The United States has a long tradition of burning fossil fuels. As of 2019, 38% of utility-scale electricity came from natural gas, and 24% came from coal. In contrast, only 18% of American electricity needs were met by renewable energy. The result of this heavily fossil fuel-dependent system is that despite Americans making up only 4% of the world’s population, we are responsible for 14% of global CO2 emissions. To reduce air pollution and limit climate change, climate scientists agree that industrialized nations such as the United States need to decarbonize their electrical grids by moving away from fossil fuels.
On the campaign trail, U.S. President Donald Trump worked hard to win the support of rural Midwestern voters, and among his tactics was to berate the Obama administration’s “war on coal”. But here’s the thing: such a war never existed. In fact, since the Revenue Act of 1916, the United States has offered fossil fuel producers generous subsidies and tax breaks, many of which are still in place today. For all the talk about the government trying to kill coal, it has actually been supporting it for over a century.
The original logic for fossil fuel subsidies made sense. During a time when oil was still scarce and other sources of energy were all but nonexistent, policymakers wanted to support energy independence, and people were not yet aware of the external costs of CO2 emissions. Yet to this day, many of those same subsidies and tax breaks remain in place. Direct subsidies include deductions for drilling costs ($1.59 billion/year), tax breaks depending on how depleted an oil reserve or coal mine is ($12.9 billion over 10 years), and broad tax credits to promote domestic production. The larger group of subsidies, however, is indirect. Fossil fuel companies avoid paying billions of dollars of taxes each year by exploiting accounting loopholes, claiming foreign tax credits, and harnessing tax breaks meant for other industries. In total, the federal government shovels over nearly $14.7 billion per year to oil, gas, and coal companies.
While the majority of these government handouts go to oil and natural gas, nearly 20 percent go to coal. Furthermore, the coal industry pays an effective tax rate of only 0.97% — nearly nothing — compared with an average of 7.32% for all industries. In other words, the United States government is paying billions of dollars in subsidies and foregone tax revenues to support an industry whose emissions are costing lives and destroying the planet. In fact, an IMF report found that the fossil fuel industry costs the United States $649 billion per year — more than the Pentagon’s annual expenditures — when direct subsidies and external costs of pollution are taken into account.
The policy solution to this problem is very simple: remove and reallocate the existing fossil fuel subsidies to climate-friendly industries. Although it would be politically challenging to enact a carbon tax or other emissions pricing initiative, there is no reason for fossil fuels to receive special tax exemptions. As of 2020, the United States is a net exporter of crude oil, so there is little substance to the argument that we still need to prioritize energy independence. In contrast, renewable energy is the fastest-growing energy sector in the US, and it offers more sustainable long-term energy produced on home soil. Furthermore, once external costs are considered, renewable energy is the least expensive way to generate energy for nearly every US state.
Rather than offering broad, obsolete subsidies to the coal companies that pollute our atmosphere, the federal government should redirect funds to cutting-edge solar and wind power projects. Today, the government is facing pressure from oil and coal lobbyists to remove renewable energy subsidies, but as wind and solar continue to grapple with intermittency issues, we need them more than ever. Although solar installation costs currently have a 26% federal tax deduction, that will fall to 10% by 2022 and apply only to commercial solar systems (not residential ones). If the federal government were to instead cut the majority of fossil fuel subsidies, it could maintain the renewable ones and still collect more revenues.
With that said, not every fossil fuel subsidy is a bad subsidy. Rather, the government needs to be smart in its approach. The only fossil fuel subsidies worth keeping are for pollution abatement, power plant closure, and environmental protection. For example, some natural gas subsidies might make sense, as long as they incentivize the shuttering of dirtier coal plants. In other words, subsidies should be used as precise tools to ease the transition towards clean energy, not merely a way to take money from citizens and put it in the pockets of industrialists.
Many young voters are very concerned about climate change and support broad new environmental plans, such as the Green New Deal. As we work towards a more sustainable future for America, we must both pass sweeping new legislation and eliminate the bad policies that go against the interests of the citizens. No longer should the American public be subsidizing our bigges
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