Consumer Energy Report
This week I was reading an article from the Associated Press called Some fracking critics use bad science. The gist of the article is that Gasland director Josh Fox used false information in his new film, The Sky is Pink. Among other things, he claimed that cancer rates were higher in Texas where fracking is taking place. Three different cancer researchers in the area contradicted him on this claim.
But then the article went on to say something that I thought was very relevant to debates on just about any controversial energy topic — fossil fuel subsidies, climate change, hydraulic fracturing:
One expert said there’s an actual psychological process at work that sometimes blinds people to science, on the fracking debate and many others. “You can literally put facts in front of people, and they will just ignore them,” said Mark Lubell, the director of the Center for Environmental Policy and Behavior at the University of California, Davis.
Lubell said the situation, which happens on both sides of a debate, is called “motivated reasoning.” Rational people insist on believing things that aren’t true, in part because of feedback from other people who share their views, he said.
As a result, misinformation is hard to stamp out, because it tends to be repeated — confirming the views people already hold. That brings me to the topic of today’s column: Climate change claims around the Keystone XL pipeline.
Keystone Pipeline and Climate Change
While some might mistake this column for advocacy for the Keystone XL pipeline, its real purpose is a call for truth in advertising. Whether the Keystone XL is wise energy policy is certainly debatable, but the debate should be on the basis of factual information. Our best chance for passing responsible energy policy is if all sides can differentiate between fact, opinion, hyperbole, and misinformation.
I have gone on record as saying I favor the Keystone XL pipeline for a very simple reason: We are going to continue to need oil for some years to come, and the pipeline would improve U.S. energy security. I also strongly advocate for policies that reduce U.S. oil dependence, so my ideal objective would be that the Keystone pipeline is built — creating jobs in the process — and the transition from U.S. oil dependence renders it obsolete. But it would be there as an insurance policy in case our policies fail to sufficiently wean us from oil in a timely manner.
Opponents envision that by shutting down the pipeline, they will slow the growth of the tar sands industry and force a faster transition from oil. The risk that they never acknowledge is that it may weaken our energy security by shifting our dependence from Canada to Venezuela or the Middle East, and further encourage Canada to strengthen their relationship with China. If that happens, then pipeline opponents will have made the situation worse on just about every count.
Game Over For the Planet?
NASA scientist and climate change advocate James Hansen declared that if the oil sands are tapped, “it is essentially game over” for the planet, and that the pipeline would be a “fuse to the biggest carbon bomb on the planet.” Bill McKibben has led a high profile campaign of protests against the pipeline on the basis of climate change impacts. Keystone opponents have recently called for a review of the climate change implications of building the pipeline.
But then a paper published last February in Nature Climate Change calculated that if the 170 billion barrels of proven reserves from the Alberta oil sands were burned it would produce just 0.02 to 0.05 C of warming. That contrasts sharply with the hyperbolic statements.
So how did Hansen and McKibben respond? In Least Reassuring Reassurance of All Time, McKibben wrote:
If we burn through the known quantities of tarsands oil, that alone will raise the planet’s temperature by .4 degree Celsius—which is about exactly how much we’ve already raised the planet’s temperature by burning everything we’ve burned since the start of the Industrial Revolution.
“The argument that the currently known amount of carbon in the tar sands pit is small compared to the total fossil fuels burned in two centuries is fallacious and misleading — every single source, even Saudi Arabia, is small compared to the total. If we once get hooked on tar sands and set up infrastructure, the numbers will grow as mining capabilities increase. Tar sands are particularly egregious, because you get relatively less energy per unit carbon emitted and there is associated environmental damage in the mining.”
Joe Romm deemed the report confusing because the “study does not actually include the extra emissions from tar sands extraction in its core calculations” and he goes on to state that inclusion of those emissions could bump up the total by 17%.
Let’s examine each criticism. Granted, Romm is correct and the emissions could actually be 17% higher. What does that mean? The 0.02 to 0.05 C of warming might be as high as 0.06 C. In other words, instead of warming by one-twentieth of a degree, it might be one-seventeenth of a degree. Romm chose not to spell that out, preferring to leave readers with the impression that the study is questionable.
With respect to McKibben’s comment, there is zero possibility of burning through all of the oil sands. It is technically impossible to extract all of the oil in place, so he put up a fictional case of burning through 1.8 trillion barrels of oil in place in order to make the number — 0.4 C — as high as he could possibly make it. The number is nonsense because the assumption is nonsense. The real question at hand is the 170 billion barrels of proven reserves, but more importantly how quickly that could reasonably be developed (more on that below).
Hansen’s argument is more along the lines of “We can’t get this oil sands thing started because production will grow and that will add to an already bad situation.” Of course Canada is highly committed to developing their oil sands, oil sands production has in fact been growing for many years, and a great deal of infrastructure is already in place.
Length of Time
Other than Romm’s nitpick, critics of the study didn’t find much fault with the calculations, but insisted “We have to make a stand over the oil sands.” But here is a point I haven’t heard anyone discuss. Canada’s oil production in 2011 was 1.3 billion barrels. Over the past decade, its growth rate has been under 3% (but still above the global average growth rate). Let’s pretend that growth rate can continue until Canada reaches 10 million barrels per day, putting its oil production on par with Saudi Arabia and Russia. How long would it take to produce 170 billion barrels of oil and contribute the 0.02 to 0.05 C (or 0.06 C) of warming? Until the year 2075!
So given the very low contribution to the overall climate change equation — plus the length of time it would take to extract and burn through that 170 billion barrel reserve — the focus on this issue is tremendously misplaced. It is a classic tempest in a teapot. Time would be far more efficiently spent trying to figure out a way for the developing world to industrialize without consuming ever greater quantities of coal.
My point here is not “Don’t worry, be happy.” Certainly we can say that in a world struggling to limit carbon emissions, Keystone XL will just add to the problem. But all carbon emissions add to the problem, and if that’s the case, have pipeline opponents stopped using oil? Almost universally the answer is no. Why? Individuals would probably rationalize that what they consume isn’t significant enough when weighed against the bigger picture.
But that’s my point about Keystone. We have all of this hyperbole around it, when the math shows that it would be effectively background noise. If you are basing your opposition to Keystone on the climate change implications, then you may want to question whether fighting to stop a 0.06 C temperature rise in 2075 is the correct issue to rally around.
There are more legitimate issues upon which to base your opposition. What might be the real downside of building the pipeline? Much has been made of the risk of spills and leaks. These risks do not disappear if the pipeline isn’t built; they just shift to the rail cars and trucks that are carrying that oil right now. The pipeline is likely an improvement over the status quo in that regard.
The real downside from building the pipeline in my view is that U.S. consumers — particularly those in the Midwest — are likely to pay higher prices for fuel. After all, the purpose of building the pipeline is to access new markets for the crude oil, which would relieve a glut of oil in the Midwest. This would mean higher prices as that glut is relieved (but potentially lower world prices as the crude is added to global supplies). Of course many climate change advocates believe we should pay higher prices for fuel, so you have to consider whether arguing this point is consistent with your views on fuel prices.
But that possibility could form the basis of an informed debate on the topic. We can weigh the jobs created and potentially the jobs saved in Gulf Coast refineries against extra costs to consumers in the Midwest. But the risk of a potential tiny temperature change more than 60 years from now does not — in my opinion — form the basis for a credible argument against the pipeline.
Last week, China began combat-ready patrols in the waters around the potentially resource rich Spratly Islands that both China and Vietnam have disputed claims to. And on Friday, China Daily reported that Beijing may develop a military presence in Sansha – a newly incorporated city located on one of the disputed Paracel Islands that was stood up to administer Chinese authority over the country’s South China Sea territories. (The city was established in response to a recent Vietnamese law that claimed sovereignty over the Paracel and Spratly Islands.)
The deployment of combat-ready patrols and discussions of developing forces at Sansha comes on the heels of an announcement from the China National Offshore Oil Company (CNOOC) that it will accept bits from foreign energy companies to explore and develop nine new blocs of the South China Sea that fall within Vietnam’s 200-nautcial mile Exclusive Economic Zone. (See the map here.) It is unlikely, though, that foreign energy companies will cooperate with CNOOC in these disputed blocs given the amount of risk the companies would have to assume in operating there. Regardless, Beijing is putting itself in a better position to protect its energy interests: “the announcement of these blocks reflects another step in China’s effort to strengthen its jurisdiction over these waters,” according to MIT Professor M. Taylor Fravel.
Making a Play for Resources
This recent activity joins a string of other incidents by China to protect its claims to the region’s potential hydrocarbon resources. Estimates of oil and natural gas in the South China Sea vary widely, from U.S. estimates of 28 billion barrels of oil to Chinese estimates of 213 billion barrels of oil. Yet no country knows what really lies beneath the seabed. Officials in Beijing appear to be placing bets that the South China Sea could turn out to be a “second Persian Gulf,” driving up strategic competition over potentially energy rich territory. But for years, efforts to conduct surveys to produce better measurements of the region’s resources have been impeded by Chinese vessels obstructing survey ships and others conducting seismic measurements.
China’s gamble in the South China Sea is in part driven by its strategic vulnerability over assured access to petroleum resources elsewhere. Approximately 80 percent of its imported petroleum comes from the Middle East and Africa, traveling through the narrow Strait of Malacca, a choke point wedged between Indonesia and Malaysia that carries risks of closure or disruption. Meanwhile, China’s vast infrastructure of overland energy pipelines from Central Asia carries risks, shipping petroleum across unstable transit states like Pakistan and Burma and delivering it to western China where Beijing’s influence is sometimes tenuous. These vulnerabilities contribute to China’s assertive behavior in the South China Sea, where officials in Beijing appear to believe they can secure access to potentially large hydrocarbon reserves, even if China does not have internationally recognized claims to the region’s resources.
More Than Mere Symbolism
Although some see China’s recent activity as mostly symbolic, it is important not to underestimate the practical benefits that combat patrols and a PLA Navy station or some other military presence at Sansha could provide Beijing in the future.
In time, China may not need to cooperate with foreign energy companies to explore and develop blocs in the South China Sea, including the contested areas. To date, China’s offshore oil drilling activities have been encumbered by the lack of technological capability to drill in waters deeper than 300 meters. But that is changing: In May, CNOOC began operating its first-ever deep-water drilling rig that will allow China to drill to depths of between 10,000 and 12,000 meters, which may encourage unilateral drilling in contested areas of the South China Sea.
China’s technological breakthrough in deepwater offshore drilling (though still untested) could raise the stakes for other countries in the region worried that China will exploit the region’s resources first. This could potentially increase the number of attempts by others to obstruct offshore oil and natural gas drilling activities. China’s combat-ready patrols and other military assets could help protect those operations from sabotage, consolidating China’s control over South China Sea energy resources. In that light, China’s recent moves could be more practical than observers let on. And officials in Beijing may be planning for it.
As I wrote recently, I believe that High Speed Rail (HSR) is the best option for linking the country’s major regions together. The past week has seen two major developments in America’s development and deployment of high speed rail.
First, last Friday, the California Senate approved $4.6 billion in funding for the construction of the first section of the state’s HSR. This would allow $3.2 billion in federal stimulus funding to be released to the state. Second, on Tuesday, Amtrak released its updated proposal (pdf) to upgrade its Northeast Corridor (from Washington DC to Boston) to true high speed rail, capable of cruising at 220 miles per hour.
Differences Between California and the Northeast Corridor
The plans for the Northeast Corridor and California are necessarily very different. The NEC would take an ‘iterative’ approach, whereby service is slowly and steadily improved along existing right of ways and along existing routes. This makes sense for the NEC because it is the corridor of the U.S. with the best existing rail service, including the Acela line, which actually approaches internationally-recognized levels of high speed service. Amtrak’s iterative approach — what Amtrak calls “Stair-Step Service Milestones” — would slowly upgrade existing infrastructure and rolling stock over the next two decades, initially focusing on choke points like the Baltimore tunnel (a civil-war era relic) and building a new trans-Hudson tunnel into Manhattan. By 2040, they anticipate that the whole thing will cost $151 billion, but by the end, it could lead to 90 minute rides between New York and both Boston and Washington, with New York to Philadelphia being only 37 minutes apart (close enough to commute).
California, on the other hand, has a very low level of existing rail service. I tried to find a way to get by train from downtown San Francisco to downtown Los Angeles, and there simply was no way to do it, without taking multiple buses and switching between local and regional trains. Therefore, it will have to try a ‘big bang’ approach whereby it builds as much as possible as soon as possible. The first link in the line to be built is the Bakersfield-Fresno link, which has been decried by opponents as a “train to nowhere” because these San Joaquin Valley cities are clearly not major metropolitan areas. However, this line is important as a start both because the planning is the easiest (it’s flat, and acquiring land is cheap) and because it would nearly complete the unconnected rail link between Northern and Southern California. The entire project is projected to cost $68 billion by the time it is done — it’s unclear where the balance of the funding will come from, but it will be more difficult to kill it once building has begun. This will link San Francisco to Los Angeles in 2 hours, 40 minutes.
Ultimately, as I wrote yesterday, more transportation options are needed in America’s densely packed regions. High speed rail has the ability to promote dense, urban development over the oil-dependent sprawl-oriented development that has prevailed in the U.S. for the last 50 years. While this type of infrastructure development was appropriate in a world of low gas prices and no environmental problems, in today’s dense urban areas it no longer makes sense. The best part of taking high speed rail, for me — and most other people living in America’s cities — is that it will not require a trip to the airport. Going from Union Station in DC to Penn Station in New York is one of the great parts of living on the East Coast. People living in California and within 500 miles of Chicago should have the same opportunity. That will also promote economic growth and development to happen inside cities — an imperative as the country’s open spaces fill up.
Why Doing Nothing is Not an Option
When opponents talk about the high costs of high speed rail (and they are high), they are comparing it to the cost of doing nothing. But that’s not an option. Building new interstate highways has a cost per mile from $5 million up to beyond $20 million. In California, the state estimates that building the same amount of transportation capacity as the full high speed rail plan in highways and airport infrastructure would cost $114 billion, vs. the projected rail cost of $68 billion. On the East Coast, I suspect the numbers would be similar, or even more disparate, as the land for highway expansion is simply not available.
Finally, a note about what I said in yesterday’s post about my skepticism about the funding model: government funding to government-sponsored companies. I take Amtrak between Washington and the New York area pretty often (my family lives in northern New Jersey) and the level of service and attention to detail drives me crazy. From the 1970s-era cars to the overpriced microwaved food, there is much that can be improved. Even on the few occasions when I travel by the Acela (only when someone else is paying), it’s a better experience, but still doesn’t meet levels I’ve seen when I’ve taken the train in Spain, Japan, or France. That said, it is better than domestic air travel these days, so I’m not sure that outright privatizing of the line would make it better. House Transportation and Infrastructure Committee Chairman Mica has proposed legislation that would privatize Amtrak’s Northeast Corridor, and there is some logic to that: this section (the only part of Amtrak that makes money) is used to cross-subsidize the other routes that lose money for every passenger.
William Lind, one of the only conservative activists in favor of rail (he writes for the American Conservative’s Center for Public Transportation) has made a coherent case that the big-government highway-building program of the ‘50s and ’60 undermined the free-market passenger rail companies. In a world where private actors paid the full cost of transportation, I think rail would still win — but until government gets out of the highway and airport business, there must be a role for government in the rail business too.
Financial Dependence Can Cause Bias
Generally when I find myself having to clarify my position from a previous column, I find that I did not explain myself as well as I should have. Such is the case with last week’s column Environmentalism is a Profitable Business.
There were several ways in which that column was misunderstood, but I want to be clear that I was not arguing that people are drawn to environmentalism for the money. I believe that in most cases they are drawn to the cause because they genuinely care, but in some cases that has led to the creation of organizations that have done very well financially. Because these organizations often put out misleading information, and due to the fact that some peoples’ livelihoods have become tied into the success of these organizations, I questioned money’s role in the promotion of misinformation.
A friend suggested that sometimes organizations go “off the deep end” because they have large donors who are off the deep end and want their cause promoted. And that would be exactly what I am talking about; an example of money leading to misinformation.
Misinformation for the Greater Good?
Last week’s post discussed misinformation about fossil fuel subsidies. To recap, there was a recent “Twitter storm” in which the message was that fossil fuel companies are wallowing in subsidies of up to a trillion dollars a year. The truth of the matter is that nearly 90% of the subsidies cited were for fuel subsidies for poor people. So I questioned whether promoters of the “trillion dollar story” are unaware of this, or whether they are knowingly misleading people “for the greater good.” But my larger point was whether a problem can be solved if you don’t understand the nature of that problem.
Many environmental organizations focus their efforts on U.S. oil consumption because of its role in global carbon dioxide emissions. I suspect people overestimate that role. So what I want to do here is to quantify that role, because my impression is that they are focusing a disproportionate amount of time and energy on a tiny portion of the problem. (I also wanted to satisfy my own curiosity; the truth is that I didn’t know the answer when I started writing this post).
So the question I want to answer is this: Of the 70 PPM rise in the atmospheric carbon dioxide concentration in the past 46 years, how much of that was due to U.S. oil consumption?
U.S. Oil Consumption & Carbon Emissions – Drilling Down Into the Numbers
While the U.S. does consume a lot of oil per capita — and to be clear I have advocated for policies to cut down on our oil consumption — Americans represent only 5% of the global population. Hence, while our impact may be disproportionate, in total it is a relatively small fraction of the total.
In Global Carbon Dioxide Emissions — Facts and Figures, I noted that over the past 46 years (since 1965), the global carbon dioxide concentration has increased by 70 parts per million (PPM). I calculated that cumulative U.S. emissions over that time frame were 255 billion tons of CO2 , which would have contributed 18 PPM toward the 70 PPM rise. Certainly 5% of the global population contributing 26% of the total rise in carbon dioxide concentrations is a disproportionate impact.
However, this was the total for oil, coal, and natural gas. Cumulative oil consumption for the U.S. from 1965 through 2011 was 37 billion metric tons. I contacted BP to ensure that my calculations were consistent with theirs, and they indicated that they are assuming 3.07 metric tons of carbon dioxide released per metric ton of oil equivalent consumed.
In the past 46 years, the U.S. has consumed 37 billion metric tons of oil which would have contributed 114 billion metric tons of CO2 to the atmosphere. Plugging back into our correlation between tons of CO2 and PPM of CO2 in the atmosphere (see footnote), we can see that U.S. consumption of oil in the past 46 years contributed 8 PPM of the 70 PPM rise in the atmospheric CO2 concentration.
On an annual basis, at current rates of consumption, U.S. oil use would be responsible for a 1 PPM increase in the global CO2 concentration every 5.5 years. Certainly, that’s a measurable contribution, but it pales in comparison to the other contributors. If we could cut oil consumption in half in the U.S. for the next 30 years, it would only make a 3 PPM difference. Global coal consumption — dominated by Asia Pacific with 69% of global demand in 2011 — emits enough CO2 to add more than 1 PPM to the global CO2 concentration every single year.
Conclusion: Fighting the Relatively Minor Problem
My point is that we have a small problem and a big problem. Fixing the small problem does not fix the big problem, and yet the resources of these organizations are primarily directed at the small problem. I certainly have not gotten press releases from environmental organizations discussing how they are fighting against rising emissions in China, but I am besieged by emails calling for more support in their fight against the Keystone XL Pipeline.
It’s as if a man goes to a doctor and is diagnosed with lung cancer and an ingrown toenail. The doctor throws all of his time and effort into fixing the ingrown toenail, while the man dies of cancer. Certainly the ingrown toenail may need treatment, but treating it is really irrelevant with respect to the larger problem. That’s not just my opinion — that’s what the numbers indicate. U.S. oil consumption is nearly irrelevant with respect to the big picture, and a lot of time and energy are being spent on a minor part of a much larger problem.
In my next column, I want to look at some of the specific claims around the Keystone XL pipeline and about Canadian oil sands to put those numbers in perspective.
Footnote: According to this analysis, the average amount of CO2 emissions that causes an atmospheric increase of 1 ppm is 14.138 billion metric tons of CO2 . The U.S. contribution of 255 billion tons over the past 36 years would then contribute 255/14.138 = 18.1.
Note to readers: I am traveling over the next two weeks, and my Internet access may be spotty. So responses to comments and emails may be delayed.
I want to preface this column by saying that I am very concerned about climate change. The rapid growth of atmospheric carbon dioxide shows no sign of abating, and I have concerns over what this will ultimately mean for the climate. The fact is that we are conducting a global experiment with the atmosphere, and predictions of severe consequences as a result should be taken with the utmost seriousness.
Having said that, I think it is important to maintain a healthy scientific discourse on the matter. “The science is settled” is just not a statement that I am comfortable with, and I am uncomfortable labeling those who question climate change with something that evokes comparisons with Holocaust denial.
Without a doubt, some of the attacks against climate science are ignorance-based. But some of those challenges and questions are by sincere people — sometimes scientists — who doubt the science in the same way that there have always been skeptics in science. In most cases the small band of skeptics is wrong, but sometimes they overturn entrenched paradigms. Those skeptics should be engaged on the basis of science, and not politics or personal animosity. (Hint: If your willingness to accept the conclusions of a report is based on whether it agrees with your position, then your position isn’t based on science nor is it objective — regardless of which side you are on).
So, in a nutshell I accept that accumulating carbon dioxide has the potential to change the climate — and may very well be doing so now — but I believe skeptics should be engaged scientifically rather than shouted down. On the flip side, I believe skeptics must engage on the basis of the science and not engage in ad hominem attacks.
Not all skeptics are idiots. But not all proponents are well-informed, as I show in today’s column.
Organized Environmentalists are Often Naive
I have always considered myself an environmentalist, in that 1). I care about the environment; 2). I want to protect and preserve our wildlife; 3). I try to promote sustainability; and 4). I try to minimize my impact on the environment in my personal life. I recycle, drive a fuel efficient car, grow a portion of my family’s food, walk or bike when I can, etc.
However, the “environmental movement” has often come to represent something I do not wish to associate myself with, because it often appears to me to be synonymous with willful ignorance. Certainly, many (if not all) who would characterize themselves as being a part of this movement are sincere and caring people who believe their actions are just, warranted, and effective. But far too often their actions are based upon misinformation.
An example of just how misinformed this group is can be seen in the recent “Twitter storm” against fossil fuel subsidies. The Guardian described the campaign: Activists hail success of Twitter storm against fossil fuel subsidies
Climate and anti-poverty activists have launched a 24-hour “Twitter storm” against the hundreds of billions of dollars of government subsidies paid each year to the petroleum and coal industry, despite the global economic downturn and the rise in emissions. The blitz, which has been supported by Stephen Fry, Robert Redford, actor Mark Ruffalo, politicians and environmentalists, took the hash tag #endfossilfuelsubsidies up to number two in the ranking of globally trending topics and number one in the US.
“This world has a few problems where a trillion dollars might come in handy – and we’d have a few less problems if we weren’t paying the fossil fuel industry to wreck the climate,” said 350.org founder Bill McKibben. “This is the public policy no-brainer of all time.”
As I will show here, there is great irony in the fact that anti-poverty activists were actively involved, and a great deal of misinformation along the lines of McKibben’s claim that we are “paying the fossil fuel industry to wreck the climate.” Incidentally, McKibben is the friend of a good friend of mine. My friend – who walks the talk because he lives the life of an environmentalist – described McKibben to me as a caring and sincere human being, but said that he is “in error”, that “environmentalists don’t understand energy,” and that “I suspect they are naive, well-intended idealists.” So please don’t misconstrue this as a personal attack on McKibben. I just believe he is wrong.
Fossil Fuel Subsidy Numbers: Full of Misinformation
The source that McKibben and company relied upon for the claim that $750 billion or $1 trillion of fossil fuel subsidies is being paid out each year is Oil Change International. (I know this because I asked). The site claims $775 billion in global annual fossil fuel subsidies — a number that was repeated often during the Twitter storm — and they said the number was “quite possibly higher.” Naturally advocates went with the “quite possibly higher” number, which is the source of the $1 trillion claim.
Here is the irony. Of the total of $775 billion, $630 billion was for “Consumption Subsidies in Developing Countries” and another $45 billion was for “Consumption Subsidies in Developed Countries.” In contrast to McKibben’s claim that these are handouts to the fossil fuel industry, they are overwhelmingly handouts to poor people so they can afford fuel. Examples of these subsidies are Venezuela’s policy of keeping gasoline prices very low for consumers, and the Low Income Heating Assistance Program (LIHEAP) in the U.S. that liberals have staunchly defended. Thus, you have anti-poverty activists and liberals arguing to eliminate programs they actually staunchly support because they are ignorant of what these subsidies actually entail.
Of course some will argue (and indeed have argued with me) that these aren’t really fossil fuel subsidies, and that isn’t what they are against. The problem is that LIHEAP, for instance, is mentioned by name as a fossil fuel subsidy and the amount spent on that program is included in the total. Thus, 87% of the total subsidies being cited are directed at making energy more affordable for consumers. A fossil fuel subsidy? Sure, and one that results in increased fossil fuel consumption. A “massive giveaway to Big Oil” which is how the issue has been framed? No, and by constantly framing the issue as such people are being grossly misinformed.
Thus, climate change advocates are shooting at the wrong target. They are making a lot of noise for sure. They are raising a lot of money (more on that below). But is their campaign going to have any impact on policies in Venezuela or Nigeria to stop subsidizing fuel for their citizens? Of course not. Thus, campaigns like this are totally impotent at getting the desired results because they have spent their money and their time in the wrong area.
The Environmental Movement is a For-Profit Industry
I am not so cynical to believe that this is all about money, but I do question how money influences some of the environmental organizations. I recently spent some time looking through the financials of a prominent environmental “non-profit.” They have $250 million in assets, annual donations of more than $100 million, and a dozen employees listed as receiving more than $200,000 a year in compensation. I think it is safe to say that environmentalism is indeed a lucrative business for some.
Climate change advocates would argue that this sort of funding is necessary because they are up against the deep pockets of Big Oil. I am sure they would deny that money influences their objectivity just as it influences the objectivity of the banking industry, the pharmaceutical industry, or the oil industry. I do not reject this notion, because I get press releases every day from environmental organizations that are misleading, factually incorrect, and grossly misinformed.
Waging Battle Away From the Wrong Target
Yet despite all of the funding and activity of the advocates, carbon dioxide emissions are not only increasing, in the past few years they have accelerated. Why haven’t the advocates managed to make a major impact? Because most climate change advocates in the U.S. are fighting a tiny local skirmish, while the real war rages elsewhere. The following graphic from my recent article Global Carbon Dioxide Emissions — Facts and Figures tells the story:
From that graphic, one can see that U.S. emissions 1). Are a small fraction of Asia Pacific’s; and 2). Have declined in recent years. In fact, since 2006 the U.S. is the world leader in reducing carbon dioxide emissions. But the biggest reasons for the decline in carbon emissions have nothing to do with the environmental movement. People have cut back on fossil fuel consumption due to high oil prices and a recession. Low natural gas prices have resulted in a large shift for power producers from coal to natural gas. Not only did environmentalists have nothing to do with any of this, they have actively fought against the growth of natural gas.
Further, if one were to limit the emissions to only emissions from U.S. consumption of oil (which I will do in a follow-up), you can immediately see that a lot of money is being spent in an area that will have little to no impact on the overall problem. It’s as if you are trying to cure obesity by launching a major campaign to ensure that everyone clips their toenails. Sure, it will help you lose a tiny fraction of an ounce, but is that really where you want to focus your efforts? Does that really address the root problem?
The Danger of Misinformation
I believe some of these organizations do more harm than good by misleading people, because misinformation causes people to spend their money and expend their time in the wrong places. Meanwhile, a new year brings a new record for global carbon dioxide emissions.
The truth is that current and future emissions are being driven by developing countries, and developing countries are the overwhelming source of fossil fuel subsidies cited in the recent Twitterstorm. The narrative being spun by the environmental movement tells a story that is disconnected from the facts.
Environmentalism is big business, so there is a large incentive to spin misleading narratives that stir people’s emotions if that helps with the fundraising. Perhaps most of these organizations are started with the purest of intentions, but I suspect somewhere along the line the people in charge recognized a profitable opportunity. So if they can keep people angry enough about fossil fuel subsidies to companies like ExxonMobil, the donations come pouring in.
I am not suggesting that there is nothing at all to be done in the U.S., but I am suggesting that a disproportionate amount of money is being spent on an increasingly marginal part of the problem. So it should come as no surprise that while their misleading narratives are effective at raising money, these organizations have been wholly ineffective at impacting the real problem.
As the population of the U.S. grows from a country of 300 million to 400 million over the next 30-40 years, we’re going to have some decisions to make about how we keep the country moving. In our biggest cities — also the source of the greatest portion of our wealth creation — the highways and transportation systems are becoming more jammed by the day. It should be obvious that more transportation infrastructure options are needed in America’s densely packed regions.
The Interstate Highway System has been successful in linking the country together, but I’m afraid that it promotes sprawling, auto dependent development — which essentially outsources a major cost (fuel) to consumers. More highways, even if they could be built to meet capacity, are not the answer for dense regions because they have proved to only encourage more oil-dependent sprawl.
I believe that High Speed Rail (HSR) is the way to build dense, interlinked cities and regions. This past week saw two major developments about the future of HSR, as the California Senate approved $4.6 billion in funding for the construction of the first section of the state’s HSR and Amtrak announced a plan for significant upgrades to the lines along the Northeast Corridor.
Political Hot Potato
High-speed rail has had a rough few years. Initially, there was some enthusiasm generated by the $8 billion investment in the 2009 stimulus legislation. However, the stimulus bill very quickly became a political football; the high-speed rail money was identified as a particular priority of President Obama’s, so it became a popular target. Republican governors in Wisconsin, Ohio, and Florida rejected the high-speed rail funding, even though the funding came with very few strings attached (compared to most other federal funding).
Ultimately, I think it was a good thing that these states rejected the funding. High-speed rail actually doesn’t make sense in most of the country — only when it can connect high density regions and cities. That means, as a 2009 report “Where HSR Works Best” (PDF) by America 2050 showed, that funding for HSR should be focused on the Northeast corridor, California, and parts of the Midwest. Of the top 20 city pairs, as ranked by their criteria, 7 were in the Boston-Washington route (including the top 4), 4 were in California, and 4 were in spokes extending from Chicago. The only route of the top 20 that didn’t include at least one city in one of those three main areas was the Dallas-Houston route in Texas.
Although the best business and efficiency case can be made for investment in those areas, the nature of political funding is to spread the funding around to many interest groups. I’m convinced that’s why we ended up with large amounts of funding initially being sent to states like Florida, Wisconsin, and Ohio. What these states have in common is not a strong potential for HSR, but that they are electoral swing-states.
As someone usually skeptical of government, the way we’re doing it — with government funding to government-sponsored companies (Amtrak or the California High Speed Rail Authority) — may not be the most efficient or effective method, but it’s the only one on the table right now. A credible conservative response would be to give tax credits or preferred financing to private companies to build and operate the lines, but the Republican party right now is more interested in shutting down rail altogether rather than building a real transportation system.
Fortunately, when their Republican governors decided to turn down the funding, that freed it up to be concentrated on where it could be most useful: the Northeast corridor and California.
As I have been researching and writing about Arctic energy development recently, there’s one important – and easy – policy prescription that often comes up: joining the UN Convention on the Law of the Sea (UNCLOS). As I mentioned in my article, “Energy Development in the Arctic: Threats and Opportunities” the USGS estimates that the Arctic region has 22% of the world’s undiscovered energy resources – and 84% of those resources are expected to occur offshore (so 18.5% of the undiscovered resources are on or under the Arctic seabed).
In the Arctic Sea, where there has been very little economic, social, or military activity, borders are not clearly defined and tested by international law. That is changing swiftly, as Shell prepares to move significant personnel and drilling equipment to the Chukchi and Beaufort Seas north of Alaska this summer for the first time. Other countries to are joining a “Race for the Arctic“ as countries and companies seek access to newly available oil and gas. As countries compete for these resources, the US needs to become a party to the UN Convention on the Law of the Sea in order to define American exclusive rights.
Under customary maritime law, the US has access to its exclusive economic zone (EEZ) out to 200 nautical miles from shore. That means that the US can allow, regulate, tax, or prohibit any economic activity in this area. The most obvious economic activities are offshore drilling and fishing. The EEZ is different from territorial waters in that the EEZ is considered international waters, but territorial waters — through which states must still allow ‘innocent passage’ of ships — are considered fully part of sovereign territory.
Under UNCLOS, the EEZ for resources on or under the seabed can be extended a further 150 nautical miles (for a total of 350 nautical miles from shore) if it can be proved that the continental shelf extends that far.
In the Arctic, all the other littoral states — Canada, Denmark (for Greenland), Norway, Iceland, and Russia — have put their claim for extended seabed EEZs into the UNCLOS secretariat for the purposes of claiming the seabed rights to the undiscovered resources, but because the U.S. is not a party to UNCLOS, the U.S. has not submitted any claim. The map, provided in the IISS’ (my former employer) 2012 Military Balance, shows how some of those claims overlap. Because the U.S. has not ratified the Convention, American diplomats are not at the table when those territorial claims are arbitrated.
This past Wednesday, I attended a forum hosted by the Pew Charitable Trusts and the Atlantic Council which brought together some of the nation’s most important business and national security leaders to call for a ratification of the Law of the Sea. Secretary of Defense Panetta and Chairman of the Joint Chiefs Dempsey, former Senators Lott, Warner, and Hagel, and former Director of National Intelligence Negroponte all expressed their strong support for passage of the treaty. Pew has founded a group called the American Sovereignty Campaign (www.ratifythetreatynow.org) to call for a ratification of the UNCLOS in the Senate. Not surprisingly, two of the most supportive Senators are Alaska’s Senators Begich and Murkowski.
Ratification of the Law of the Sea Treaty is a tool to expand and confirm American sovereignty without resorting to military force. The Arctic Ocean is the region in which American sovereignty is most in doubt. The Navy and Coast Guard can unilaterally protect and extend American sovereignty in that region, but joining the UNCLOS would be a better way to confirm that sovereignty in law.
I often hear the comment — “If we only had an energy policy” — but what does that really mean? In this column I will provide three examples — originating with both Democrats and Republicans and impacting both renewable energy and fossil fuels — of how constantly shifting legislation makes it very difficult to plan and execute energy projects.
Imagine that you were considering buying a home. However, let’s say your income is inclined to wild swings and the mortgage interest deduction is only approved on a year by year basis. Perhaps it is allowed to expire on occasion. In a situation like this, you would be wise to be very conservative with your purchase, or to even forego the purchase altogether.
This is analogous to the way energy companies plan and execute projects. Decisions hinge on the economics of the project. These projects are large capital expenditures and they only pay out over many years. Thus, when considering the economics of a project, it is important to have a stable environment around regulations and tax policies. Failure on these two items makes for dysfunctional energy policy.
Below are three recent examples of an unstable environment that can result in projects that will be either delayed or cancelled because of the uncertainty this causes for project economics.
Case 1: The Production Tax Credit (PTC)
The Renewable Electricity Production Tax Credit (PTC) is a per-kilowatt-hour tax credit for electricity generated by renewable energy resources such as wind, biomass, geothermal, landfill gas, and hydropower. Solar power is eligible for various subsidies, but is not currently eligible for the PTC.
The PTC was originally established by the Energy Policy Act of 1992 to incentivize renewable energy technologies for power production. Since it was first established, the credit has lapsed on several occasions only to be later extended — generally in periods of only one or two years at a time.
Congress is once again debating an extension of the PTC, set to expire again at the end of 2012. The constant political posturing over the PTC creates uncertainty for renewable energy developers. If we as a nation believe that we should encourage production of renewable electricity (and I do believe we should), these extensions of one or two years at a time are not helpful.
On the other hand, there are technologies that may never be competitive and that will need subsidies forever to survive, and that is not a prescription for success either. So a reasonable compromise — in my view — is to extend the PTC for a long period of time but reduce it over time. The current credit is 2.2 cents/kilowatt-hour for power derived from wind and geothermal, as well as for some biomass power plants. The credit is 1.1 cents/kilowatt-hour for some of the other options like power from municipal solid waste.
One might envision a 10-year extension in which the credits drop by 10% each year. Through a combination of economies of scale and improving technology, the economics should improve over time. If they do not, then opponents of these subsidies will have some assurance that we will not subsidize uneconomical options forever.
Case 2: End Polluter Welfare Act
Senator Bernie Sanders, an Independent from Vermont, has cointroduced legislation with Minnesota Democratic Congressman Keith Ellison called the End Polluter Welfare Act. The legislation is aimed at domestic U.S. oil companies, and with a title like that is there any wonder why our level of discourse on energy is so dysfunctional?
Senator Sanders does have an agenda, but it isn’t based on being informed on energy matters. He has made highly inflammatory comments on the Senate floor about ExxonMobil which PolitiFact.com deemed “false” after fact-checking his statements. He promoted misinformation on the Senate floor, and that misinformation has been repeated endlessly. So with this kind of misinformation running rampant (and it certainly isn’t just him) among our elected officials, it should be no surprise that we get ignorance-based legislation.
Senator Sanders lists the “welfare” he proposes to eliminate on his website. I would be willing to make a bet that Senator Sanders knows neither the purpose of the tax incentives he proposes to eliminate, nor the projected impact from doing so. I am not going to go through them here; you can refer to some of my previous columns.
The biggest problem with the legislation is that it is not conducive to U.S. energy security. It is legislation that is politically driven, and if oil prices decline it is a prescription for a rapid decline in domestic drilling. In other words, it isn’t sensible long-term energy policy.
There are ways to capture more revenue from oil companies when oil prices are rising, and I will detail that in a future column. My proposal would actually capture more revenue than Senator Sanders’ proposal in an environment of rising oil prices, but would not have the same chilling impact if prices fall.
Case 3: Navy Purchases of Biofuels Curtailed
One of the top priorities of Navy Secretary Ray Mabus has been to aggressively pursue biofuels for Navy ships and planes. The Navy’s goals are summarized in a 2010 interview that I conducted with Tom Hicks, who is the Deputy Assistant Secretary to the Navy (Energy). In part, Mr. Hicks said:
“So what we are saying is that by 2012, to test the fleet and do the local ops that I mentioned with the Great Green Fleet, we need 8,000 barrels of biofuel. To deploy that in 2016, we need 80,000 barrels. Those are certainly quantities that – we have talked to industry – and they will have no problem with delivering. By 2020, we go from 8,000 to 80,000 to 8 million barrels, is what our need is to meet that goal of 50% alternative fuel. So if we were to sit passively back and not send out the demand signal, perhaps we would have a different outcome. We choose a leadership position, and part of that position is sending out a strong demand signal to the market, that if you can deliver this; if you establish this; if you can meet it at a competitive cost long-term, then this is something we are going to commit to.”
In support of these objectives the Navy has made major purchase over the past few years of biofuels made from various feedstocks, including algae and camelina. However, the prices paid were well above the price of petroleum-derived fuel, and last week the House Armed Services Committee voted to put a stop to the practice — once more marking an abrupt change in energy policy.
Again, whether you agree or disagree with the Navy’s commitment to purchase biofuel, here is another example of changing legislation that can totally stunt the development of advanced biofuels. If you are an opponent, you may think this is a fine idea, but there has to be a better way.
The biggest problem with the Navy case is that the amounts paid for the fuel were 4 or 10 or even 100 times more than the price paid for petroleum-derived fuel. Further, the prices paid were not transparent. The fuel contracts frequently contained money for research which made it difficult to determine exactly how much was paid for the fuel. I think it was fairly obvious that this sort of practice would eventually be stopped, but as in the case of the PTC it would have probably been politically feasible to provide long-term incentives that phase out over a period of 10 years or so.
Excerpting from my book:
“A sound energy policy should take into account the supply side, the demand side, and the possibility that projections will be wrong on one or both counts. Energy policy decisions must also factor in the impact on current and future generations, and they should be capable of weathering changing political climates.”
In order to develop long-term alternatives to oil (or as in the previous example, to develop our domestic oil), it is important that the rules don’t change every 2 to 4 years. Energy projects span much longer than election cycles, and if energy policy can’t withstand changing political climates the result is paralysis.
I believe the best possibility of passing energy legislation that is stable for energy producers, yet palatable to both major political parties is to build in mechanisms that either phase out subsidies over time, or that automatically change tax incentives based on the price of oil. However, even then there is nothing to prevent the next election from ushering in new leaders who will completely overturn existing energy policies.
Thus, the real reason we have dysfunctional energy policies is that we elect dysfunctional leaders. We just have to figure out ways of working around them.
A Complex Issue
A couple of months ago, Robert Rapier, Sam Avro, and I had an interesting debate about the resource curse in the context of a Tom Friedman column about how countries that aren’t blessed with natural resources succeed because they are forced to invest in their people. I believe, as my post (Oil – Easy to Produce, but Not Easy to Buy) said, that countries blessed with natural resources like oil “don’t have to learn how to build factories” because they can sell oil to the world instead. Robert and Sam cited countries like Norway, the US, and the U.K. as examples of countries that have thrived even with resources.
The new edition of The New York Review of Books features an article, “What Makes Countries Rich or Poor?” written by Jared Diamond that is a review of Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James A. Robinson. This is another book to add to my ever-growing list of ‘must-reads’ – but Diamond’s review gave some interesting points that are very relevant to our previous discussion about the resources curse and what causes countries to grow or fail. The truth, as shown by the article, is complicated: there are many determinants to growth, and it is difficult to separate out individual causes.
What Determines Growth: Geography or Institutions Built by Society?
Diamond, the author of Guns, Germs, and Steel and Collapse: How Societies Choose to Fail or Succeed, is probably the leading voice, along with economist Jeffrey Sachs, of the school that argues that countries are most affected by their geography. Essentially, they argue that tropical countries are cursed by their location. This “Geography is Destiny” school argues that tropical countries, especially those in Central and West Africa, are undone by a combination of poor soil quality, lack of access to world markets (few good ports or navigable rivers), and endemic disease that makes it virtually impossible for them to sustainably grow out of poverty.
On the other hand, the authors Acemoglu and Robinson, along with economist William Easterly, are leaders in what could be called the “Institutional” theory of growth. They argue that it is the governments and institutions that our societies create which determines how successful a society becomes. Essentially, it’s our government, not our environment that decides our wealth over the long term.
I would recommend reading Diamond’s article in its entirety, as he does an excellent job of showing the differences in opinion between the two sides, without falling into pointless argument (something Easterly and Sachs are unable to do with each other). His article does show some interesting debate about the “resources curse” which Robert and I debated.
The ‘Resources Curse’
Acemoglu and Robinson’s book argues that resources like oil, diamonds, or minerals ironically make endowed countries end up worse-off than countries with no natural resources. Diamond writes: “the result of the many ways in which national dependence on certain types of natural resources (like diamonds and oil) tends to promote bad institutions, such as corruption, civil wars, inflation, and neglect of education.”
They note that forward-thinking countries like Norway, Botswana, or Trinidad and Tobago have avoided these problems by investing the proceeds in separate accounts marked for economic development or education. The key part, however, that they note is that the very nature of their institutions means that they wanted to share the proceeds of the country broadly. In other words, because they had strong institutions, they have been able to avoid the resource curse. Diamond specifically identifies that the US does not count for the resources curse because of how large and diverse the economy is; oil production is too small relative to total production to cause a ‘resource curse’.
This argument is relevant today because we are drilling for oil and mining for minerals in more remote countries and environments than ever before. Where drilling used to be in established areas, like Texas, Saudi Arabia, and Russia, it is now moving to offshore Brazil, the Arctic, and Mozambique. Whether the institutional capacities of these countries and regions are sufficient to avoid the resource curse will be one of the deciding factors in which countries thrive in the 21st Century.
If you were to survey people and ask the question “Should we subsidize oil companies?” — the overwhelming majority would undoubtedly respond “No!” The notion that we are subsidizing oil companies generates outrage in many people, but in this article I will show why these subsidies aren’t going to go away any time soon. The reason may surprise you.
I decided to write this article following a a recent discussion in a CleanTech discussion group on the social networking site LinkedIn. The person who started the discussion asked the question “Why is it so Hard to Kill Fossil-Fuel Subsidies?” The discussion was prompted by a recent article by environmental activist and author Bill McKibben called "Payola for the Most Profitable Corporations in History." In the article McKibben proposes “five rules of the road that should be applied to the fossil-fuel industry.” But McKibben himself demonstrated in his article that he doesn’t really understand the nature of these subsidies — and this sort of misunderstanding largely explains why so many people are outraged that they persist.
So let’s take the original question on subsidies and ask it in a different way: “Should we allow oil companies to take a tax deduction also available to any U.S. manufacturer such as Apple or Microsoft?” A lot of people will still answer “No” to that question, but certainly fewer than answered “No” to the original question.
Now ask the question “Should farmers be allowed a fuel tax exemption for the fuel they use on the farm?” In this case, some people are going to say “No”, but farmers are going to be near unanimous in saying “Yes!”
Let’s ask one final question: “Should low-income families who struggle to pay their heating bills be helped with programs like the Low Income Home Energy Assistance Program (LIHEAP)?” The irony in this question is that some of the people who are the most vehemently opposed to fossil fuel subsidies will argue that this is an important program that helps keep poor people from freezing to death in winter, and thus it would be inhumane to eliminate it.
Yet unless you answered “No” to all four questions you support programs that have been identified as fossil fuel subsidies. Bill McKibben himself indicates sympathy for subsidies when he wrote: “Many of those subsidies, however, take the form of cheap, subsidized gas in petro-states, often with impoverished populations — as in Nigeria, where popular protests forced the government to back down on a decision to cut such subsidies earlier this year.” However, he then incorrectly asserts “In the U.S., though, they’re simply straightforward presents to rich companies, gifts from the 99% to the 1%.”
That’s just not true, and a failure to understand this is why there is so much outrage over fossil fuel subsidies in the U.S. (As an aside, characterizing the oil companies as “the 1%” is also misleading, because oil companies are overwhelmingly owned by the 99%). During the course of the LinkedIn discussion, a link was provided to Oil Change International, an organization devoted to pushing a transition away from fossil fuels. On their site they have a page on fossil fuel subsidies, which includes a link to a spreadsheet from the OECD breaking down various fossil fuel subsidies. The summary of oil-related subsidies for 2010 totals $4.5 billion. That is a number often thrown out there; $4 billion a year or so in support for those greedy oil companies.
But look at the breakdown. The single largest expenditure is just over $1 billion for the Strategic Petroleum Reserve, which is designed to protect the U.S. from oil shortages. The second largest category is just under $1 billion in tax exemptions for farm fuel. The justification for that tax exemption is that fuel taxes pay for roads, and the farm equipment that benefits from the tax exemption is technically not supposed to be using the roads. The third largest category? $570 million for the Low-Income Home Energy Assistance Program. (This program is classified as a petroleum subsidy because it artificially reduces the price of oil). Those three programs account for $2.5 billion a year in “oil subsidies.” So the next time you hear someone express outrage over oil company subsidies, you may want to ask them exactly which ones they are talking about.
Oil Subsidies that Liberals Love
So why do we still have fossil fuel subsidies? Because almost nobody — not even Bill McKibben — wants to get rid of all of the programs that are classified as fossil fuel subsidies. I suspect McKibben would not advocate eliminating the Low Income Home Energy Assistance Program. Two of the most outspoken Democratic opponents of oil subsidies have strongly defended this particular program — even though it has been identified by the OECD as the 3rd largest petroleum subsidy. When Republicans tried to cut funding for the program, Sen. Chuck Schumer, D-N.Y., called the proposal an “extreme idea” that would “set the country backwards.” Rep. Edward Markey, D-Mass, states on his website that he is a “longtime Congressional champion of providing assistance to low-income families to heat and cool their homes.”
In fact, look at the reaction from Democrats when President Obama tried to reduce funding for the program. Rep. Markey’s office said: “If these cuts are real, it would be a very disappointing development for millions of families still struggling through a harsh winter.” Sen. Jeanne Shaheen, D-N.H., noted her opposition: “The President’s reported proposal to drastically slash LIHEAP funds by more than half would have a severe impact on many of New Hampshire’s most vulnerable citizens and I strongly oppose it.” Sen. John Kerry, D-Mass., wrote a letter to President Obama that stated in part: “We simply cannot afford to cut LIHEAP funding during one of the most brutal winters in history. Families across Massachusetts, and the country, depend on these monies to heat their homes and survive the season.” Each one of these Democrats was defending a program that has been identified as a subsidy to Big Oil.
What is the Impact of Eliminating the Subsidy?
Of course there are other tax deductions that do more directly benefit the oil industry, just like every taxpayer has tax deductions that benefit them. Many of us take advantage of a mortgage interest deduction when we pay our taxes, but I bet most people would resent being told they are collecting subsidies just because they sliced a small portion off of their tax bill with that deduction.
Last year CNN did a story where they put together their own list of the so-called oil subsidies, and they wrote that the “largest single tax break” — amounting to $1.7 billion per year for the oil industry — is a manufacturer’s tax deduction that is defined in Section 199 of the IRS code. This is a tax credit designed to keep manufacturing in the U.S., but it isn’t limited to oil companies. It is a tax credit enjoyed by highly profitable companies like Microsoft and Apple, and even foreign companies that operate factories in the U.S. Further, the deduction for oil companies is already limited. Apple is able to take a 9% manufacturer’s tax deduction, but ExxonMobil is only allowed to take a 6% deduction.
We can certainly debate whether the manufacturer’s tax credit is a subsidy that should be eliminated. But it is important to be informed as we discuss the issue. We need to ask three questions: 1). What is the purpose of this “subsidy?”; 2). Is the tax credit working as intended?; and 3). What is the projected impact from eliminating it?
The intended purpose of course is to keep manufacturing in the U.S. It is really irrelevant how profitable Apple might be; if there is a compelling financial advantage for them to build a factory overseas they will do so. This tax credit provides incentive for them to keep manufacturing in the U.S.
Likewise, ExxonMobil has access to oil fields and refineries in many foreign countries. If they are comparing projects here and abroad, that tax credit will factor into their decision. Whether it is enough to push them one way or another is something I don’t know. There should be some independent analyses to examine the impact. Many opponents of subsidies imagine that the impact will merely be taxpayer savings as ExxonMobil loses out on this tax credit. But what if the impact is that we lose domestic jobs as ExxonMobil shifts operations out of the U.S. (something that tax credit was designed to prevent)? What if the impact is that we continue to use just as much oil, but more of it now comes from overseas because we placed our domestic producers at a competitive disadvantage? Have those who are calling for an end to this tax credit actually studied the issue?
The Three Pinocchios
We explained in a previous column that reasonable minds disagree about whether it is appropriate to use the term “subsidies” to describe what are really just oil industry tax breaks. That’s because the average person understands the term “subsidy” to mean actual cash investments, the likes of which the Obama administration has given to alternative energy companies like the now-bankrupt solar-panel manufacturer Solyndra.
Technically speaking, the government has allowed only tax deductions to help oil companies recover the cost of doing business — this is standard in virtually all industries. No money from the U.S. Treasury goes to the oil industry, so it’s a stretch to describe the tax breaks as literal handouts like Solyndra received. Admittedly, we’re talking about a semantics issue here. But we can’t understand why the DNC and Obama continue to use the word “subsidies” in such a questionable way, especially when the term “tax breaks” is more accurate and indisputably true.
The subsidy claim being pushed by President Obama and others (like Bill McKibben) received a Washington Post rating of Three Pinocchios, which represents “Significant factual error and/or obvious contradictions.”
If we are to have a productive discussion of fossil fuel subsidies, it is important that participants understand what they are, their intended purpose, and what the impact of removing them is projected to be (and projected means conducting an actual analysis). Because of misleading political rhetoric, people imagine these subsidies as cash payments to oil companies. But, these subsidies are not what people think they are, and in many cases they are benefiting people who have nothing to do with the oil industry.
That is why it is so hard to get rid of them; a majority of the population likely supports at least some of them. And until those who are loudly screaming that we must eliminate these subsidies actually take the time to understand what they are — as well as the impact of removing them — we can expect there will continue to be much heat and little light on this topic.
Link to Original Article: The Hard Truth: Even Liberals are Big Fans of Oil Subsidies