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Economic Benefits to Fossil Carbon Far Outweigh Those for Renewables

March 05, 2014
Author: Stan Parton
We in the forest products sector were certainly glad to see the ‘wins’ in the Farm Bill. Clarification that logging roads are not point source emissions and inclusion of forest products as qualified materials under the BioPreferred Program are good news for the industry.

The $956 BILLION bill also included some funding for bioenergy and biochemicals, and for that we are grateful. But let’s put the funding level in context. The portion of funding related to bio-carbon is 0.01% of the Farm Bill, a mere $115 million annually which represents a $57 million reduction from the 2012 spending level.

To become long-term, viable options to fossil sourced energy and materials, renewable energy and biochemicals must be economically competitive. One of the roles of government is to provide economic and policy assistance to help nascent industries which are in the broader public interest to get up and running. This assistance is sometime provided through direct subsidies (like those in the Farm Bill) but can also be provided in the form of indirect subsidies such as favorable tax treatment and accounting practices.

At one point in our history, the fossil carbon industry required and received such assistance. This industry is now well established, and the companies participating in this sector are hugely successful economically. Unfortunately, many of those assistance measures put in place remain today, and by their existence, create an unlevel economic playing field in which the emerging bio-carbon industry must compete. Let’s examine the favorable financial treatments received by the fossil carbon industry compared to the recent support given to the bio-carbon industry.

The Environmental and Energy Study Institute (EESI) is a non-profit organization founded in 1984 by a bipartisan Congressional caucus and is dedicated to finding innovative and environmental and energy solutions. In June 2011, EESI published the brief Fossil Fuel Subsidies: A Closer Look at Tax Breaks, Special Accounting, and Societal Cost.

The brief points out that direct subsidies typically have a specific financial amount or are in place for a specific period of time. However, indirect subsidies are often imbedded into the tax code and continue to survive well beyond the conditions which existed at the time they were put in place. The fossil carbon industry continues to derive benefit from such indirect subsidies, and the magnitude of these indirect and hidden subsidies far exceed, in scale, any direct subsidies. As stated, the result is default financial support for fossil carbon which makes renewable carbon sources ‘appear’ to be uneconomical.

The EESI brief examined cases in the following types of indirect subsidies, provided historical context for the subsidies being put in place, and estimated the financial benefit to the fossil carbon industry.

  • Direct Tax Subsidies
    • Capital Gains Treatment of Royalties on Coal Credit - Revenue Act of 1951 - $1 billion for the period 2002-2008 / Annualized $150 million
  • Other Tax Benefits
    • Domestic Manufacturing Deduction - American Jobs Creation Act of 2004 (put in place to prevent export of jobs, which of course the domestic fossil industry cannot do) - $13.2 billion for the period 2010-2019 / Annualized $1.3 billion
  • Abnormal Accounting
    • Percentage Depletion - Revenue Act of 1926 (which allows a depletion rate which exceeds actual depletion and investment life) - Annualized $1.1 billion
  • Royalty Relief
    • Deepwater Royalty Relief Act of 1995 (enacted to encourage off-shore drilling when crude was selling in the $20/barrel range)  - Annualized $1 billion (for the under royalty receipts for off-shore; does not consider under royalty receipts for development of oil and gas on federal lands)

Collectively, these provisions provide an economic benefit to the fossil carbon industry in excess of $3 billion. In light of the record profits of companies participating in this sector, there have been calls to reduce or eliminate these unneeded economic benefits. If this was done, the economic playing field between fossil carbon and above ground carbon would become more level, thereby allowing the above ground carbon sector to compete economically. And the magnitude of the economic adjustment would far exceed the level of direct support provided in the Farm Bill.

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