The US does not subsidise fossil fuels by $31 billion a year
Or, to be more boringly accurate, this report does not show that the US subsidises fossil fuels by $31 billion a year.
We’re wholly willing to agree that subidy to fossil fuel firms would be a bad thing. On the grounds that we’re against subsidies tout court. But before we get all het up about these claimed subsidies we’d need a great deal more evidence than this:
The US currently subsidizes the fossil-fuel industry to the tune of nearly $31bn per year, according to a new analysis.
That figure, calculated by the environmental campaign group Oil Change International, has more than doubled since 2017. And it is likely a vast understatement, due to the difficulty of quantifying the financial gains from some government supports, and to a lack of transparency and reliable data from government sources, the group says.
Well, no. It’s not “likely a vast understatement” as the actual claims rather fall apart and rather quickly. The report is here.
One of the largest fossil fuel subsidies on an annual basis is the unusual tax deduction for intangible drilling costs (IDC). The IDC deduction, first instituted in 1916, allows independent oil and gas producers to immediately deduct 100 percent of costs not related to final operation of an oil or gas well.
Companies are taxed on their profits. Costs are deducted from revenues before the profit is declared. Being able to deduct costs from revenues before the calculation of profit that tax is paid upon is not a subsidy. It’s just how the world works. An immediate 100% deduction has cashflow implications but it doesn’t change the amount of profit made nor the tax paid on it. It’s not a subsidy.
Available since 1926, the percentage depletion allowance for oil, gas, and coal is another large tax subsidy to fossil fuel production. This subsidy allows certain fossil fuel producers to deduct an annual 15 percent of gross oil and gas income – or 10 percent of gross coal income – from their production costs, rather than writing off only the true cost of reserve depletion in a given year.
Depreciation is a fact as is the closely allied reserve depletion. There are many corners of the tax code where a simple allowance is suggested rather than calculating the issue to the penny each year. This is not a subsidy. At very worst it’s just a convenience for both company and taxman.
Last-in, first-out accounting practices (LIFO) are highly unusual and are prohibited under the International Financial Reporting Standards, but allowed in the United States
Over time this makes no difference at all. As all stock does move through the system so therefore all stock is subjected to tax at the true purchase or production cost. This is also the mirror image of resource companies reporting their profits at replacement cost - something we desperately desire them to do of course.
Current tax law allows U.S. corporations to receive the Foreign Tax Credit to reduce their U.S. tax liability for taxes they pay to foreign countries on income earned abroad and avoid double taxation of the same income.
Taxes - and royalties and so on - to Johnny Foreigner are a cost of doing business. Being able to deduct them is not a subsidy.
We agree, subsidies Are Bad, M’Kay? But they do actually have to be subsidies to be bad, M’Kay?
Tim Worstall