Fossil Fuel Subsidies

Let’s examine depreciation.

Depreciation has been an accepted accounting practice for 100 years.

All companies, large and small, whether they manufacture, mine, drill or generate electricity, may use depreciation when calculating their tax liabilities.

It allows a deduction to cover the cost of replacing equipment and buildings at the end of their useful life.

For example, a dry-cleaning company buys a delivery truck for $20,000. Assuming it has a life of 10 years, as established by the IRS, the dry-cleaning company can, using straight line depreciation and without consideration of scrap value, deduct $2,000 from its earnings each year. At the end of 10 years the company will have accumulated enough money to buy a replacement truck.

If the depreciation deduction was disallowed, the dry-cleaning company would pay income taxes on the $2,000 it is currently deducting. This would reduce the amount of money available for buying a new truck when the old truck is no longer working.

Not allowing depreciation overstates profits, and cannibalizes existing assets.

Next, let’s look at depletion allowance.

This allowance is essentially restricted to smaller companies, while the majors, such as Exxon Mobile, have not qualified for the depletion allowance since the 1970’s..

The concept of a depletion allowance follows the same rationale as depreciation, except it applies to mineral resources including oil.

A mining or oil company will use up its reserves over time. If it’s determined that the oil field or coal or copper mine will be exhausted in 30 years, the company will be allowed a depletion allowance based on the life of the resource. The funds from the depletion allowance will allow the company to explore for and develop a new oil field or mine to replace the one that’s exhausted.

Without the depletion allowance, the company is cannibalizing its resources.

The production tax credit is available to wind farms as is the outright grant. This is a 2.2 cent credit for every kWh generated by the wind farm company. If the company doesn’t have earnings against which to apply the credit, it can take the grant instead.

No fossil fuel company gets this credit or grant unless it happens to also own a wind farm.

Next let’s look at expensing drilling costs.

This allows the drilling company to expense, in the current year, its cost of drilling wells. This lowers its tax bill for the current year.

The alternative would be to depreciate the drilling costs over some established life, with essentially the same cumulative effect.

Expensing drilling costs is similar to accelerated depreciation that wind farm companies can take advantage of.

Accelerated depreciation increases the size of the depreciation in the first year, and reduces it in subsequent years until the depreciation allowance is exhausted.

In both cases, expensing drilling costs and accelerated depreciation merely lowers the tax payment in the early years. Since there is a time value to money, both the drilling company and the wind farm company get the advantage of keeping dollars that are economically more valuable.

The foreign tax credit is merely an offset for taxes paid to foreign governments. All companies that operate in foreign countries can take advantage of this credit. General Electric Company, that manufactures wind turbines, takes advantage of the credit. Wind farms in the United States operate locally and aren’t exposed to having to pay taxes to foreign governments, so aren’t in a position to use the credit.

Finally, some reports mistakenly classify some subsidies as benefitting the fossil fuel industry.

As Larry Bell pointed out in his July 7, 2013 article, a listing of subsidies to the fossil fuel industry in the 2010 OECD-IEA report titled “Fossil Fuel Subsidies and Other Support” included such items as, the Low-Income Energy Assistance Program (LIHEAP), money spent on the Strategic Petroleum Reserve, and exemptions for farm fuel.

These, in order, are to assist low income families, increase national security and help farmers … and are not subsidies.

An objective examination of this issue should conclude that the proponents of wind energy, and other renewables, are overstating their claim that fossil fuels receive larger subsidies than wind, etc.

To claim that depreciation, depletion, accelerated depreciation or foreign tax credits are subsidies defies logic … and intellectual honesty.

Claiming that fossil fuel companies receive large subsidies is a gambit to fool the public that often doesn’t have financial training.

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