A new analysis measures the concrete impact that US fossil fuel subsidies have on the profitability of US oil & gas projects. One subsidy in particular makes a substantial difference.
While it is great that more work is being done to understand the subsidies for production of fossil fuel commodities, I feel that insufficient attention is being paid to subsidization of the transmission and distribution of fossil fuels. The end-user cost of these fuels is, of course, something like the sum of the costs of production, transmission, distribution, taxes, etc. Thus, a reduction in transmission or distribution costs has the effect of allowing more headroom to support higher commodity costs whether or not production is directly subsidized. I'll give two examples below of distribution programs that have the effect of subsidizing gas production: Demand Management programs and straight-line (time-based) cost-recovery.
The purpose of a Demand Response Management (DRM) program is to modify consumer's demand profiles in such a way that utilization of the existing distribution infrastructure can be "safely and reliably" increased while avoiding the cost of installing more infrastructure. Thus, DRM is often pitched as providing cost-saving benefits to consumers. While this makes sense for electric DRM programs, since electricity is a commodity that we want people to use more of, it doesn't make sense for natural gas, a commodity that we must use less of in the future. Nonetheless, environmentalists often translate their very wise support for electric-DRM into unthinking support for gas-DRM since they assume that it is useful to reduce the gas consumption by the large users who subscribe to gas-DRM programs. What they miss is that trimming the peaks allows filling the valleys and thus increasing aggregate gas throughput even if peak throughput is reduced.
Of course, the large gas customers who subscribe to DRM or interruptible-use programs are well compensated, through reduced rates, for their willingness to curtail gas use by temporarily switching to oil or other fuels. Also, the the gas utility will often be rewarded for meeting DRM targets by being permitted to increase its allowed return-on-equity. Both the utilities and gas producers also benefit since their costs can be spread across greater unit sales. This allows more headroom for either increasing the cost of the produced commodity or for other further increases in the utilities' allowed rate of return.
Ratepayer funded gas DRM programs support higher gas throughput and increased profits for the entire gas supply chain. They are an important, although often overlooked, form of fossil fuel subsidy.
Straight-line depreciation allocates the costs of assets equally over each year of the asset's expected useful life. Thus, if a gas pipe is expected to have an EUL of 85 years, then 1/85th of its cost would be recovered each year. This method has traditionally worked reasonably well and equitably for both electric and gas assets since those assets tended to be heavily used throughout their lives. However, we'll soon discover that straight-line depreciation no longer makes sense for gas assets since we expect, and in states like New York we require, that gas throughput must decline dramatically in the future. Thus, we expect that future gas ratepayers will benefit proportionately less from the existing gas infrastructure than do current ratepayers. But since current and future ratepayers will pay the same each year for existing assets, this means that costs are being shifted from current users to future users. The result is an inter-generational cost-shift that artificially reduces today's gas rates, and thus encourages its continued and even increased use, while requiring either that future gas rates must increase dramatically to cover the use of them unused assets or that taxpayers, or electric ratepayers, will eventually have to subsidize the costs of a less used gas system. (We'll have to keep gas flowing until folk convert to something else since we can't let people freeze in the winter...) We should also realize that wealthier customers are likely to have the capital needed to abandon gas and switch to heat pumps, etc. Thus, the gas customer base will become increasingly low and moderate income (LMI). This means that LMI folk are going to be stuck paying the costs of assets built for, but abandoned by, wealthier ex-ratepayers... Not good.
A more appropriate means of allocating costs, for a system whose use is expected to decline, would be what is known as the UoP or "Units of Production" method. For gas, this method would require an estimate of the total volume of gas to be delivered during the life of a pipe. Then, ratepayers would be allocated costs which are proportional to the quantity of gas actually delivered to them during the billing period. (For example, if the asset has a 30 year life, straight line depreciation would charge ratepayers 1/30th of the costs each year even if, during that year, they actually consumed 1/20th of the volume of gas that would be reasonably expected to be delivered during the asset's life. The difference between 1/30 and 1/20 (i.e. 1.6%) is the amount of money shifted from current to future ratepayers. As asset utilization decreases, the amount of the cost-shift rises dramatically...)
The continued use of straight-line depreciation is often supported by consumer advocates since it results in lower rates for current gas users. These advocates have little concern for future users. The benefit to the gas supply chain is, of course, that lower rates today increase sales and provide more headroom for profit. The utilities aren't terribly concerned about the growing risk of ballooning gas delivery charges, due to the inter-generational cost-shift, since they are confident that regulators and government will allow them to recover their full costs whatever they might be (see: The mythical "Regulatory Compact.").
Straight-line depreciation is a means to have future ratepayers subsidize current ratepayers and thus artificially lowers today's gas rates while increasing the opportunity for profit taking in the gas supply chain. This is a common, but overlooked, form of subsidy for fossil fuels.
I could go on, but will spare you the details. (For instance, allowing fossil fuel transmission and distribution systems to use eminent domain and also receive free easements or the use of public rights-of-way is another big subsidy.) My point is that there are many hidden or non-obvious subsidies for fossil fuels, particularly for gas, We need to look beyond subsidies for the fossil fuel commodity and more carefully analyze subsidies for the commodity's transmission, distribution, etc.
It may be hard to get rid of subsidies like the IDC but I guarantee you it would be a helluva lot easier to do so than to pass a carbon or gas tax. The only way we're going to establish climate change policy that is intended to create disincentives to use fossil fuel or change people's options is to do it indirectly. Asking people to vote for carbon taxes (a la Washington state) won't work; the legislature passing bills (and hoping there's no backlash at the polls) just might. Establishing a mandate to stop the sale of ICE vehicles in 10 years or so may work (coupled with building an EV infrastructure); raising the gas tax to incentivize buying EVs won't.
Getting rid of the IDC would almost certainly lead to higher fossil fuel costs for the consumer. That's what we want. But it will be hard for anyone to make the argument after the fact that that was caused by getting rid of the IDC subsidy: it won't fit on a bumper sticker.
It may not be a big or comprehensive enough policy as others in this thread argue, but the political forces are so arrayed against increasing the costs of using FF that we have to use any and every means at our disposal. It may be hard to pass legislation to do so, but I'm getting the feeling that the FF corporations are not as strong as they used to be. Fingers crossed.
EESI recently published a list of proposals, including bills in Congress, to reduce or limit subsidies for fossil fuels. Those concerned with this issue might want to see what, if anything, on the list they could or would support.
David, I've always wondered what percentage of RW "donations" come from fossil fuel producers or their allies. How would you feel about a podcast on that topic?
Excellent analysis! Another estimate from Kotchen’s paper: subsidies including GHG externality estimate are a whopping 3% of US GDP, with lots going straight to oil & gas profits. Some cash to play politics with, no?
The problem isn't that eliminating the IDC is a heavy political lift nor is the problem that eliminating the IDC is easy to lobby against.
The problem is that eliminating it is just a weak strategy.
Strategically they could focus on decomposing the subsidy (breaking out the popular wages component for instance, so the toxic components become literally politically toxic). The messaging strategy would be about trumpeting it as a win on jobs that also focuses on "clean up" hah. right?
Or they could strategically focus on limiting the subsidy. Capping it's value and gradually letting the cap become less and less year over year. This would backfire. either because it's easy to lobby against or it's easy for lobbyists to capture and control the terms in maximally beneficial ways. It would also front-load/accelerate new FF infrastructure as the value of getting anything new under today's cap is much greater if they can't get new FF infrastructure under a reduced cap ten years out.
The other opportunity is to redirect the subsidy so that in order to get the subsidy they're required to spend an amount equivalent to the subsidy on renewable solutions. Oh you got 20 million for your new gas well? now you have to buy 20 million of BEV heavy construction equipment or buy and install 20 million of solar panels at your headquarters. Basically use the subsidy as leverage to force them to diversify so that every FF company is forced to create or grow a (subsidized) zero/negative emission branch of that company.
on a sixty year time horizon, FF companies are in a death spiral and this sort of redirect could force them to internally reorganize themselves now in a way that they have a pathway out of that death spiral.
While it is great that more work is being done to understand the subsidies for production of fossil fuel commodities, I feel that insufficient attention is being paid to subsidization of the transmission and distribution of fossil fuels. The end-user cost of these fuels is, of course, something like the sum of the costs of production, transmission, distribution, taxes, etc. Thus, a reduction in transmission or distribution costs has the effect of allowing more headroom to support higher commodity costs whether or not production is directly subsidized. I'll give two examples below of distribution programs that have the effect of subsidizing gas production: Demand Management programs and straight-line (time-based) cost-recovery.
The purpose of a Demand Response Management (DRM) program is to modify consumer's demand profiles in such a way that utilization of the existing distribution infrastructure can be "safely and reliably" increased while avoiding the cost of installing more infrastructure. Thus, DRM is often pitched as providing cost-saving benefits to consumers. While this makes sense for electric DRM programs, since electricity is a commodity that we want people to use more of, it doesn't make sense for natural gas, a commodity that we must use less of in the future. Nonetheless, environmentalists often translate their very wise support for electric-DRM into unthinking support for gas-DRM since they assume that it is useful to reduce the gas consumption by the large users who subscribe to gas-DRM programs. What they miss is that trimming the peaks allows filling the valleys and thus increasing aggregate gas throughput even if peak throughput is reduced.
Of course, the large gas customers who subscribe to DRM or interruptible-use programs are well compensated, through reduced rates, for their willingness to curtail gas use by temporarily switching to oil or other fuels. Also, the the gas utility will often be rewarded for meeting DRM targets by being permitted to increase its allowed return-on-equity. Both the utilities and gas producers also benefit since their costs can be spread across greater unit sales. This allows more headroom for either increasing the cost of the produced commodity or for other further increases in the utilities' allowed rate of return.
Ratepayer funded gas DRM programs support higher gas throughput and increased profits for the entire gas supply chain. They are an important, although often overlooked, form of fossil fuel subsidy.
Straight-line depreciation allocates the costs of assets equally over each year of the asset's expected useful life. Thus, if a gas pipe is expected to have an EUL of 85 years, then 1/85th of its cost would be recovered each year. This method has traditionally worked reasonably well and equitably for both electric and gas assets since those assets tended to be heavily used throughout their lives. However, we'll soon discover that straight-line depreciation no longer makes sense for gas assets since we expect, and in states like New York we require, that gas throughput must decline dramatically in the future. Thus, we expect that future gas ratepayers will benefit proportionately less from the existing gas infrastructure than do current ratepayers. But since current and future ratepayers will pay the same each year for existing assets, this means that costs are being shifted from current users to future users. The result is an inter-generational cost-shift that artificially reduces today's gas rates, and thus encourages its continued and even increased use, while requiring either that future gas rates must increase dramatically to cover the use of them unused assets or that taxpayers, or electric ratepayers, will eventually have to subsidize the costs of a less used gas system. (We'll have to keep gas flowing until folk convert to something else since we can't let people freeze in the winter...) We should also realize that wealthier customers are likely to have the capital needed to abandon gas and switch to heat pumps, etc. Thus, the gas customer base will become increasingly low and moderate income (LMI). This means that LMI folk are going to be stuck paying the costs of assets built for, but abandoned by, wealthier ex-ratepayers... Not good.
A more appropriate means of allocating costs, for a system whose use is expected to decline, would be what is known as the UoP or "Units of Production" method. For gas, this method would require an estimate of the total volume of gas to be delivered during the life of a pipe. Then, ratepayers would be allocated costs which are proportional to the quantity of gas actually delivered to them during the billing period. (For example, if the asset has a 30 year life, straight line depreciation would charge ratepayers 1/30th of the costs each year even if, during that year, they actually consumed 1/20th of the volume of gas that would be reasonably expected to be delivered during the asset's life. The difference between 1/30 and 1/20 (i.e. 1.6%) is the amount of money shifted from current to future ratepayers. As asset utilization decreases, the amount of the cost-shift rises dramatically...)
The continued use of straight-line depreciation is often supported by consumer advocates since it results in lower rates for current gas users. These advocates have little concern for future users. The benefit to the gas supply chain is, of course, that lower rates today increase sales and provide more headroom for profit. The utilities aren't terribly concerned about the growing risk of ballooning gas delivery charges, due to the inter-generational cost-shift, since they are confident that regulators and government will allow them to recover their full costs whatever they might be (see: The mythical "Regulatory Compact.").
Straight-line depreciation is a means to have future ratepayers subsidize current ratepayers and thus artificially lowers today's gas rates while increasing the opportunity for profit taking in the gas supply chain. This is a common, but overlooked, form of subsidy for fossil fuels.
I could go on, but will spare you the details. (For instance, allowing fossil fuel transmission and distribution systems to use eminent domain and also receive free easements or the use of public rights-of-way is another big subsidy.) My point is that there are many hidden or non-obvious subsidies for fossil fuels, particularly for gas, We need to look beyond subsidies for the fossil fuel commodity and more carefully analyze subsidies for the commodity's transmission, distribution, etc.
It may be hard to get rid of subsidies like the IDC but I guarantee you it would be a helluva lot easier to do so than to pass a carbon or gas tax. The only way we're going to establish climate change policy that is intended to create disincentives to use fossil fuel or change people's options is to do it indirectly. Asking people to vote for carbon taxes (a la Washington state) won't work; the legislature passing bills (and hoping there's no backlash at the polls) just might. Establishing a mandate to stop the sale of ICE vehicles in 10 years or so may work (coupled with building an EV infrastructure); raising the gas tax to incentivize buying EVs won't.
Getting rid of the IDC would almost certainly lead to higher fossil fuel costs for the consumer. That's what we want. But it will be hard for anyone to make the argument after the fact that that was caused by getting rid of the IDC subsidy: it won't fit on a bumper sticker.
It may not be a big or comprehensive enough policy as others in this thread argue, but the political forces are so arrayed against increasing the costs of using FF that we have to use any and every means at our disposal. It may be hard to pass legislation to do so, but I'm getting the feeling that the FF corporations are not as strong as they used to be. Fingers crossed.
EESI recently published a list of proposals, including bills in Congress, to reduce or limit subsidies for fossil fuels. Those concerned with this issue might want to see what, if anything, on the list they could or would support.
Take a look at: https://www.eesi.org/papers/view/fact-sheet-proposals-to-reduce-fossil-fuel-subsidies-2021
David, I've always wondered what percentage of RW "donations" come from fossil fuel producers or their allies. How would you feel about a podcast on that topic?
Excellent analysis! Another estimate from Kotchen’s paper: subsidies including GHG externality estimate are a whopping 3% of US GDP, with lots going straight to oil & gas profits. Some cash to play politics with, no?
The problem isn't that eliminating the IDC is a heavy political lift nor is the problem that eliminating the IDC is easy to lobby against.
The problem is that eliminating it is just a weak strategy.
Strategically they could focus on decomposing the subsidy (breaking out the popular wages component for instance, so the toxic components become literally politically toxic). The messaging strategy would be about trumpeting it as a win on jobs that also focuses on "clean up" hah. right?
Or they could strategically focus on limiting the subsidy. Capping it's value and gradually letting the cap become less and less year over year. This would backfire. either because it's easy to lobby against or it's easy for lobbyists to capture and control the terms in maximally beneficial ways. It would also front-load/accelerate new FF infrastructure as the value of getting anything new under today's cap is much greater if they can't get new FF infrastructure under a reduced cap ten years out.
The other opportunity is to redirect the subsidy so that in order to get the subsidy they're required to spend an amount equivalent to the subsidy on renewable solutions. Oh you got 20 million for your new gas well? now you have to buy 20 million of BEV heavy construction equipment or buy and install 20 million of solar panels at your headquarters. Basically use the subsidy as leverage to force them to diversify so that every FF company is forced to create or grow a (subsidized) zero/negative emission branch of that company.
on a sixty year time horizon, FF companies are in a death spiral and this sort of redirect could force them to internally reorganize themselves now in a way that they have a pathway out of that death spiral.