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End Existing Subsidies

There are three types of fuel-specific subsidies handled by the Energy Policy Simulator: subsidies for production of a particular type of fuel (such as coal or crude oil), subsidies for construction of a type of electricity generation capacity (such as a payment per MW of coal power plant constructed), and subsidies for production of electricity from a given fuel or energy source (such as a payment per MWh generated by wind power plants). This policy allows for the reduction of these types of subsidies, if they exist in the business-as-usual (BAU) case.

The rest of this page describes the policy's application to the United States.

The U.S. has two kinds of federal programs that subsidize the fossil fuel industry – consumption subsidies and production subsidies. Consumption subsidies take the form of low-income assistance for heating and other energy expenses, making the price of fuel cheaper for a subset of consumers. Production subsidies sit in the tax code. They provide preferential treatment to fossil fuel extraction and refining activities by deducting many of these expenses from a company’s taxable income. These subsidies distort markets by encouraging more investment in the oil and natural gas industry than would occur under a neutral tax system.

According to the U.S. treasury department, fossil fuel production subsidies cost American taxpayers more than $4.5 billion in 2014. The largest of these subsidies is the deduction of intangible drilling costs from income. Under this provision, up to 70% of expenses made by an operator incidental to and necessary in the drilling and preparation for the production of oil and gas may be deducted from income rather than capitalized, as is customary in other industries. Another large subsidy that costs over a billion dollars annually is the percentage depletion rate for oil and natural gas extraction. Because it is a 15% deduction from income that does not relate to actual expenses, it effectively provides a lower rate of tax for oil and gas producers relative to the cost depletion structure that applies to other industries. Other subsidies include manufacturing deductions, adjustments to amortization rates, capital gains treatment for coal royalties, and expensing of exploration and development.

There is one consumption subsidy funded by the federal government in the United States, the Low-Income Home Energy Assistance Program (LIHEAP). LIHEAP targets low-income households, and benefits are typically dispersed as a lump sum credit on a household’s utility bill. Federal guidelines limit eligibility to households with incomes up to 50% over the poverty line or 60% of state median income. This program costs $3.4 billion, the majority of which makes the consumption of fossil fuels cheaper. Some portion of the funds may also be used for weatherization and program administration.

Changes to these programs would require an act of the U.S. Congress, which controls the federal tax code and LIHEAP appropriations. A full list of fossil fuel subsidies is on the U.S. Treasury Department website.