US 2011 budget may cut coal subsidies

by Milan on March 3, 2010

in Climate change, Coal mining, Economics, Ethics

Analysis from the US Office of Management and Budget (OMB) shows that federal subsidies for coal in the United States will be reduced significantly between 2011 and 2020, provided the budget can be passed through Congress.

Four coal tax preferences are being reduced: Expensing of Exploration and Development Costs, Percent Depletion for Hard Mineral Fossil Fuels, Royalty Taxation, and Domestic Manufacturing Deduction for Hard Mineral Fossil Fuels. Collectively, the reduced subsidies are expected to amount to US$2.3 billion over the whole span. The repealing of these provisions is justified as follows: “To foster the development of a clean energy economy and reduce our dependence on fossil fuels that contribute to climate change, the Administration proposes to repeal tax provisions that preferentially benefit fossil fuel production.” They also argue that: “Repealing fossil fuel tax preferences helps eliminate market distortions, strengthening incentives for investments in clean, renewable, and more energy efficient technologies.”

This is just a start. The OMB explains that these subsidies represent less than 1% of annual domestic coal revenues, so the impact of eliminating them would be modest. Given the huge negative externalities associated with coal (particularly habitat destruction, health impacts, and climate change), coal producers and users should be facing Pigovian taxes rather than receiving subsidies. Still, this is undeniably a step in the right direction. That said, the OMB does cite an OECD study which concluded that eliminating all fossil fuel subsidies in G20 countries could reduce global greenhouse gas emissions by 10%.

Here’s hoping these components of the budget don’t get killed by some senator from Appalachia.

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{ 3 comments… read them below or add one }

Milan March 3, 2010 at 1:49 pm

From the OECD report:

Fossil fuel energy subsidies are currently high in several non-OECD countries. OECD countries also provide subsidies to energy production and/or consumption, but it is estimated that they are small in comparison to non-OECD countries, and they are often provided through channels that are harder to measure, thus they are not reflected in the modelling analysis presented here (IEA, 1999). In the latter case, they are particularly substantial in Russia, other non-EU Eastern European countries, and a number of large developing countries, particularly India. These subsidies amount to a negative carbon price that keeps fossil fuel consumption, and hence GHG emissions, higher than they would otherwise be. Thus, removing them is a necessary, though politically difficult, step towards broad-based international carbon pricing. It would also free up finances for more direct reallocation to the social objectives being supported by the subsidies. Removing energy subsidies in non-OECD countries will have positive effects:

  • Closing the gap between domestic and international fossil fuel prices could cut GHG emissions drastically in the subsidising countries, in some cases by over 30% relative to BAU levels by 2050, and globally by 10%. Nonetheless, broad-based energy subsidy removal would lower the demand for, and thereby the world prices of, fossil fuels. As a result, emissions would rise in other (mainly developed) countries, limiting the decline in world emissions. However, with binding emission caps in developed countries, such leakage would be contained, and world emission reductions would be even larger.
  • Energy subsidy removal would also raise GDP per capita in most of the countries concerned, including India and, to a lesser extent, China. Conversely, broad-based energy subsidy removal would imply terms-of-trade and output losses for producing countries. Still, the global GDP effect would be positive.

In short, these summaries only serve members of special interests, while harming the world’s population as a whole.

Milan March 3, 2010 at 2:22 pm

According to p.162 of this OMB document, oil and gas subsidies could potentially be cut by up to US$36.5 billion between 2011 and 2020.

The biggest cuts could be to expensing of intangible drilling costs ($7.8B), repealing percentage depletion for oil and natural gas wells ($10B), and repealing domestic manufacturing tax deduction for oil and natural gas companies ($17.3B).

. October 21, 2010 at 3:26 pm

Coal: The Biggest Corporate Bailout of All (Part 1 of 3)
Posted on October 20, 2010 by claseur

Hidden federal subsidies for the coal industry are a huge story, but let’s start with this. The Powder River Basin, currently the source of more than 40% of U.S. coal production, is not a certified coal producing region under the Federal Coal Leasing Amendments Act of 1976. FCLAA followed a 1970s coal leasing moratorium brought about by rampant speculation on federal coal leases. Since then, a system put in place to earn fair market value for the public for the vast federal coal resources has steadily fallen apart.

The result is a huge hidden subsidy for coal production that drains billions from the U.S. Treasury, falsely bolsters coal’s competitiveness against cleaner forms of energy, and lines the pockets of the coal industry, which funds the most ardent and effective opponents of climate legislation with astroturf campaigns like the American Coalition for Clean Coal Electricity.

The story goes back at least four decades.

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