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.
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.