Biden’s ambitions to eliminate fossil fuel subsidies are welcomed, but policy consistency is key.
US President Joe Biden’s plans to phase out US$31 billion of fossil fuel subsidies over the next ten years are ambitious but unlikely to pass through Congress, highlighting the scale of the challenges even for committed governments, according to industry experts.
Announced in March, Biden’s US$6.9 trillion budget for 2024 outlines which tax subsidies for oil and gas are under threat, including a tax break on domestic production intangible drilling costs, which allows independent and integrated oil and gas producers to deduct much of the cost of drilling. If eliminated, this alone could save around US$13 billion over the next decade.
“Repealing the tax credits is welcome – we don’t need to incentivise producing more of what we need to produce less of,” Rob Schuwerk, North American Executive Director at think tank Carbon Tracker, told ESG Investor.
However, Schuwerk said “there will surely be pushback” against Biden’s ambitions. “We would expect some but not all of these to make their way into the budget, such is the nature of politics,” he noted.
Andrew Otis, Partner at law firm Kramer Levin, agreed, saying that “the elimination of these subsidies is unlikely to pass the Republican-controlled House [and] would also struggle to pass the Senate, where they have been opposed by Senator Joe Manchin”.
It is estimated that total fossil fuel subsidies in the US range between US$10-50 billion per year, with 2021 research from the International Monetary Fund (IMF) noting that all fossil fuel subsidies globally reached US$5.9 trillion in 2020 (around 6.8% of global GDP).
The International Energy Agency (IEA) has said that subsidies, regulated prices and taxes that favour fossil fuels are “a roadblock to a cleaner energy future”.
Biden’s budget also proposed additional funding for upscaling renewable energy, including US$6.9 billion in the National Oceanic and Atmospheric Administration (NOAA), up from US$1.4 billion from the 2021 enacted level, to support programmes that will catalyse wind energy, restore habitats, protect the oceans and coasts, and improve NOAA’s ability to predict extreme weather associated with climate change.
However, despite his commitments to mitigate the impacts of climate change, President Biden has also recently approved new multi-billion oil and gas production projects in Alaska.
“The federal oil and gas production subsidies are substantial and can affect the economics of oil and gas projects, even with high oil prices,” said Kramer Levin’s Otis.
“Investors and lenders will seek clear signals from government with regard to these subsidies so that they can accurately model oil and gas project economics.”
Carrots over sticks
The budget follows the US Inflation Reduction Act (IRA), which was signed into law last year and provides subsidies to upscale the domestic production of renewable energy.
“The Biden Administration appears to be trying to entice industry with carrots rather than sticks,” said Schuwerk.
However, the IRA also offers subsidies for oil and gas companies under amendments to the 45Q tax credit, which is a subsidy for the development of carbon capture and storage (CCS) technology.
It has been argued that the use of CCS in oil and gas production is a way to prolong the shelf life of a polluting industry, rather than phasing-down production and transitioning to renewable energy.
“The IRA provisions regarding the 45Q tax credit for CCS were consistent with Senator Manchin’s ‘all of the above’ energy policy and were likely necessary to secure the bill’s passage,” noted Otis from Kramer Levin, pointing to the potential positive impact of subsidies available for electric vehicles and renewable energy.
Schuwerk added: “If you look at the climate scenarios with respect to CCS, it is ‘and’ not ‘or’ – we have to decarbonise energy and then sequester carbon. At least the 45Q eliminates excuses for oil and gas companies and offers them a short-term lifeline to shift business models.”
A clear direction of travel
For investors, it’s important that government climate policy is consistent in its commitment to phase down the production of fossil fuels while upscaling clean energy, according to Richard Folland, Carbon Tracker’s Head of Policy and Engagement.
“A consistency of signal indicates a long-term direction of travel on policy generally: long-term signals are crucial from an investor standpoint; whereas mixed messages from governments can make an investor turn elsewhere to a jurisdiction where they can be more confident about the security of their investments and assets,” Folland said.
“Action on fossil fuel subsidies is a prime example of this – leading western economies have been attempting for years – notably in Group of Seven fora – to agree a common position and platform which can mobilise international co-operation for phasing out fossil fuel subsidies,” he added.
During the G7’s most recent meeting in Sapporo, climate ministers again reiterated their commitment “to the elimination of inefficient fossil fuel subsidies by 2025 or sooner”, agreeing to take steps to increase cooperation, discussion, transparency and sharing best practices to ensure progress.
Although no government can claim “ideal” practice on subsidies, Folland cited the Friends of Fossil Fuel Subsidy Reform as an example of good progress.
Under Italy’s recent Group of 20 (G20) Presidency, the IEA and OECD also published a report on the reform of inefficient fossil fuel subsidies, outlining policy insights and best practice to build consensus around the policy tools required.
Folland said governments need to urgently turn rhetoric around subsidy reform into “meaningful action, not least within the umbrella of the overall supply-side agenda and the need to accelerate a managed phase-out of fossil fuels to keep us within 1.5°C”.