1. Eliminating subsidies reinvigorates US climate leadership - this is crucial to pushing for global CO2 reductions

(Joseph E., PublicPolicy@Harvard, , 4-11)

The Impacts of Eliminating Subsidies for US Oil and Gas Production Oil and gas tax expenditures do not have a meaningful impact on US oil and gas production. Oil and gas companies have had access to two of the most prominent subsidies, the intangible drilling cost and percentage depletion provisions, since long before the first oil shock in 1973. Over the 1973–2008 period, US oil production declined each year an average of more than 120,000 barrels per day. Since 2008, US oil production has averaged an annual increase of more than 350,000 barrels per day. These subsidies could not reverse the decline in domestic production before 2008, and high oil prices and technological innovation, not subsidies, explain the rapid production growth in recent years. The remarkable technological innovation that has transformed the US oil and gas sector over the past half dozen years more than offsets any adverse impacts that subsidy elimination would have on domestic production. The National Research Council (NRC) recently modeled the elimination of the percentage depletion provision for natural gas. For this analysis, the NRC used the US Department of Energy's (DOE's) 2011 benchmark energy forecast through 2035. Over the 2010–2035 period, the NRC estimated that eliminating this subsidy would reduce US gas production by about 2 percent relative to this 2011 forecast. This impact appears modest on two dimensions. First, the NRC estimates that US gas production would continue to increase in the years immediately after subsidy elimination and remain above 2010 levels every year through 2035. Thus, the impact is not a fall in the level of production, but slower growth in production. Second, and more profoundly, the DOE's 2013 version of the benchmark forecast shows 15 percent greater gas production through 2035 than the 2011 version used by the NRC. Continuing innovation has led the DOE, year after year, to raise its forecast domestic production and lower its estimated wellhead prices. RFF Visiting Fellow Stephen Brown evaluated the elimination of oil and gas tax expenditures with his colleague Maura Allaire in 2009. He found that US oil production would be about 26,000 barrels per day lower than it would be without the subsidy elimination. Also in 2009, the US Department of the Treasury estimated a similarly modest impact on domestic oil production on the order of about 0.5 percent. The recent, dramatic increase in US oil production—reaching levels unseen since the 1980s—puts this production impact into context. Since January 2009, the average monthly increase in domestic oil production is about 45,000 barrels per day. Thus, it takes about 17 days to make up for a decline of 26,000 barrels per day of production. If the point of these subsidies is to stimulate US production, then the taxpayer is not getting a good deal. If a private company spent nearly $5 billion per year to produce 26,000 barrels per day, it would lose a lot of money. Even applying the Department of the Treasury's 0.5 percent production impact to today's higher level of US oil production translates into the taxpayer spending several hundred dollars per barrel of incremental production. This reflects the fact that the vast majority of these subsidies go to producers that do not change their production in response to the subsidies. Since independents finance projects substantially through cash flow, instead of raising debt, eliminating the tax provisions that subsidize their activities could impact their financing strategy. For example, these companies may need to raise debt and equity for their drilling projects, not unlike how firms in other sectors of the economy finance major projects. In other words, eliminating these subsidies requires them to operate on a level playing field for attracting investment along with supermajors and other companies throughout the economy. Environmental Impact of Eliminating Fossil Fuel Subsidies These subsidies' very small production impacts result in imperceptible effects on US fossil fuel prices and subsequent domestic consumption. As a result, the current subsidies in the US tax code likely have little direct impact on US carbon dioxide emissions. Nonetheless, eliminating these subsidies could lead to significant carbon dioxide emissions reductions globally. Given the US effort in securing the G20 agreement to eliminate fossil fuel subsidies in 2009, the failure to make any domestic progress hamstrings US officials in leveraging progress by other G20 nations. While this issue continues to receive attention from leaders in G20 summits, the progress to date has been slow. Eliminating these domestic subsidies would empower the United States to push other large economies to do likewise. Eliminating fossil fuel subsidies around the world would deliver quite dramatic carbon pollution benefits, as well as important economic and fiscal impacts. The International Energy Agency estimates that eliminating fossil fuel consumption subsidies, currently about a half trillion dollars annually, would reduce carbon dioxide emissions by about 7 percent by the end of the decade and 10 percent by 2050. Doing so would also free up resources—amounting to at least a quarter of some countries' government budgets—that could be used to address important social needs, such as public health and education.