U.S. Subsidies to Fossil Fuels
I just finished writing my review of Steven E. Rhoads’s excellent book titled The Economist’s View of the World. It’s excellent. In a longer than usual review, I didn’t have space to highlight his discussion of U.S. government subsidies to fossil fuels. We often hear how high they are. But Rhoads footnotes a Brookings study by Joseph Aldy that estimates those subsidies to total $41 billion over 10 years, for an average of just $4 billion a year. That’s not as high as we often see claimed.
All of the subsidies are implicit subsidies in the tax code. That is, they are provisions in the tax code that treat fossil fuels preferentially. The study was published in February 2013. So I’m fairly confident that updating for inflation since then would give a higher number.
On the the other hand, there’s an effect that goes the other way. The biggest single item (see his Table 5-1) is $13.9 billion over 10 years for oil drillers being able to expense, rather than depreciate, intangible drilling costs. But the 2017 tax cut permitted expensing for investments in short-lived assets such as machinery and equipment. So the preference for the oil industry suddenly fell. That would make the $13.9 billion for, say 2021, fall, possibly all the way to zero.
It is true that the expensing provision of the 2017 tax law was temporary. It starts to phase out this year and will be completely gone by 2026.
It might be useful for someone to do an update of Aldy’s study.
Note: There is an issue, especially for libertarians, about whether preferential tax treatment constitutes a subsidy. I’m always a little torn about this.