The Tax Breaks That Are Killing the Planet

ExxonMobil, the world's largest oil company, hauled in a $32.6 billion profit last year. Chief executive Rex Tillerson got a 3 percent bump in his pay package, sending it above $28 million. And today the company gets its annual boost from the federal government: an estimated $600 million in tax breaks.

All told, the government gifts as much as $4.8 billion to the oil industry each year, more than any other country. Much of that comes not as direct handouts but instead via loopholes in the tax code; deductions for depleting oil reserves, for example, and write-offs for the expense of drilling a new well. These reflect a long-past era in which oil exploration was financially risky, and prices were low. Now oil prices and profits are high, and the government is losing revenue while promoting the continued exploitation of carbon-intensive fuels. In the face of a changing climate and a constrained domestic budget, the lunacy of such preferential treatment is hard to overstate.

"Perverse" is the word the Intergovernmental Panel on Climate Change found for such policies in its latest report, which was released in full on Tuesday. Globally, subsidies for fossil fuel production--amounting to $1.9 trillion in 2011, or 8 percent of government revenues, according to the International Monetary Fund--"prove to increase emissions and put heavy burdens on public budgets," reads the report.

On the other hand, rolling them back could be a key part of a serious climate agenda. The IMF estimates that eliminating fossil fuel subsidies could lower emissions by 13 percent. That general principle, if not the exact figure, is supported by the IPCC, which wrote, "Lowering or removing such subsidies would contribute to global mitigation, but this has proved difficult."

"Difficult" may be an understatement in the United States. As a recent article at Mother Jones lays out, the energy industry wields considerable influence in Washington. In the last fifteen years oil and gas companies spent more than $1.4 billion on lobbying, employing nearly 800 lobbyists, many of them culled from congressional offices. That expense is actually a shrewd investment: every dollar the five largest oil companies spend on lobbying reflects $53 in tax breaks. The industry also leverages millions in donations to candidates and political ads during each election cycle, discouraging politicians from taking a hard line on tax breaks.

Government support for fossil fuels goes beyond the tax code. Another de facto subsidy comes from the Interior Department's failure to collect proper royalties on domestic oil and coal. The government has lost as much as $14.7 million because royalties are not collected on offshore leases in the Gulf of Mexico. In Wyoming's Powder River Basin, below-market sale prices and an uncompetitive bidding process for coal reserves has cost taxpayers as much as $30 billion over the past two decades, while helping to prop up a collapsing industry. There's also evidence that the federal coal program is failing to properly collect royalties on coal sold overseas. While President Obama may not be able to do much about the tax code unilaterally, his Interior Department certainly has the authority--in fact, the obligation--to reform its coal-leasing program.

Finally, there is a more deeply hidden giveaway to the fossil fuel industry, the most critical of oversights: the fact that companies don't pay for the damages caused by their products--their external costs. While every citizen will pay for climate change, as those living near extraction and refining sites have long borne the burden of local pollution, companies get a free pass on their carbon emissions. This imbalance is what a carbon tax is designed to remedy.

Closing loopholes in the tax code would be only a small part of an aggressive climate agenda--particularly since it's unlikely that eliminating those subsidies would affect global oil prices significantly. Still, those tax breaks represent billions that could be spent elsewhere, such as investment in renewables. The IPCC report concluded that subsidies, directed properly, can be an effective tool for slowing down global warming by helping low-carbon technologies and products overcome their competitive disadvantage in relationship to fossil fuels. Federal support for renewables now outstrips benefits for fossil fuels, but it's still not comparable to the help that the government gave the oil industry in its early days. Important incentives, like the wind energy tax credit, have been allowed to expire. Furthermore, our national infrastructure is designed for the age of cheap fossil fuels, making it even more difficult for alternative energy to compete.

The best chance for closing the loopholes--and, perhaps, for imposing a carbon tax--is if Congress overhauls the tax code, something both parties have indicated an interest in. But even the best chance is a slim one given the cabal of climate deniers in the House, and a broader reluctance to challenge energy interests. If climate change seems like a problem too big to to approach, perhaps start here: elections matter.