SEI researcher testifies at US congressional hearing on fossil fuel subsidies

Thank you Chairwoman Maloney, Chairman Khanna, and Ranking Member Comer, for this opportunity to testify today.

My name is Peter Erickson, and I am a senior scientist at the U.S. Center of the Stockholm Environment Institute, a research affiliate of Tufts University.

Today my testimony has three points: (1) Fossil fuel subsidies are an inefficient means of supporting economic activity. (2) They undermine efforts to deal with climate change. And (3) they work against improvements in public health.

First, fossil fuel subsidies are an inefficient means of supporting economic activity.

The US government has subsidized fossil fuel production for more than a century, including by forgiving or delaying tax payments that are otherwise required. The intangible drilling cost provision and the percentage depletion allowance are examples of this.

The ostensible rationale for these subsidies has been to promote increased production and jobs.

However, the vast majority of the value of subsidies goes to new oil and gas wells that are already expected to be profitable and would be developed anyway.

For example, my research has found that over 96% of subsidy value flows directly to excess profits, over and above the profits required to satisfy minimum investment hurdles.

Most of the value of these subsidies is therefore not contributing to jobs on the ground.

Even in the few cases where subsidies do lead to increased investment, subsidizing fossil fuels is not an efficient means of creating jobs. If job creation is the goal, other industries, besides fossil fuels, are better job creators.

Second, fossil fuel subsidies undermine efforts to deal with climate change.

Subsidies can, at times, make production of fossil fuels higher than it would otherwise be. This happens when oil and gas prices are very low, and companies otherwise have little or no incentive to drill.

These subsidy-driven increases in drilling, even though relatively small, still raise global greenhouse gas emissions, undercutting hard-won gains on the climate crisis. Subsidies therefore work against the need to rapidly wind down emissions from burning oil, gas, and coal.

Further, subsidies can have symbolic effects, since their continued existence may be read by other nations as a sign that the US is not taking its commitments to subsidy reform, or to climate action, as seriously as it should be.

In 2016, with other G7 governments gathered in Japan, the US committed to eliminate fossil fuel subsidies by 2025. By following through on this, the US would encourage other countries to do the same, multiplying the benefits.

Third, fossil fuel subsidies work against needed improvements in public health.

Subsidies to fossil fuels also contribute, indirectly, to air and water pollution, creating added community health concerns.

For example, research has found that the cumulative health damages from the shale gas boom in Appalachia outweigh benefits from any new employment. Producing and burning fossil fuels creates air pollution that can lead to worsening asthma, adverse pregnancy and birth outcomes, and even premature death.

Air pollution from oil and gas drilling can also exacerbate inequalities. In the Eagle Ford basin in Texas, oil producers routinely burn off large quantities of natural gas that they consider to be waste, releasing toxic and carcinogenic compounds. This happens more often in Hispanic neighborhoods than in non-Hispanic ones.

Closing thoughts

Opponents of fossil fuel subsidy reform have argued that special provisions in the tax code are not subsidies specifically because they have been there for so long.

But that is wrong. Policies that provide financial benefits to companies at a cost to the public, whether provided through the tax code or otherwise, constitute just as much a subsidy as writing a check, if these financial benefits are not generally available to other industries.

Not only do tax preferences meet that definition, but so do other policies that extend beyond the tax code.

For example, governments often charge companies inadequate fees to cover the cost of retiring oil and gas wells. The result is a clean-up bill that now totals hundreds of billions of dollars – and may well be paid by the public, rather than the companies that created the problem.

In summary, subsidies to fossil fuel producers are an inefficient means of creating jobs, they hold back the low-carbon energy transition, and they work against efforts to improve public health.

Government resources are better spent elsewhere, where they can support economic recovery, climate, and other public benefits.

Removing fossil fuel subsidies can be an important part of addressing the climate crisis.

Thank you to the committee for this important hearing.