Earth Track Blog

IISD's Global Subsidies Initiative Turns 20

dkoplow — Fri, 26 Sep 2025 15:44:52 +0000

Friday, September 26, 2025 - 11:44am

Congratulations to the Global Subsidies Initiative, part of the International Institute for Sustainable Development, which just celebrated its 20th anniversary! Over its two decades, GSI has engaged with subsidy transparency and reform efforts across dozens of countries and in multiple natural resource areas. They have expanded the data on subsidies in many countries, studied what makes reforms more likely to succeed, and helped initiate, support, and document many, many international meetings on environmentally harmful subsidies (EHS). Continued attention to EHS has been critical in keeping this issue in the public spotlight and on the agendas of key international bodies.

I participated in the original kick-off meetings for GSI back in February 2005, and happened across a photo of that event. Quite a few of the attendees have remained active in subsidy transparency and reform issues. Too many have passed since the original meeting.

It was an exciting time, and with more people than ever focused on the massive damages that EHS cause across the world, we can redouble our efforts to achieve standardized and systematic subsidy disclosure, reform, and removal.

Participants at the Kick-Off meeting for the Global Subsidies Initiative
Rockefeller Bellagio Center, February 28 - March 2, 2005

Attendees,with affiliations at the time of the meeting: Back row, left to right - Jacob Werksman (Rockefeller Foundation), David Runnals (IISD), Celso Lafer (University of Sao Paulo), Paula Stern (The Stern Group), Doug Koplow (Earth Track), David Boyer (IISD), Konrad von Moltke (IISD). Front row, left to right - (Paul Koutstaal, Netherlands Ministry of Finance), Norman Myers (Author), Jennifer Kent (Author), Horst Siebert (Kiel Institute for World Economics), Gerrit Zalm (Netherlands Ministry of Finance), Sylvia Ostry (Centre for International Studies, University of Toronto), Simon Upton (OECD Roundtable on Sustainable Development), Mark Halle (IISD), Isher Judge Ahluwalia (International Food Policy Research Institute). Not pictured - Ronald Steenblik (OECD).

Global Subsidies Initiative

Rockefeller

Bellagio

government transparency

Taxpayer Costs for Carbon Capture, Utilization and Storage: A Fiscal Disaster in the Making

dkoplow — Tue, 15 Apr 2025 15:22:50 +0000

Tuesday, April 15, 2025 - 11:22am

The 45Q tax credit expansion for Carbon Capture, Utilization, and Storage, passed as part of the Inflation Reduction Act of 2022, dramatically increases the expected cost to taxpayers without adequate oversight or transparency to ensure fiscal integrity or program efficacy. Unlike federal grants, loans, and some tax subsidies, the cost of 45Q to taxpayers is uncapped. And this cost could be massive.

Independent analyses suggest tax subsidies could average $46 billion per year—more than 140 times the original official projections. Total costs could reach as high as $835 billion by 2042; and were industry-proposed expansions implemented, the taxpayer cost could surge above $2 trillion. With lax oversight, little transparency, and most credits funding enhanced oil recovery rather than true carbon reduction, the risks to taxpayers are enormous. This report examines the 45Q program’s potential fiscal impacts and the urgent need for reform of this flawed federal subsidy.

Read the full document

45Q

ccus

carbon capture and sequestration

tax subsidies

Environmentally harmful subsidies update: $2.6 trillion/year and a continuing threat to nature

dkoplow — Tue, 17 Sep 2024 17:39:16 +0000

Tuesday, September 17, 2024 - 1:39pm

A big success at the last Conference of Parties for the Convention on Biodiversity (COP15) nearly two years was passage of the Kunming-Montreal Global Biodiversity Framework (GBF) to protect and restore nature. The GBF included Target 18, the first quantitative reduction goal for environmentally harmful subsidies (EHS), which commits to reduce EHS by $500 billion annually by 2030. Not long after, the Biodiversity Beyond National Jurisdiction (BBNJ) Agreement, or the “High Seas Treaty” also passed. It now has more than 90 signatories (though far fewer ratifications), and will establish a legally binding instrument to conserve and sustainably manage marine biodiversity in areas beyond national jurisdiction, an area that encompasses roughly two-thirds of the world’s oceans.

With COP16 coming up in just over a month, and the 2025 reporting deadlines on EHS under Target 18 fast approaching, revisiting the state of EHS seemed both timely and important. The result of that review, "Protecting Nature by Reforming Environmentally Harmful Subsidies: An Update" has been released today. As was the case on the initial study, I've authored the update with Ron Steenblik, my long-time colleague on many subsidy-related issues. We are again grateful to Business for Nature and Greenhouse Communications for their help in amplifying the key messages, Spiral Communications for their graphic design of the report, and the Society of Entrepreneurs and Ecology (SEE) and Shell Lin for the Mandarin translation of the Update.

A critical aspect of our initial review in February of 2022 was the inclusion multiple economic sectors affecting resource extraction and land-use change. It is the combined effect of subsidies to these sectors that compound to drive loss of nature and biodiversity resources. International analysis of subsidies has too often focused on a single sector, which risks underestimating the subsidy-related distortions affecting resource use patterns in specific locations.

English Version of EHS Update Chinese Version of EHS Update

EHS are at least $2.6 trillion, equivalent to 2.5% of global GDP

Even with the GBF and associated increased focus on EHS, the scale of subsidies continues to rise. Our current estimate is at least $2.6 trillion a year, equivalent to 2.5% of global GDP. These subsidies harm nature and associated biodiversity, and slow global efforts to transition to lower-impact production methods and energy systems. We continue to view our estimate as a floor value for EHS because we know there are so many large data gaps. Closing the largest of these should be a priority for signatories working on Target 18 compliance.

Our updated EHS estimate is about $800 billion higher than two years ago, or roughly $570 billion higher net of inflation. A combination of improved data -- including estimates for non-energy mining and plastics production for the first time, inflation, and rising subsidies particularly to fossil fuels was behind the increase. It is also worth noting that the $500 billion reduction commitment by 2030 under Target 18 is not indexed for inflation and will have declining purchasing power as the years go on.

As in 2022, the largest EHS subsidies remain those supporting fossil fuels, agriculture, and water. Fossil fuel subsidies (FFS) are the primary driver of the increased totals. FFS surged to more than $1.5 trillion by the end of 2022 as the Russian invasion of Ukraine led governments around the world to attempt to buffer consumers from price increases. Although FFS dropped to more standard levels in 2023, the volatility highlights the sensitivity of EHS levels to macroeconomic shocks. Policy structures to prevent backsliding on EHS need to be incorporated into compliance with Target 18. Further, subsidies to carbon capture are growing rapidly in many countries, and are particularly generous in the United States. Much of this will support core fossil fuel industries, including through enhanced oil recovery, and the economic incentives to keep older high-carbon infrastructure in service longer and operating at higher capacity factors. At least in the US, CCS subsidies could exceed all other producer subsidies to the sector combined by 2030 or soon after.

Subsidies to agriculture also increased sharply to bolster food security following the Russian invasion of Ukraine, though these are not considered EHS. EHS within agriculture were largely flat net of inflation, though subsidies to biofuels seem to be growing and remain inadequately quantified globally. Often the feedstocks for these fuels are resource-intensive monocultures, and scaling production has contributed to habitat loss in the past.

Subsidies to fisheries, forestry, and water are little changed net of inflation in the update, the result of continuing large data gaps rather than a stable policy environment. Indeed, analytic work combining remote sensing of key fisheries with AI processing of images suggest that illegal fishing may be greatly undercounted. Similarly, consumption by agriculture and industry continue to comprise more than 85 percent of global freshwater consumption, most of which comes via direct withdrawals from aquifers and surface water. However, data on the economics of these transactions, including what, if any prices are paid, were almost entirely lacking.

Although subsidies to both transport and construction remain mostly placeholders because of known gaps in our information, we were able to incorporate policy updates and some additional analysis of subsidies to housing construction within the EU and improve coverage of subsidies to maritime transport. User fees on core road and rail infrastructure globally appear to lag system costs by a large amount, possibly hundreds of billions of USD annually.

The update includes an estimate to non-energy mining for the first time, though the value is also more a placeholder than global estimate. Rising subsidies to minerals used for EVs and other decarbonization technologies are evident in media articles but are not tabulated globally. Subsidies to plastics industries have also been added as a category of EHS owing to rising international attention on plastics and plastics pollution. Work to quantify plastics subsidies for the first time was done by a team that included Ron Steenblik.

The graphic below provides a breakout of our updated estimates by sector.

Estimated EHS by Sector

Progress on Target 18

Initial work on Target 18 has focused on reporting mechanisms, data sources, and early measurement challenges. Reviews have either been conducted or are in process by a number of countries, and regionally by the EU. Helpfully, many of these proposed identification and estimation methods aim to measure not only policies within their country, but also to highlight any significant EHS affecting commodity imports from countries with critical habitat and biodiversity risks.

Two baseline measures are being used. Target 18.1 focuses on positive incentives to promote biodiversity protection and sustainability, and Target 18.2 aims to track the value of EHS and other incentives harmful to biodiversity that have been eliminated, phased out, or otherwise reformed.

Progress on Target 18.1 has been moving faster, reliant on data already tabulated by OECD. However, policy details focus mostly on the number of measures rather than a more rigorous evaluation of their scale and impact. On EHS reforms, existing data sets are also being tapped, though coverage varies widely by sector, and in all areas the data capture only a portion of the subsidy types.

Building a comprehensive baseline set of EHS under Target 18 is implied but not formally committed to in the current efforts. It will be necessary. New EHS are continually created, so measuring only removals would miss important trends. Similarly, if tracking is limited to the simpler subsidy mechanisms such as direct spending and reductions in fuel taxes, political pressures will likely shift government support to more complicated mechanisms that are far less visible. These include credit or insurance subsidies, below-market minerals leasing, or targeted exemptions to regulatory rules.

We expect that measurement and reporting will need to improve iteratively since both data availability and measurement techniques vary widely by country and type of support. Further, disagreements across GBF signatories on how to evaluate policies with some positive and some negative impacts on nature are expected to be common. The reporting framework should be a high-ambition effort, not lowest common denominator, even if reporting progresses unevenly across signatories. Technically-focused workgroups are common for establishing financial reporting and technical standards, and that approach could be adopted to standardize measurement and reporting of specific types of subsidy instruments.

Multiple paths of action needed to contain EHS

Target 18 establishes a multi-sector tracking system for EHS. Other prior international agreements in fisheries, agriculture, and fossil fuels have had similar goals, despite being more narrowly targeted. These initiatives, summarized in the Update, have faced some common challenges, such as difficulty in getting sufficient ratifiers to bring the agreements into force; spotty or inconsistent reporting; inadequately funded secretariats; disincentives for "first movers" to fully engage with the reporting process; and limited or no enforcement powers against non-compliers.

These challenges mean that Target 18 should be one, but not the only path to address EHS; and that people should think creatively about how to leverage the opportunity that Target 18 offers. For example, in addition to informing actions by others, the data within the EHS tracking system should be supplemented by information those outside may have. Independent parties such as civil service organizations or those harmed by existing subsidies often have relevant and sometimes obscure data. They should be able to report missing or inaccurate data about signatory countries, possibly anonymously, into the Target 18 system. In addition to collecting raw data on subsidies, it is also important to get better at measuring trade-offs (subsidies that harm nature may also create jobs or alleviate poverty, for example), and identifying ways to achieve these same social goals more efficiently and without the environmental down-sides.

Engagement by business remains critical in addressing EHS. Some businesses are harmed by subsidized producers in other countries, so have an obvious interest in reform. Others may see a potential business opportunity either in tracking subsidies or related activities, or in developing new products to help address the unmet needs. New insurance products might be an example; given rising risks to the built environment from severe events often linked to climate change, the current path has been to provide more government subsidy. But innovation in better ways to predict, offset, share and spread risk could reduce the gaps here that are more financially and environmentally sustainable over the long-term.

New innovation often starts with a niche idea, pursued by a small group of people who see benefits others don't, or face pressures others don't. In the beginning, they are too small for anybody to care about; but if they are successful, sometimes the systems, software, and products they build change the way everybody else works and interacts with the world.

The logic and opportunity for business success was addressed in more detail in our 2022 report; the recommendations remain as valid now as they were then. I wrote then that new innovation often starts with a niche idea, pursued by a small group of people who see benefits others don't, or face pressures others don't. In the beginning, they are too small for anybody to care about; but if they are successful, sometimes the systems, software, and products they build change the way everybody else works and interacts with the world. A big advantage of business engagement is that across many areas of concern firms can operate and innovate individually or in small groups. And while international agreement can set important parameters for market activity and innovation, the parties often move slowly. Businesses can move much faster.

We had hoped to see many seeds of this type of innovation start to grow over the past two years, and invite you to share any you have seen. Some of the most interesting and powerful examples highlighted in this update are from the marriage of satellite imaging and machine learning -- though often blending a mix of private firms, governments, and universities. The potential here to change what is possible in managing forests, mining operations, and fisheries seems enormous. The ability to identify and monitor emissions in this way is growing as well. So there is reason to be hopeful.

Related Resources

Earth Track 2024 report on EHS - English version - Mandarin version

Earth Track 2022 report on EHS - English version - Mandarin Version

Business for Nature's EHS Reform webpage and reform action briefs "Financing Our Survival - 2024 Update - 2022 Original

EHS reform video from 2022

Convention on Biological Diversity COP16 web page.

environmentally harmful subsidies

COP16

biodiversity

target 18

fossil fuel subsidies

Fossil fuel subsidies in the Permian remain pervasive and should be eliminated

dkoplow — Fri, 26 Jan 2024 17:20:15 +0000

Friday, January 26, 2024 - 12:20pm

The Permian Basin leads US oil production by a large margin and is the second-largest natural gas producing basin in the country.1 Production reached an all-time high of 5.8 mbpd in 2023, "out-producing even Saudi Arabia’s massive Ghawar oilfield."2 The economics of the region are strong, with more than $100 billion in mergers and acquisitions last year, and shale output that "is highly productive with large undeveloped reserves and robust infrastructure."3 This is hardly the market environment that calls for government subsidies; and yet subsidies there are. Some have been around for a century, many for decades, and new subsidies continue to be added.

And against this backdrop there is a well-recognized need to decarbonize the global economy -- as well as national commitments that call out subsidy removal as a way to do so. For example, the G7 Leader's Declaration, issued at the conclusion of the 2016 Ise-Shima Summit in Japan, contained a timeline for removing fossil fuel subsidies:

Given the fact that energy production and use account for around two-thirds of global GHG emissions, we recognize the crucial role that the energy sector has to play in combatting climate change. We remain committed to the elimination of inefficient fossil fuel subsidies and encourage all countries to do so by 2025.4

As the largest economy within the G7, that statement clearly applies to the United States. Unfortunately, while the 2025 deadline is rapidly approaching, subsidy elimination is not. Our mapping of Permian subsidies (Fossilized Finances: Oil and Gas Subsidies in the Permian Basin, prepared with the Natural Resources Defense Council) provides many useful places to move subsidy reform forward. Highlights from, and discussions of, our findings are in this article; the full report can be accessed at the link below.

Report: Fossilized Finances: Oil and Gas Subsidies in the Permian Basin

Texas High Cost Well Subsidy (Texas)

The Texas High Cost Well subsidy offers a reduced severance tax rate for selected natural gas wells for 10 years, or until the well accumulates tax savings that total 50 percent of its drilling and completion costs. The Texas Railroad Commission defines "high-cost natural gas" as natural gas that is produced from a well deeper than 15,000 feet using certain types of production methods.5 There is no requirement that wells be unprofitable in order to receive this benefit. Similarly, improvements in the cost-efficiency of wells meeting these criteria as a group will not result in the subsidy being reduced or removed.

This subsidy will cost Texas taxpayers approximately $6.3 billion between 2023 and 2028.6 It has been in place for much longer: state data suggest revenues losses of $17.1 billion between 2009 and 2028.7 Cost transparency on the provision has been an issue as well: arcane rules on tax expenditure reporting in Texas have resulted in the cost to taxpayers from the High Cost Well provision being left out of some editions of the state's primary information source on tax expenditures, the biennial Tax Exemptions & Tax Incidence Report. See more on the cost and transparency issues around this tax break here and here.

Natural Gas Transportation and Processing Deduction (New Mexico)

New Mexico’s Oil and Gas Emergency School Tax was imposed in 1959 for the “privilege of engaging in the business of severing oil, natural gas or liquid hydrocarbons, and carbon dioxide from New Mexico soil.” The rate for natural gas is 4 percent, but to offset the risks of fossil fuel exploration the state has allowed deductions to this tax for the cost of “reasonable expenses” either to process natural gas so it is ready for sale or to truck oil to the first place of market.8 In both of these cases, there is an incentive for producers to inflate processing and transport costs since this reduces the extraction taxes and royalties due.

This type of gaming is a risk because the "sale price" is not a clear-cut value and policing how it is calculated is both important and challenging. Where products are transferred to related parties without "arms-length" market prices, accurate valuation is particularly difficult. While this issue is not unique to New Mexico, they allow more extensive cost deductions from the taxable base than many other oil and gas producing states.9

New Mexico's Taxation & Revenue Department monitors changes in taxes paid from prior years and researches large disparities; however, it doesn't conduct a formal review of claims.10 Data reported on NM's form ACD-31114 could allow some analysis of deductions across taxpayers, though does not differentiate transfers to affiliates from sales to third parties.11

Researchers at the University of Chicago analyzed the valuation challenges regarding royalties on federal oil and gas leases, noting that "firms currently enjoy tremendous flexibility in how they price oil and gas sales and take allowable cost deductions for the purpose of royalty valuation...All of these choices and more allow firms to select terms that are most favorable to them, at the expense of U.S. taxpayers." While their analysis applied to royalties rather than extraction taxes, the issues are similar. And they suggested an effective solution would be simply eliminating these deductions from the royalty base.12

Between 2018 and 2022 the natural gas processing deductions cost NM state taxpayers $268 million. Although deductions for oil transport and processing are not included in the tax expenditure budget, it is likely that similar valuation challenges apply. Both areas should be analyzed in much more detail given the importance of fuel tax and royalty revenues to the state. For FY 2023, NM raised $2.17 billion from oil and gas severance taxes and another $3.19 billion from the state share of federal oil and gas royalties; these were among their largest sources of revenue.13 Expanded auditing of deductions, benchmarking to levels in other states, and reducing the range of costs that can be deducted would all be worthwhile strategies for the state to pursue.

Abandoned Oil and Gas Wells (Federal, Texas, and New Mexico)

Many thousands of dormant or unproductive oil and gas wells are found across the Permian Basin. Without proper plugging, these wells can pollute the surrounding land, air, and water with leaked toxins, including uncontrolled methane. Despite state and federal requirements that fossil fuel companies properly shut down their wells when production is completed, many declare bankruptcy instead, effectively shifting the cost of cleanup to taxpayers. Requirements to hold bonds that would prevent such cost shifting in the event of bankruptcy are set far too low at both the federal and state levels. State well plugging funds, often funded by taxes on industry, help a bit. But collections are also well below the amounts needed to properly close the abandoned sites.

Although Texas does not release data on bond coverage ratios for existing wells, data on surety bonds in New Mexico demonstrate the scale of the problem. With a face value of less than 1 percent of estimated closure costs, it seems likely that the public will end up footing a large portion of the cleanup bill.14 The estimated cost to plug and abandon all currently operating wells in New Mexico and Texas could reach $110 billion.15

Well closure is a predictable cost of oil and gas operations. The costs are supposed to be funded by well operators and owners, or in the case of defunct operators, via surety bonds and state orphan well funds. Too often, these costs are being dumped on to taxpayers instead. The Bipartisan Infrastructure Law, for example, provided $4.7 billion in federal money to supplement other funding sources.TX estimates it will receive $344m of this amount.16 NM estimates it will receive $44m.17 The funds should come from oil and gas producers within the state, not from state or federal taxpayers. Further, the higher premiums associated with procuring proper bonding levels would have the added benefit of encouraging better site management to reduce insurance costs.

Government-provided hedges against low oil and gas prices

A variety of holidays from, or reductions in, state taxes and fees are implemented in both states and the federal tax code when well production declines (marginal or stripper wells), to restart idled or orphaned wells, or to use enhanced recovery methods. Examples in New Mexico include a reduction in the oil and gas emergency school tax or severance tax in low price environments for stripper wells, well restarts or workovers, or the adoption of enhanced recovery methods. Texas also reduces taxes for marginal oil and gas wells during low price periods, as does the federal government for enhanced oil recovery.

At first glance, subsidies in low price environments appear to have some logic. By reducing the state charges when product prices decline, maybe wells can continue producing for longer in the face of worsening market conditions.

Once one applies a broader market view, however, it is clear that these policies should be ended. First, all industries go through macro-related pricing cycles. All face competitive challenges from rising costs as capital ages and productivity drops, or from more efficient new entrants. All industries face changing demand for their products due to shifts in consumer needs or demand. Yet, the government doesn't cut out fees in those other sectors. Rather, firms need to manage these risks internally through process improvements, research and development, and improved efficiency.

Second, subsidies with price triggers can seem costless when oil and gas prices are relatively high (as they are now), but they are not. In these environments, tax expenditure budgets include the provisions and estimate their cost in terms of lost revenue to the state at zero. Despite these optics, it is important to recognize that even now -- and despite a zero value in tax expenditure budgets -- the provisions remain subsidies and are distorting the market. By shifting down-side market risk to taxpayers, the share of investment risks borne by the private owners of the wells, and likely their cost of capital for new investment as well, both decline. This benefits investors and owners via a reduced breakeven for new investments in oil and gas relative to what would exist absent the subsidies. Since the economy needs to reduce carbon emissions, these types of subsidies don't make sense.

In addition, hedging to protect against price declines is already available in the private sector, albeit not for free like with the government programs. Indeed, the private cost to hedge is incurred whether or not prices end up dropping as feared. The key point is that if oil and gas producers highly value the down-side market protections they obtain through these subsidies, they could hedge these risks directly in the options market. Some of this already happens with both producers and large purchasers (such as airlines). The "hedge ratio" is a metric of how widely price risks are being hedged by industry. As of mid-2023, for example, hedge ratios for oil nationally were just above 21%, considered low. At the time, only 5% of 2024 output was hedged. Hedge rates for natural gas were higher, 43.2% for 2023 and 22.5% for 2024.18 The author notes that natural gas had more recent price crashes, which may drive their higher hedge rate. Were subsidies to producers in low price environments to be removed, producers could alter their hedging ratios to adjust. This approach would ensure that the risks are borne by the private producer rather than the taxpayer, and the cost of hedging that risk flows through market prices for oil and gas. Both outcomes are beneficial.

Where politics prevents the elimination of down-side price protection subsidies, the governments should at least receive a higher-than-baseline tax or fee during periods of high prices.

An important side-note is that governments, including in the Permian, often have similar subsidies but with no price phase-outs. This means that subsidies are granted even in high priced markets, effectively padding producer profits. In Texas, these include subsidies to the restart of orphaned wells or wells inactive more more than two years; low production wells that use energy efficient production equipment; a permanent severance tax exemption for capturing and marketing casinghead gas that had previously been vented or flared; and for enhanced oil recovery techniques, with supplemental tax reductions if anthropogenic CO₂ is used as an injectant. Subsidies that phase out as oil and gas prices rise are at least a better structure for taxpayers.

Emerging Subsidies

Political pressure for new policies supporting fossil fuels are always present. Too often this results in new subsidies rather than subsidy reform or elimination. This dynamic makes achieving significant net subsidy reductions even more challenging. A few examples affecting the Permian warrant mention, as they are potentially quite large.

New investment property tax credits (Texas)

Property tax credits aimed at job creation from new investments are awarded to upstream oil and gas investments, refineries, gas processing, liquid natural gas and manufacturers of extraction equipment, and chemical plants reliant on fossil fuel feedstocks. These sectors received at least half of the $10.8 billion in such tax credits through 2022 under the predecessor tax exemption, Chapter 313, which expired in 2022.19 Interestingly, Chapter 313 reporting included separate categories for wind and non-wind renewables. However, projects related to oil and gas were not separately tabulated, but rather grouped as "manufacturing" making the industry linkage less visible.

While Chapter 313 allowed eligibility for renewables, the replacement tax credit under Chapter 403 does not. Projects related to oil and gas remain eligible.20

Texas Energy Fund

Passed by referendum in November 2023, Proposition 7 created a $10 billion fund to increase grid reliability in Texas with a stated goal of addressing serious grid failures in 2021 that resulted in the death of more than 200 people. Of this amount, $7.2 billion is allocated for dispatchable power generation infrastructure. While theoretically available to nuclear and coal, this program is widely understood to fund new natural gas plants.21 Utility-scale batteries are dispatchable and can efficiently boost reliability in many cases, but are not eligible. Nor are other strategies on the demand side or increased grid interconnects.

Carbon capture and sequestration

Many new policies, particularly at the federal level, aim to subsidize the costs of carbon capture and sequestration. Approaches include direct grants, cost sharing, and large tax credits, such as the Section 45Q credit for CCS that was greatly expanded in the Inflation Reduction Act. Shifting the responsibility for the risks of failed sequestration projects from owners to taxpayers is another emerging venue of subsidization. The liability periods for failed projects and recapture of credits claimed appear to be much shorter than the project duration in many jurisdictions.

This is an area requiring a great deal of monitoring and additional research. However, in any scenario it is likely that a substantial portion of these subsidies will flow to firms and projects in the Permian. Indeed, modeling by Princeton University suggests that the largest and least-expensive sites for storing captured carbon are adjacent to the Permian. Their assessments suggest that the Gulf Coast may provide about 75% of the US total sequestration capacity, initially fed mostly from the Permian though adding other regions as CO2 pipeline capacity is built out. New CO2 pipelines are estimated to require investment of $170 to $230b.22 Storage costs for basins in TX and the Gulf Coast were estimated to be the least expensive in the country by the Princeton team.23 Plans for a Gulf Coast carbon storage hub have been floated by Exxon with a projected cost of $100 billion, which they propose be met through an (unspecified) mix of public and private funding.24

With carbon prices, the costs to control emissions from fossil fuel extraction and carbon-intensive industries would be reflected in the pricing of the resultant products. Those price signals would align with decarbonization goals and support substitute products with a lower carbon footprint. Under the current policy mix, CO₂ instead will have a monetary value from the subsidies. The details of how this will affect investment decisions and operational management of existing assets is unclear. However, it is likely that some older, high-carbon facilities may remain open longer or be utilized more intensively; and that drilling in marginal wells with higher CO₂ content may now be economic. Entry of alternative products will occur more slowly than would have been the case in a no-subsidy baseline.

1US Energy Information Administration, "Drilling Productivity Report," 16 January 2024. See https://www.eia.gov/petroleum/drilling/, accessed 27 January 2024.
2Robert Rapier, "The Permian Basin Is Out-Producing Saudi Arabia’s Ghawar Field," Oilprice.com, 19 June 2023. See https://oilprice.com/Energy/Energy-General/The-Permian-Basin-Is-Out-Producing-Saudi-Arabias-Ghawar-Field.html, accessed 27 January 2024.
3Reuters, "M&A deals in Permian basin exceeds $100 billion in 2023 - WoodMac," 12 December 2023. See https://www.reuters.com/markets/deals/ma-deals-permian-basin-exceeds-100-billion-2023-woodmac-2023-12-12/ accessed 27 January 2024.
4"G7 Ise-Shima Leaders’ Declaration," G7 Ise-Shima Summit, 26-27 May 2016, p. 28. See https://www.mofa.go.jp/files/000160266.pdf, accessed 27 January 2024.
5Texas Comptroller of Public Accounts, ‘Information for Approval of Reduced Tax Rates for High Cost Gas Wells,’ accessed September 25, 2023, https://comptroller.texas.gov/taxes/natural-gas/high-cost-wells.php#:~:text=Definition%20of%20High%2DCost%20Gas,seams%20(occluded%20natural%20gas)%3B
6Texas Comptroller of Public Accounts, “Tax Exemptions & Tax Incidence” February 2023, 35-37.
7Data for the period 2020-23 was provided in a public records request Earth Track made to Texas. See details here: https://www.earthtrack.net/blog/1-billion-natural-gas-subsidies-missing-texas-official-tax-expenditure-report
8Thomas Clifford, “Overview of New Mexico Taxes on Oil and Gas Production,” (Presentation to the Revenue Stabilization and Tax Policy Committee, New Mexico State Legislature, accessed September 25, 2023, https://www.nmlegis.gov/handouts/RSTP%20072111%20Item%200%20rstpjul21.11.oilandgas.pdf.
9Weber, Jeremy, Yongsheng Wang and Maxwell Chomas (2016). “A Quantitative Description of State-Level Taxation of Oil and Gas Production in the Continental U.S.,” Energy Policy 96, p. 299. Accessed at https://doi.org/10.1016/j.enpol.2016.06.008
10Sydow, Lucinda (2023), Chief Economist, Tax Analysis, Research & Statistics, Office of the Secretary in the New Mexico Taxation & Revenue Department, emails to Doug Koplow, Earth Track, 1 November and 27 November.
11State of New Mexico - Taxation and Revenue Department, Audit and Compliance Division (2015). "Form ACD-31114: Oil and Gas Taxes Detail Report," accessed 27 November 2023.
12Covert, Thomas R. and Ryan Kellogg, Ensuring Americans Receive Fair Value for U.S. Oil and Gas Resources, in U.S. Energy & Climate Roadmap: Evidence-Based Policies for Effective Action, Energy Policy Institute at the University of Chicago (2021), p. 154. Accessed at https://epic.uchicago.edu/area-of-focus/ensuring-americans-receive-fair-value-for-us-oil-and-gas-resources/
13State of New Mexico - Legislative Finance Committee (2023). "General Fund Consensus Revenue Estimate," Money Matters, August, pp. 1, 7. Accessed at https://www.nmlegis.gov/Entity/LFC/Documents/Revenue_Reports/General_Fund_Revenue_Forecast/2023/-%20General%20Fund%20Consensus%20Revenue%20Estimate.pdf
14Data on well counts, operating status and closure liabilities are based on compilations in the Carbon Tracker Plugging Liability Estimator Tool which can be accessed at their ARO portal. Data updated through September 2020. https://carbontracker.org/aro-portal-state-profiles/#breakdown-of-vintage-wells
15Ibid.
16Texas Railroad Commission, "Federally Funded Well Plugging," accessed 26 August. See https://www.rrc.texas.gov/oil-and-gas/environmental-cleanup-programs/federally-funded-well-plugging/, accessed 26 August 2022.
17NM Governor's Office (2022). "New Mexico to get $43.7 million for orphan well clean-up," press release, 31 January. See https://www.governor.state.nm.us/2022/01/31/new-mexico-to-get-43-7-million-for-orphan-well-clean-up/
18Alex Kimani, "Underhedged Oil Producers Heavily Exposed To Low Oil Prices," Oilprice.com, May 16, 2023. See: https://oilprice.com/Energy/Crude-Oil/Underhedged-Oil-Producers-Heavily-Exposed-To-Low-Oil-Prices.html
19Doug Koplow, Earth Track analysis of Chapter 313 project detail “CDR Reports” data released by the Texas Comptroller of Public Accounts under a public records request, August 5, 2022.
20Grant Thornton, “Texas Enacts Changes To Property Tax Abatement And Enterprise Zone Incentives,” July 11, 2023, accessed December 2, 2023, https://www.grantthornton.com/insights/alerts/tax/2023/salt/p-t/tx-enacts-changes-to-property-tax-abatement-and-enterprise-zone-incentives-07-11.
21Mose Buchele, “Proposition 7 Would Provide Billions in Incentives for New Power Plants in Texas,“ KUT 90.5, November 6, 2023, https://www.kut.org/energyenvironment/2023-11-06/proposition-7-would-provide-billions-in-incentives-for-new-power-plants-in-texas; Robert Walton, “Texas Voters Approve $10B Energy Fund, with Most Going to Build Gas-Fired Power Plants,“ Utility Dive, November 8, 2023, https://www.utilitydive.com/news/texas-voters-approveenergy-fund-gas-power-plants-proposition-7/699110/.
22Eric Larson et al., Net Zero America: Potential Pathways, Infrastructure, and Impacts (Princeton, NJ: Princeton University Press, 2021), 231–35,https://www.dropbox.com/s/ptp92f65lgds5n2/princeton%20NZA%20FINAL%20REPORT%20%2829Oct2021%29.pdf?dl=0.
23Greig, Chris and Pascale, Andrew (2021). Princeton’s Net-Zero America study - Annex I: CO2 Transport and Storage Infrastructure transition analysis, 6 August. See https://netzeroamerica.princeton.edu/img/NZA%20Annex%20I%20-%20CO2%20transport%20&%20storage.pdf
24Bussewitz, Cathy (2021). "Exxon seeks $100 billion for Houston carbon capture plan," Associated Press. See: https://apnews.com/article/climate-technology-business-paris-f76df7ee4e6a8a4b6bab96badb2eb41a

World Nuclear Industry Status Report 2023: Growing role of state and state subsidies, competitive headwinds

dkoplow — Fri, 08 Dec 2023 19:43:57 +0000

Friday, December 8, 2023 - 2:43pm

The 2023 edition of the World Nuclear Industry Status Report (WNISR 2023) once again provides a comprehensive review of industry growth, performance, and political and economic drivers around the world. This has always been a huge undertaking, but is made ever more so by a continuing migration away from critical analysis of nuclear power by many of the traditional funders supporting analysis of nuclear policy. My personal view is that careful evaluation of the economic, political, and environmental aspects of all energy pathways remains critical in helping us make good choices and avoid big problems. The importance of these reviews grows as niche ideas start to scale since sometimes side-effects that can be ignored during early research and pilot phases become big problems once the production base is big. This is a large issue with biofuels, where growing scale increases conversion of natural habitats and the diversion of staple crops from food and feed sectors into energy. For nuclear, there are trade-offs on cost and timing of delivery in addition to the proliferation concerns that remain.

I was happy to be able to contribute to the WNISR 2023 effort, writing the Economics and Finance section of the paper. Key findings and extracts from that section are presented below.

Economics and Finance Chapter WNISR 2023 Full Report

WNISR 2023 Global Launch Slide Pack

Nuclear's continuing economic challenges

The engineering allure of nuclear is understandable given it is a compact, high load-factor and low-carbon power source. These attributes are desirable in a world with growing demand for energy and increasingly dire concerns about greenhouse gas emissions. Public pronouncements touting these benefits are common (this one says nuclear is the "only" solution to climate change). At the recently concluded COP28 meetings, nuclear was specifically included for the first time since the meetings started in 1995, with a global commitment to triple capacity. The International Atomic Energy Agency noted that

the inclusion of nuclear, together with a separate declaration made last week at COP28 by more than 22 countries to advance the aspirational goal of tripling nuclear power capacity by 2050, as well as statements by the IAEA and the nuclear industry, underscored the momentum building behind the world’s second largest source of clean electricity.

But the economic challenges that have plagued nuclear's growth for more than a half-century remain. The sector continues to struggle with rising costs, which, combined with long construction delays, has made investors wary. While routinely including cost reductions from learning (the "Nth of a kind reactor, or NOAK) in cost projections and modeling of decarbonization scenarios, these gains remain largely speculative rather than empirical. The sector has had much lower learning curves than its competitors in recent years. Between 2010 and 2021, the global-weighted levelized cost of energy (LCOE) for utility scale PV dropped by nearly 90 percent, by nearly 70 percent for concentrating solar power and onshore wind, and by 60 percent for off-shore wind.1 Lazard’s U.S.-focused analysis of LCOE shows significant declines since 2009 (83 percent for utility scale solar and 63 percent for onshore wind) as well, despite an uptick in costs during 2022–2023. In contrast, the LCOE for nuclear has risen 47 percent over the same period.2 Even in the elevated growth scenarios for nuclear that are now being discussed, the unit counts remain orders of magnitude lower than competitors, providing a much smaller base for learning, materials substitution and evolution, production scale, and workforce development.

The result has been a push for ever increasing "policy support" -- simply a polite way to say "massive government subsidies."

Further, innovation within the power sector and increased ability for loads to time shift their demand has already put even operating reactors (where much of the capital cost has already been paid off) under competitive pressure. These pressures are likely to increase going forward. The result has been a push for ever increasing "policy support" -- simply a polite way to say "massive government subsidies." Though the form is not identical across countries, subsidies have been provided in virtually all countries and stages of the fuel chain.

Operating reactors rely on regulated rates or state subsidy to stay in business

For decades, proponents have characterized nuclear power as “expensive to build but relatively cheap to run”. The characteristics driving this claim are low operating costs in comparison to other power sources, a long operating life for reactors, and high load factors that enable the investment costs of nuclear power plants to be spread over many kWh, thereby reducing the fixed costs per unit of energy produced.

But a combination of rising competition and, particularly in France and Japan, rising maintenance costs and outages, have put operating reactors under pressure. In the US, inexpensive natural gas from fracking has been a big factor. There is also pressure from paired solar and storage, where declining costs and higher load factors from the battery firming has been increasingly competitive.

Market transitions are a standard part of economic growth and resiliency: innumerable facilities shut down temporarily or permanently when changing market conditions render their products too expensive or no longer desired by consumers. Permanent shutdowns happen routinely, and rarely is this because the facility is no longer physically able to produce its product. Indeed, those closures are not viewed as “premature” but rather as the normal functioning of market forces, retiring obsolete assets to make way for competitive new ones.

Nuclear plant closures have been framed entirely differently. Arguing that plant closures would drive up carbon emissions and that their product, labelled “low-carbon, reliable power”, was not being properly valued by the market, the industry has tagged the closures as premature, and has lobbied for—and increasingly often successfully obtained—subsidies to remain in operation. Within the United States, operating subsidies at the state level are estimated to exceed $15 billion by 2030, with new and large supports at the federal level as well. In France, poor economics led to the renationalization of EDF in a transaction finalized in June 2023. French taxpayers will now be enlisted to support reactor refurbishment and operation, as well as the construction of new facilities. In Belgium, subsidies are being directed to restart two reactors and the state has capped the nuclear waste liabilities of utility Engie. And in Japan, a large number of reactors remain closed since the Fukushima accident in March 2011 and the government plans to provide subsidies to accelerate reopenings.

These and similar policies around the world have slowed the pace of reactor exits on the grounds that the reactors provide a short-term bridge of low carbon power and should be protected. Note that a similar outcome -- likely including life extensions for many existing reactors -- would have been achieved by countries pricing greenhouse gas emissions. However, unlike the earmarked subsidies for nuclear, carbon pricing would have put the cost of emissions on polluters and allowed any sector able to provide low-carbon economic services (including, but not limited to electricity) to compete on an equal playing field.

While operating subsidies will keep units open longer, the mean age of reactor fleets outside of China continues to climb: 42.1 years in the US, 37.6 years in France; 29.4 years in Russia. China's mean reactor age is 9.3. (WNISR 2023: 68). Even with subsidies and license extensions, these older units will continue to close over time, and for nuclear to make a material contribution to global decarbonization, there will need to be a large and sustained set of new reactors coming online.

Nuclear newbuild has become less competitive over time; SMRs seem unlikely to solve this

Estimates of the cost of newbuild reactors are often presented as Overnight Capital Costs (OCC), where the costs of financing, delay, operations and grid connections are ignored; or as a Levelized Cost of Energy (LCOE) which incorporates many of the factors missing from OCC metrics. The OCC is simpler to do, though because construction delays and finance costs are central to the delivered cost of nuclear, it is not a very robust metric for the sector. In the WNISR we reviewed existing OCC and LCOE estimates from a range of studies. Even with the OCC, estimates varied by more than a factor of three across countries. OCC costs per kW for SMRs were also significantly above those for LWRs, highlighting one of the central challenges SMRs face in gaining market share even if NOAK gains are realized. Data availability and cost of capital assumptions varied across assessments.

The graph below was developed by the IEA in 2020 to show the sensitivity of LCOE estimates to different assumptions on the cost of capital. The lines indicate median values; the shaded area is the 50% central region (20% central region for renewables). The vertical bars on the left chart have been added to show more recent estimates both by IEA and within Lazard's annual review of LCOE trends.

At very low discount rates, nuclear is highly competitive. This visually illustrates why so many nuclear subsidies focus on shifting the cost and risks of finance from developers onto the state, taxpayers, or customers. However, “shifting the risk does not magically reduce the financing cost; the government’s cost-of-capital is not necessarily less than [that of] private investors.”3 Instead, it often means that the government entity is providing a larger credit subsidy to the riskier beneficiary, not that risks are somehow more effectively managed. Nuclear begins to be out-competed by gas at discount rates of around 5 percent/year. At the upper range of a 20 percent/year real cost of capital, nuclear is by far the most expensive, and its median LCOE has jumped five-fold relative to the resource’s lower bound cost. While 20 percent real may seem an excessively high discount rate, target hurdle rates for high-risk venture capital and private equity (a source of capital for some of the new SMR funding) are often around this level.

A few other points are worth noting. First, IEA's estimates assume NOAK gains for nuclear and some price ($30/t) on carbon for coal and gas. Both benefit nuclear's competitive position. Second, the more recent estimates of nuclear LCOEs have been moving up sharply relative to 2020 and earlier. Using these newer estimates, nuclear is not competitive even within the central case discount rates of 7-9%. Third, the Lazard estimate for the US is markedly higher than estimates coming out of the IEA. While Lazard's estimate is based on a smaller sample set (the Vogtle reactors in the US), it also reflects actual rather than projected costs. A meta analysis of 88 reactor projects across the world found actual costs to be much higher than the projected ones, and construction times much longer.4

While most scenarios show nuclear as more expensive than renewables (and the LCOE does a much better job then the OCC in capturing the economic implications of both delayed openings on nuclear and lower load factors on renewables), comparisons with renewables plus firming provide better metrics. Nuclear is starting to be out-competed there as well. Finally, a market-based view of project risk would likely ascribe a higher, and possibly significantly higher, discount rate for nuclear than for the other energy pathways shown. This would worsen the competitive position of nuclear relative to all of its competitors. Despite much effort, we were not able to identify any market-based estimate for the cost of capital of newbuild nuclear. Every project had significant government intervention.

Lower nuclear LCOEs in China, Russia, South Korea, and a few other countries have been of great interest, and can be seen for China and India in the chart below. Lower cost labor in China and South Korea has been flagged as one source of advantage, as has been better construction management approaches in a number of the lower-cost countries. However, limited data availability has prevented full estimates of LCOEs in many countries by disinterested parties. This is an area of focus that I hope can part of the next WNISR. But given the uncertainties, and full state ownership of the entire fuel cycle in China and Russia, direct comparisons should be done with caution. Subsidies within state-owned enterprises are often both large and quite hard to see and quantify.

Within the low-cost countries, it is also important not to evaluate these competitive advantages in isolation. Whatever its cause (including large state subsidies), the cost advantage also applies at least equally to other forms of energy as well. For example, Chinese wind and solar were well below the cost of Chinese nuclear on a levelized cost/MWh basis, “so China invested at least as much in renewables in 2020 as it had invested cumulatively in nuclear power during 2008–20, adding half the world’s 2020 new renewable capacity and 80% of the global increase over 2019’s.”5.

Figure 1

Sources: NEA/IEA 2020; IEA 2021-23; Lazard 20236

Government subsidies to nuclear have always been large, but they are getting bigger still

Functioning markets allow complicated trade-offs to be made more seamlessly. In cases where there are externalities such as carbon emissions, putting a price on them can address the problem over time. That approach also allows the full range of possible solutions to come to the fore: new generation, efficiency, load shifting, power storage, and so forth. With subsidies, political lobbying or governmental preferences become much more important determinants of where limited public resources are spent, for how long, and which solutions "win."

Table 1 provides an overall picture of the role of the state in the nuclear energy pathway. Each element is discussed in much more detail in the Economics and Finance chapter. But it is evident even within the Table how significant a role state ownership and support plays in the rise of China and Russia within the nuclear sector; and in key steps of the fuel chain, including uranium mining, conversion, enrichment, facility decommissioning, nuclear waste management, and accident liability. Also important is just how many different ways governments have tried to subsidize the cost to finance new plants. Because there are many ways to decarbonize the world, directing so much support by government fiat creates competitive problems that likely result in decarbonization that is smaller in scale, slower, and more expensive that what could be achieved by pricing carbon.

Table 1
Large and Growing Role of the State in all Parts of the Nuclear Fuel Chain

Source: Compiled from WNISR 2023

New markets for nuclear will be challenging and often compete with existing electricity customers

Frequently-mentioned areas of future growth for nuclear include production of hydrogen, water desalination, high temperature heat, and power for industrial production, and dedicated use for remote locations or high-demand applications such as data centers. These applications require cost-competitive power. Unless newbuild nuclear can achieve large cost reductions, new reactors are not likely to drive growth in these other areas.

Rather, the most likely way to support these new markets will be from the existing set of operating reactors. Efforts to use surplus power from existing nuclear to support these markets is attractive since the cost of power from existing reactors is lower, and there is excess supply during some periods of the day. However, because the industrial users require highly reliable deliveries to keep production orderly, efficient, and competitive, either a dedicated reactor or a 24/7 slice of reactor production would be needed. This would put these other uses in competition with current grid users for low-carbon electricity rather than increasing the overall supply. Particularly where market diversions are driven by government subsidy (perhaps the case with hydrogen in the U.S.) rather than economic value, both system costs and carbon emissions could rise.

Table 2

Source: Compiled from WNISR 2023

1IRENA, “Renewable Power Generation Costs in 2021”, International Renewable Energy Agency, July 2022, p.15, see https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2022/Jul/IRENA_Power_Generation_Costs_2021. pdf?rev=34c22a4b244d434da0accde7de7c73d8, accessed 21 July 2023.
2Lazard, “LCOE+”, April 2023, p.9, see https://www.lazard.com/media/2ozoovyg/lazards-lcoeplus-april-2023.pdf, accessed 21 July 2023.
3John Parsons, “Madness vs Wisdom of Crowds: Models for Financing Nuclear Power”, Massachusetts Institute of Technology, 14 January 2021, presented at OECD/NEA, “Issues in the Financing of Nuclear New Build”, International Framework for Nuclear Energy Cooperation Financing Initiative, Nuclear Energy Initiative, Nuclear Energy Agency, Organisation for Economic Co-operation and Development, 14-15 January 2021, see https://www.oecd-nea.org/jcms/pl_53044/madness-vs-wisdom-of-crowds-models-for-financing-nuclear-power?details=true, accessed 21 July 2023.
4Leonard Göke, Alexander Wimmers and Christian von Hirschhausen, “Economics of Nuclear Power in Decarbonized Energy Systems”, Workgroup for Infrastructure Policy (WIP), Technical University of Berlin, and Energy, Transportation, Environment Department, German Institute for Economic Research/Deutsches Institut für Wirtschaftsforschung (DIW), Preprint, 14 March 2023, see https://arxiv.org/pdf/2302.14515.pdf, accessed 22 July 2023.
5Amory B. Lovins, “US nuclear power: Status, prospects, and climate implications”, The Electricity Journal, Vol. 35, Issue 4, May 2022, p.4, see https://doi.org/10.1016/j.tej.2022.107122, accessed 21 July 2023.
6IEA and OECD/NEA, “Projected Costs of Generating Electricity—2020 Edition”, International Energy Agency, and Nuclear Energy Agency, Organisation for Economic Co-operation and Development, 2020; Lazard, “LCOE +”, 12 April 2023; IEA, “World Energy Outlook 2022”, Revised November 2022; IEA, “World Energy Outlook 2023”, International Energy Agency, October 2023; IEA, “Net Zero by 2050: A Roadmap for the Global Energy Sector”, Revised October 2021.

world nuclear industry status report

Sensitivity of LCOE projects to discount rates

Slides for launch of WNISR 2023, December 2023

Even California has lots of fossil fuel subsidies; here's a review

dkoplow — Wed, 18 Oct 2023 14:44:54 +0000

Wednesday, October 18, 2023 - 10:44am

California has a well-earned reputation as a clean energy leader, and indeed continues to make significant progress in many areas. In 2022, for example, the state generated more than 54 gigawatt-hours from wind and solar, comprising more than one quarter of in-state power generation. Including power imports, renewables comprised 45% of the state’s power mix. The state has recently been making more investments in clean energy than any other.

And yet, even in the California there are scores of policies and programs with the potential to subsidize oil and gas exploration, production, refining, transport, and consumption. Earth Track reviewed the policy environment in the state to provide an initial roadmap of the many points of interaction between state and federal policy and the fossil fuel sector. The analysis evaluates these programs to differentiate those where subsidies to the sector seem likely to be significant from those where costs are either small or covered by user fees on industry.

We are grateful for the financial support provided by the Natural Resources Defense Council to help conduct this work.

Go to Report on Fossil Fuel Subsidies in California

What we evaluated

Type of subsidy. Too often, subsidies are viewed only as cash transfers such as grants to a favored industry. The reality of government interventions is far more complex, and opaque transfer mechanisms may actually be preferred both by recipients and their political supporters because less visible subsidies also reduce political and public relations risks. This review includes not only cash transfers, but also tax breaks, credit support, subsidized access to mineral resources, exemptions from standard regulatory requirements, and risk shifting. Data availability varies widely by subsidy type.

Subsidies at multiple levels of government. In addition to subsidies provided by the state government in California, federal policies benefitting the fossil fuel activity in the state are also included. Municipal or county-level supports may provide material support to the oil and gas sector as well, though gathering data from so many jurisdictions is complicated and was not within the scope of this analysis. Apart from Proposition 13, where some state-level assessments have already been done, the more local policies were not reviewed and are not included in the report. Subsidies from multiple different programs, and at different levels of governance, can often be taken concurrently (or “stacked”) even if they are supporting the same project or target outcome.

Policy specificity. Not every policy listed is just available to oil and gas. Some benefit all extractive mineral industries, though still disadvantage fuel-free energy technologies such as wind or solar. Other policies may be available to multiple economic sectors, such as property tax limitations under Proposition 13. For more general policies, it is important to evaluate whether they are structured or deployed in ways that are particularly supportive to the dominant industries in a region. Where the financial scale of a program is large, and fossil fuels comprise a significant industry in the state, reviewing these more general policies and who is getting the cash or tax breaks from them, is always prudent.

Building blocks. The review, including the table listing individual policies, should be viewed as (1) a starting point for further analysis, and (2) a repository to which additional policies can be added based on local knowledge from other organizations interested in transparency on this issue. We are also interested in up to five experts on CA policy who would like to partner on expanding and refining the data within the subsidy table. If you are interested in being one of them, please email dkoplow@earthtrack.net. Comments, suggested additional data sources, and suggested corrections are all welcomed and can be directed to that email as well.

Two side-notes: first, the initial version of this work was done in March of 2023, so data reflect information and reports available at that time; and second, policies that appeared in our screening not to be material have been left in the table as a guide to other researchers. Knowing what not to spend time on is also useful.

High leverage opportunities for reform

Some areas with significant opportunities from reform are highlighted below. They are also discussed in more detail in the memo and associated tables.

Asset retirement obligations. California has a large backlog of improperly closed oil and gas wells. Like many other producing states, the existing bonding levels on operating wells are far too low. Similarly, industry fees to fund abandoned well plugging are much lower than what is needed to address the task. California has recently started to tap general fund money to close them. Fuel cycle facilities are also a problem, with marine terminals and refineries that are both very old and appear inadequately funded for closure and post-closure liabilities. Further, available financial assurance is most often in the form of corporate guarantees, an instrument that does not perform well when companies go into distress. This structure increases the risk of “liability dumping” to taxpayers at the end of the service life of the facility or from a corporate bankruptcy.

Methane emissions. Multiple existing policies have the effect of subsidizing methane emissions in California. These include exemptions from federal fees on methane releases set to take effect in 2024; royalty-free streams of gas due to flaring or on-site use; and illegal methane releases that have historically been poorly tracked.

Lack of severance taxes and reduced property taxes on oil and gas reserves, equipment. California is one of only two fossil fuel producing states in the country with no severance or extraction taxes levied on oil and gas extraction (Pennsylvania is the other). Industry has argued that the state accomplishes the same end using property taxes instead, though many states have both and CA property taxes (particularly due to limits under Prop 13) do not appear sufficient to offset foregone extraction taxes.

Carbon capture, utilization, and storage (CCUS) including the Low Carbon Fuel Standard (LCFS). New subsidies to support CCUS, such as those included in the federal Inflation Reduction Act (IRA), look to be orders of magnitude larger than the estimates put forth by the Congressional Budget Office when the IRA was initially scored. California subsidies through the low carbon fuel standard may also start to flow to fossil fuels as well, since CCS is an eligible class of beneficiary fuels and can earn marketable LCFS credits. Both state and federal credits appear allowable on the same product. A potential outcome of concern is if the subsidies extend the life of carbon-intensive fossil fuel infrastructure and slow the shift to zero carbon alternatives.

Water use in oil and gas production. Inadequate water pricing is a well-known issue in California. This benefits oil and gas, though far less so than agriculture. However, increasing reuse of process water from oil and gas production on food crops likely confers substantial water treatment subsidies to the production companies using this approach and may trigger longer-term property damages and future reclamation costs on some of the farms.

Third-party liability coverage for wells located close to residential and commercial properties. The recently passed law to add buffer zones for new wells (SB1137) is on hold at least until November 2024 due to referendum activity by industry. Even with passage, emissions from existing wells remains a concern. Our efforts to determine whether well operations located next to homes and businesses have third-party liability coverage were unsuccessful. Better data on this issue, and implementation of insurance requirements if none now exist, would improve the price signals these wells face. Insurance requirements also create an additional set of evaluators on well operations and emissions (the insurance underwriters) and create a financial resource should parties living next to the wells be harmed by the activity.

Exemption of natural gas and power from state sales tax. Because energy consumption has associated environmental effects, there is little justification to have a blanket exemption from state sales taxes. Rather, policy goals such as basic access to energy for the poor, should be met in other ways. This initial review suggests that the cost savings to industry from the current exemption for electric and natural gas energy systems from the state sales and use tax is billions of dollars larger than what is collected from the sector via other fees. This likely underprices these energy resources relative to other goods and services in the state. Reform would affect all generation, but at present fossil generation still predominates.

Government funding for distributed electricity backup assets program and strategic reliability assets. To improve the resiliency of electrical supply in the state, these two programs will likely also provide billions of dollars in new subsidies to fossil-fuel fired infrastructure. While both programs also target non-fossil resources, most of the funding is likely to support incumbent infrastructure fueled by fossil fuels.

Updated introduction to energy subsidies presentation

dkoplow — Tue, 25 Apr 2023 14:58:22 +0000

Tuesday, April 25, 2023 - 10:58am

Many thanks to Auden Schendler, SVP of Sustainability at the Aspen Skiing Company for the invitation to talk about energy subsidies as part of their Aspen U Speaker Series. The event was also sponsored by the Aspen Center for Environmental Studies, Protect Our Winters, and Audi.

The event gave me a chance to update my Introduction to Energy Subsidies slide deck. The presentation is a useful starting point for people looking for a quick overview of how governments provide subsidies to industry, why these policies are a common feature of nearly every government in the world, how the pattern of support tends to favor more powerful interests, why fossil fuel subsidy estimates differ, and how the subsidies affect returns in the fossil fuels sector.

Introduction to Energy Subsidies Presentation - March 2023

While pricing of carbon emissions continues to grow around the world (nearly one-quarter of fossil fuels now have some price on carbon), these prices are often very low and global subsidies remain more than 8x global carbon revenues.

A similar pattern arises with environmentally harmful subsidies more broadly. The Kunming-Montreal Global Bioversity Framework approved in December of 2022 for the first time sets quantitative targets for reducing global EHS subsidies by $500 billion annually. This is a huge step forward. But even with estimates for EHS that we know are too low, the EHS subsidies exceed the reduction targets by more than a factor of 3x. There is much work to be done.

On a personal note, my first work on energy subsidies benefited greatly from the input, engagement, and encouragement from Rick Heede and Amory Lovins, both then at RMI. It was wonderful to reconnect with the two of them the Aspen U event.

Introduction to Energy Subsidies

Aspen Ski Company

environmentallly harmful subsidies

Tax breaks to natural gas in Texas surge to $1.4 billion in 2023 update

dkoplow — Mon, 20 Mar 2023 20:06:51 +0000

Monday, March 20, 2023 - 4:06pm

Last October, I wrote about the way that arcane statutory language on what tax breaks needed to be reported in Texas resulted in the largest tax subsidy to oil and gas in the state not being reported at all. Specifically, if a particular tax does not comprise 5% or more of the state's revenues, exemptions from that tax don't need to show up in the biennial Tax Exemptions & Tax Incidence Report. This exemption applies even if the revenue loss from the provision to the state Treasury is tens or hundreds of millions of dollars per year.

Oil and gas are often co-produced at the same wells, and tax breaks to one are often applied to the other in a similar way. Most states report the joint revenue loss from the tax break flowing to both fuels. Many states also focus on the scale of the revenue loss rather than the scale of the tax base in deciding what must be reported in their tax expenditure budget. The magnitude screen seems a good one, since if a provision is costing taxpayers $50 or $100 million per year it is reasonable to assume that state taxpayers would want to know about it.

In Texas, however, the oil and gas rules are in separate sections of the statutes. As a result, the reporting threshold for the oil production tax and the natural gas production tax are calculated separately. The result in many years has been to hide the very substantial revenue losses resulting from the natural gas subsidy.

The good news is that the latest version of the Tax Exemptions & Incident report, released in February 2023, does include high cost natural gas. Table 10 from that report is shown here.

It is likely that this change in reporting was the result of surging natural gas prices during 2022 driving the associated production taxes to exceed the 5% reporting threshold, rather than a recognition that regardless of that threshold the provision was still causing large enough losses that transparency should be provided. Earth Track has requested clarification on this from the Comptroller's office.

However, because eligibility for the high-cost natural gas is driven primarily by technical attributes of the wells and not on whether the field is actually profitable, we see surging revenue losses to the state at the same time profits to oil and gas reached their highest levels in years. This is a particularly poor incentive structure.

And the cost to Texas taxpayers has been huge. The provision was expected to reduce production taxes on natural gas by nearly $1.4 billion in 2023, and $6.3 billion between 2023 and 2028. This adds to the $11.6 billion in subsidies to these gas producers between 2009 and 2022.

It is time to end this subsidy; for specific recommendations, see my October post.

oil and gas subsidies

Texas

high cost gas tax break

tax expenditures

Shining sunlight on tax breaks around the world: Our OpEd in Bloomberg Tax

dkoplow — Thu, 12 Jan 2023 18:15:35 +0000

Thursday, January 12, 2023 - 1:15pm

Our op-ed, Tax Expenditure Scrutiny Can End Trillion-Dollar Political Game, was published in Bloomberg Tax today. I wrote the piece jointly with Flurim Aliu and Agustin Redonda at the Council on Economic Policies in Zurich. Flurim and Agustin lead a hugely important effort to build a global database of tax expenditures. It is also a huge undertaking; if you haven't yet had a look at the Global Tax Expenditures Database (GTED), you should. GTED is the only global compilation of tax breaks, and so far they have captured nearly 23,000 provisions culled from all of the official tax expenditure data released by national governments since 1990.

Go to Tax Expenditure OpEd

Budget battles are an annual ritual in many countries around the world. Views on how to best deploy the revenues differ, made all the more challenging since a sizeable portion of the budget has already been promised via mandatory benefits and multi-year commitments made in prior years. Mix in limited tax revenues (there are limits, even with deficit spending) and it's not surprising that the budget process is often contentious. Politicians and heads of state push for their favorite mix of programs and priorities, using a combination of data, persuasion, and arm twisting. The outcomes are rarely efficient, but the process is at least robust and mostly visible.

Not so with tax expenditures. Special exemptions and reductions in what taxes are due from whom, and when they must be paid by, worm their way into legislation, administrative codes, and sometimes rulings in arcane tax cases or administrative hearings. Language may be purposefully opaque to provide more cover for the beneficiaries and their supporting politicians.

Unlike budgetary spending, the total cost to the government of a specific tax expenditure is rarely known in advance. The actual revenue losses will be driven by when, and how extensively, private parties engage in the subsidized activity; and by the macro environment in which they do so. Where governments do estimate revenue losses from the tax expenditures (thankfully, in the US both the Treasury and the Joint Committee on Taxation do so), the estimates not based on budget outflows, but instead on economic modeling that incorporates the eligibility rules, economic conditions, and data from past tax returns. The resultant estimates are indicative of the policy costs, but not nearly as precise as with budgetary outlays. And while the general beneficiaries of the policies can sometimes be guessed, the degree and scale to which specific sectors, firms, factories, or individuals is largely hidden.

The total burden of these special tax benefits is huge. GTED data indicates that tax expenditures in the US and Canada are about 6% of GDP, 8% in the UK, 10% in Ireland, and more than 14% in the Netherlands. The global average is about 4% of GDP, though for many countries there is no data at all. This is not "free" money. Indeed, while nobody likes to pay taxes, it is those tax revenues that fund the governments to establish and operate the many, many activities on which millions of their citizens rely. And when tax breaks are granted to one group in society, the tax burden on those who remain often needs to rise.

As we note in the op-ed:

Similar to direct spending programs, tax expenditures are used to pursue a variety of policy goals including regional development, attracting foreign direct investment, greening the economy, or mitigating inequality and poverty. And like those spending programs, tax expenditure provisions can be politically influenced or poorly structured such that they end up supporting non-target groups or generating windfall gains to the wealthy. The big difference across these two areas is in terms of transparency, and that needs to change.

Indeed, there's no way to gauge whether a tax break is achieving its stated policy goal efficiently (or at all) based on the current data. Work by the GTED team has found that more than half of the countries tracked (116 of 218) have released no official tax expenditure report in the past 30 years. Even among reporting countries, nearly a third of the entries have no associated data on revenue foregone through the provision, necessary to get even a rough scale of the magnitude of support. The policy objective the tax break is aiming to achieve is similarly missing in far too may situations. And data at the state and provincial levels is even more sparse, despite indications that these governmental units also provide large tax subsidies to favored sectors. Earth Track recently found, for example, that reporting gaps in Texas resulted in the largest tax break flowing to the natural gas sector in the state ($1 billion in 2022) not showing up in the official tax expenditure reports.

Tax expenditures can be an effective way to achieve useful policy goals, but only if they are subject to the same levels of disclosure and analytical scrutiny as budgetary spending. Absent this, the tax breaks are more likely to flow based on political power than policy purpose, resulting in inefficient use of resources and incentives that often work against social goals being pursued elsewhere in the government.

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Global Tax Expenditure Database

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$1 billion in natural gas subsidies missing from Texas' official tax expenditure report

dkoplow — Thu, 13 Oct 2022 13:51:14 +0000

Thursday, October 13, 2022 - 9:51am

Overview

Texas’ Tax Exemptions & Tax Incidence report is missing the largest individual tax break to oil and gas in the state. This provision reduced taxes on the industry by $1 billion in 2022 according to analysis by the Texas Comptroller of Public Accounts that was provided in response to a public records request by Earth Track. The revenue losses from this provision are far larger than all other tax subsidies to fossil fuel production that the state does report on. It's omission results from the way the authorizing legislation requiring tax expenditure reporting is worded. Specifically, large exemptions from smaller tax bases can be excluded, even if they result in large losses to Texas taxpayers. Whether this reporting loophole was created intentionally or by accident, it should be fixed. As shown here, the effect has been to exclude disclosure from the sections of the tax code that are most important to natural gas producers.

Texas’ Tax Exemptions & Tax Incidence report is missing the largest tax break to oil and gas in the state.

Good governance requires complete and unbiased data

Tax preference items available to any group should be routinely disclosed in the Tax Exemptions & Incidence report. Where this is not happening -- particularly for provisions generating large revenue losses -- the data gap should be of great concern to both Texas taxpayers and legislators. This posting focuses on subsidies to oil and gas. However, the example inevitably raises the question of whether other significant tax breaks to any sector are also being excluded. Such omissions would make it much more challenging to ensure strong fiscal controls and accurately-measured policy tradeoffs in state policies.

A central tenant of tax expenditures, and the primary reason they are now reported in nearly every state in the country, is that regardless of who is getting special treatment the government still needs to raise sufficient revenues from taxes and fees to run the government. This means that tax reductions granted to one group need to be offset by higher taxes on others. If some groups are able to exclude the scale of tax benefits flowing their direction from standard reporting, governmental decisions are likely to be worse. Indeed, it is reasonable to expect that groups with more political power will be more successful in shaping authorizing legislation to keep the scale of their tax breaks private. This outcome is not good for market competition in the state, particularly where new industries with far less political heft are taking on established incumbents with better, cheaper, or cleaner products.

A related question goes beyond Texas. Whether, and to what degree, do other states, provinces, or even entire countries have enabling legislation on tax expenditure reporting that also masks material beneficiaries? Exploring the extent and scale of these omissions is something that perhaps the team producing the Global Tax Expenditures Database could take on in the future.

Baseline tax expenditure reporting in Texas

Texas releases its Tax Exemptions & Tax Incidence report roughly every two years, with the most recent version published in December 2020. At 80 pages long, and running through exemptions to all different types of taxes, the report seems a comprehensive tally of state revenue losses from targeted tax reductions to specific groups of people, industries, or activities. The review even includes exemptions from oil production taxes under section 202 of the Texas tax code. These have been worth roughly $30 million/year in recent years (Table 9 in the report linked to above).

Unfortunately, the authorizing statute mandating this report is not comprehensive, enabling large tax preferences to be legally excluded. This includes tax breaks that parallel those to oil but that instead apply to natural gas and reside in a different section (Section 201) of the Texas tax code. Section 201 appears to include five tax exemptions (see table below), of which data from the Texas Comptroller of Public Accounts indicates two have resulted in significant revenue losses over the past decade:

Reduced taxes on "high cost" natural gas wells (section 201.057(c)) with annual revenue losses of hundreds of millions of dollars per year, and more than $1 billion in FY2022; and
Low producing gas wells (section 201.059) that had minimal revenue losses in 2022, but exceeded $80 million as recently as FY2018.

Value of Gas Production Tax Exemptions in Texas, Fiscal 2009 to 2022 ($millions)

Tax Code Section

Exemption

Total, 2009-2022

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

201.057(c )

High-cost natural gas

10,844.5

1,040.6

518.5

316.2

561.4

505.8

432.3

312.1

702.8

1,086.4

905.4

951.2

1,064.0

974.6

1,473.3

201.058(a)(202.056)

Wells previously inactive

158.2

0.4

1.6

2.4

2.2

6.5

12.8

13.3

20.8

25.9

31.0

41.4

201.058(a)(202.060)

Orphan well program

201.058(b)

Flared/released gas

201.059

Low-producing gas wells

583.1

25.8

34.7

65.0

81.1

70.9

43.6

36.9

28.5

82.9

67.9

25.4

17.5

2.9

Total §201 tax exemptions

11,585.8

1,040.6

544.3

350.9

626.8

588.5

505.6

357.8

746.3

1,127.7

1,001.6

1,039.9

1,115.2

1,023.1

1,517.6

Table notes and sources
(a) Asterisk (*) denotes an estimated revenue loss that is either zero or negligible.
(b) Columns may not sum because of rounding.
(c) Data provided by the Texas Comptroller of Public Accounts, October 2022, in response to a public records request submitted by Earth Track.

The basis for this reporting gap arises through Section 403.014 of the TX government code that calls for a "Report on Effect of Certain Tax Provisions." The specific scope is worded as follows:

(a) Before each regular session of the legislature, the comptroller shall report to the legislature and the governor on the effect, if it is possible to assess, of exemptions, discounts, exclusions, special valuations, special accounting treatments, special rates, and special methods of reporting relating to:

(1) sales, excise, and use tax under Chapter 151 (Limited Sales, Excise, and Use Tax), Tax Code;
(2) franchise tax under Chapter 171 (Franchise Tax), Tax Code;
(3) school district property taxes under Title 1, Tax Code;
(4) motor vehicle tax under Section 152.090; and
(5) any other tax generating more than five percent of state tax revenue in the prior fiscal year.

Despite the scale of oil and gas production in Texas, and the outsize role Texas plays in the industry nationally, exemptions to oil and gas production taxes are not reported by default, but rather fall under the terms of the "catch all" provision in Section 403.014(a)(5). Unless the production taxes meet a 5% of tax revenues threshold, associated exemptions from these taxes will not be reported. Based on tax revenue data provided on the Comptroller portal, and a review back to FY2018, oil production taxes exceeded this 5% hurdle every year. Natural gas production taxes were below 5% during this period until FY2022. While it is possible that the next tax expenditure report (likely at the end of 2022) will include natural gas, it does not seem guaranteed. This is because the hurdle is measured in the year prior to the report and natural gas did not exceed 5% in FY21. Under this latter interpretation, exemptions from natural gas production taxes may not show up in the tax expenditure report until the end of 2024 despite surging prices, production, and likely revenue losses as well.

Fixing the problem

A few observations may be helpful in fixing this gaping hole in tax expenditure reporting in Texas:

Tax groupings should be reviewed and revised. Oil and gas are often co-produced at the same wells, and the separation of oil and gas production taxes into separate statutory categories for evaluation seems arbitrary. Indeed, it would be interesting to hear from those involved with the Texas legislative process whether there were any political drivers behind this separation at its inception. Clearly, if one looked at the revenue share of oil and gas production taxes jointly, they would have exceeded the 5% revenue threshold every year and been transparently reported. This is what should be done going forward.
Non-reported tax subsidies may still be both large and distortionary. Despite falling below the 5% reporting threshold, the revenue losses from section 201 tax exemptions were equal to 40% of what the natural gas production taxes actually raised in 2018. This share exceeded 20 percent of natural gas production tax collections in every year between 2019 and 2022. This illustrates that the 5% test is not a useful one for establishing good fiscal controls.
High-cost gas subsidy is not linked to price, but should be. Further, the structure of the high-cost natural gas tax break allows benefits to continue to flow to producers even during times of historically high prices for natural gas because the "high cost" element is linked to the relative cost of one field versus others in state, not to profitability. As a result, the provision results in large losses to Texas taxpayers even though all of these fields would be profitable without the subsidy in robust markets such as what prevails today. At the very least, the provision should phase out during periods of high prices.
Large tax expenditures should be included in the formal tax exemption report report even if underlying tax base is less than 5% of revenues. Because tax exemptions can be large and unfairly benefit particular subgroups in ways that are environmentally damaging or inequitable, and because these distortions can arise even for taxes comprising less than 5% of what is a very large state budget, the criteria for inclusion within the Tax Exemptions & Tax Incidence report should be modified. A more logical approach would be to replace a 5% of revenues test in §403.014(a)(5) of the statutes with one based on the scale of the tax expenditure in terms of revenue losses -- perhaps with a $50m/annual impact for inclusion.
Third parties have provided transparency on natural gas tax breaks despite lack of formal reporting, but formal reporting should now be implemented. Despite section 201 tax breaks to natural gas not having been included in the biennial tax expenditure reporting, it is reassuring that third parties have periodically gotten data on these provisions released. In 2014, this resulted from statutory language included in the budget by the legislature. In 2018 there was a public records request in support of research being conducted by UT Austin's Energy Institute; and the information was included in the Comptroller's 2009 report (no longer on the web, but accessible here), perhaps because the natural gas provisions hit the 5% minimum in 2008. Further, the Comptroller quickly and comprehensively responded to our public records request as well. All of these examples highlight a commitment to transparency within the state, and that the Comptroller continues to track the provisions even if they are not all published. Despite these examples, however, an ad hoc approach to transparency for provisions costing taxpayers tens or hundreds of millions of dollars is insufficient. Instead, the standard tax expenditure reports need to include all material tax breaks, even if modifications to the authorizing language in section 403.014 are needed to make it happen.

Note: this posting was updated to add 2009-2022 revenue loss totals to the data table.

Texas tax expenditures report for fy 2009