel producers…with very little to show for it” in terms of benefitting U.S. energy consumers or national security.

Aldy targets for elimination twelve direct tax provisions that subsidize fossil fuel production.  He excludes other subsidies like Federal highway spending, limits on pollution damages, public health impacts - and, one could argue, aircraft carriers in the Persian Gulf, to say nothing of the catastrophic costs of climate disruption.  The twelve provisions effectively reduce the cost to drill or mine for fossil fuels by allowing firms to expense (i.e write off in the current year) various costs instead of depreciating them over the economic life of the project and to deduct costs and claim tax credits for specific additional activities.
Supporters of these tax provisions subsidizing fossil fuels claim that eliminating these provisions would cost jobs, reduce U.S. energy security, and hurt small businesses. Aldy matter-of-factly debunks these claims, asserting that eliminating these subsidies will “have a very small impact on production,” and will not materially increase retail fuel prices, reduce employment, or weaken U.S. energy security.  It will, he says, “promote efficiency in allocating capital across the U.S. economy.”

Removing U.S. fossil fuel subsidies, Aldy argues, “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 (worth $500 billion per year) that contribute to higher oil prices in the United States.”  And higher global temperatures.

Aldy suggests that one way to achieve the elimination of fossil fuel subsidies is to pair it with corporate tax reform that lowers the marginal tax rate on corporate income. 

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