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G-20 Agrees to Phase Out Fossil Fuel Subsidies

The G-20 nations Friday were said to have forged an agreement to phase out subsidies for oil, natural gas and coal, but the document reportedly lacks teeth because it doesn't provide a timetable for when the subsidies should end.

The draft document says the government subsidies should disappear "over the medium term," thus leaving it up to individual countries to set their own deadlines, according to published reports.

The Obama administration had worked for weeks leading up to the G-20 summit in Pittsburgh to "build consensus" for its proposal to phase out fossil fuel subsidies. It saw this as critical to its plan to reduce carbon dioxide and other greenhouse gas (GHG) emissions. The failure to secure agreement on a date-certain for the phaseout is a setback.

Even with the G-20 agreement, implementing a phase-out of fossil fuel subsidies will be a difficult task. President Obama's own proposal to cut about $80 billion in U.S. oil and gas tax breaks over the next decade has been met with significant resistance from lawmakers representing producing states (see NGI, Sept. 14).

"The Obama administration and Congress now face many difficult choices if they choose to comply with the G-20 commitment to phase out 'fossil fuel subsidies,'" said Jack Gerard, president of the American Petroleum Institute, which represents major oil and gas producers.

"Above all else, the president and Congress should not use this commitment as an excuse to raise energy taxes on American consumers and businesses. Does the president really think it wise to eliminate tax provisions that encourage investment in technology and exploration and development and would likely constrict future energy supplies, raise energy costs and kill jobs?" he asked.

Obama's "call to 'phase out fossil fuel subsidies' is a wrong-headed approach that should be seen for what it really is: a giant tax hike on American consumers," Gerard said.

"The president's proposed action is based on academic notions that simply do not apply in the real world. These proposals pose severe consequences to U.S. energy producers and will impact the entire U.S. economy," agreed Barry Russell, president of the Independent Petroleum Association of America, which represents independent producers.

"Why the administration would shut down 20% of our nation's oil production and 12% of its natural gas is unfathomable. Why it would seek to take away 25-40% of the capital that finds and produces American natural gas -- half of which comes from wells developed in the past four years -- is undecipherable. Why it would choose to hand the nation's energy future to foreign leaders like [Venezuela's] Hugo Chavez...is clearly a tragic miscalculation," he said.

Conservative think tank The Heritage Foundation called the president's proposed action "commendable," but it urged Obama to go a step further and eliminate subsidies for all energy, including renewable fuels. "If the president wants a sound energy policy that will benefit electricity consumers, he should focus on removing all subsidies from the market.

"Any subsidy, whatever the source of energy or product, distorts normal market forces and encourages government dependence...Allowing all energy sources to compete absent subsidies, mandates or tax credits will benefit consumers most."

The foundation noted that renewable fuels have made little progress despite the backing of the federal government. "For many years wind energy has been the beneficiary of generous tax credits and subsidies, but it still provides less than 2% of America's electricity. It is unreliable and will be costly ($80 billion) to build transmission lines to bring wind from where it is produced to where it is needed."

A recent report by the Environmental Law Institute (ELI) and the Woodrow Wilson International Center for Scholars found that federal subsidies to energy "highly" favor sources that have high GHG emissions levels (see NGI, Sept. 21).

"The combination of subsidies -- or 'perverse incentives' -- to develop fossil fuel energy sources, and a lack of sufficient incentives to develop renewable energy and promote energy efficiency, distorts energy policy in ways that have helped cause, and continue to exacerbate, our climate change problem," said ELI Senior Attorney John Pendergrass. "With climate change and energy legislation pending on Capitol Hill, our research suggests that more attention needs to be given to the existing perverse incentives for 'dirty' fuels in the U.S. Tax Code."

The federal government provides substantially larger subsidies to fossil fuels than to renewables, ELI said. Fossil fuels benefited from approximately $72 billion over the seven-year study period, while subsidies for renewable fuels were $29 billion. More than half the subsidies for renewables -- $16.8 billion -- were attributable to corn-based ethanol, the climate effects of which have been disputed.

Of the fossil fuel subsidies, $70.2 billion went to traditional sources -- such as coal and oil -- and $2.3 billion went to carbon capture and storage. Thus, energy subsidies highly favored energy sources that emit high levels of greenhouse gases, the study said. "The U.S. energy market is shaped by a number of national and state policies that encourage the use of traditional energy sources. These policies range from royalty relief to the provision of tax incentives, direct payments and other forms of support to the nonrenewable energy industry."

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