The war on Big Oil has begun
The oil and gas industry has gotten its way in Washington for decades, thanks to favorable tax policy and gentler climate regulation than in many other developed nations. That joyride may be ending.
Democratic Sen. Ron Wyden of Oregon unveiled legislation on April 21 that would repeal longstanding tax breaks for the oil and gas industry and replace them with new ones that would incentivize clean energy. Wyden’s bill meshes with President Biden’s broad climate plan and other legislation meant to put the Biden plan into action.
Fossil fuel producers benefit from some tax incentives passed in the industry’s early days, to foster domestic energy production, and others that apply to manufacturing overall but benefit drillers in particular. The Tax Policy Center estimates those tax breaks are worth about $2.3 billion per year. Environmental groups put the value at $20 billion or more.
There are tax breaks for clean energy production too, but unlike the fossil-fuel tax breaks, clean-energy incentives tend to phase out once certain targets are met or get repealed as control of Congress changes. “We want the same kind of long-term incentives the fossil fuel sector has enjoyed for a long time,” says Gregory Wetstone, CEO of the American Council on Renewable Energy, a trade group. “Investors in the renewable sector should know the incentives are going to be there. Businesses want stability.”
The Wyden bill is “technology neutral,” meaning it doesn’t directly single out wind or solar or any energy source for tax breaks. Instead, there would be tax credits for any power production with zero carbon emissions. That clearly favors renewable energy sources such as wind and solar that don’t involve burning carbon. But a natural gas facility could hit the target too, if it deployed technology able to capture as much carbon as it emits.
There would be another tax credit for domestically produced transportation fuel that’s at least 25% cleaner than average. A third tax credit would apply to efficient homes and commercial buildings. And there would be new and extended incentives for consumers and businesses buying electric vehicles. Those four sets of tax breaks would replace roughly 40 other energy-related tax incentives Congress has passed over the decades, consolidating and simplifying a ganglion of tax laws that for now are incompatible with Biden’s goal of sharply reducing carbon emissions.
Net zero by 2050
Biden’s goal is to reach net-zero carbon emissions in the power sector, which accounts for 28% of the country’s greenhouse gas emissions, by 2035. There might still be some fossil fuel use that emits carbon, but that would be offset by technology that removes carbon from the atmosphere, for “net zero” emissions. Biden wants the entire economy, including transportation, to be net-zero by 2050.
One of Biden’s first acts as president was to “pause” the issuance of permits for new oil and gas drilling on public land and offshore waters. That didn’t affect current drilling projects, and a forthcoming review of the federal oil and gas programs will determine if the pause becomes a permanent ban or something less severe. But it did fulfill a Biden campaign promise to move aggressively on climate policy, while also signaling Democrats’ willingness to take on Big Oil.
Fossil-fuel producers argue that robust domestic production of oil and natural gas makes the United States energy-independent and limits the need to import such energy from places with looser environmental rules, such as some OPEC countries. They also warn that removing tax breaks (or imposing “new taxes”) could threaten energy jobs that pay well and in some cases are unionized, a Biden priority.
The American Petroleum Institute, which represents big drillers such as Exxon Mobil (XOM) and Chevron (CVX), recently endorsed carbon pricing, which would gradually raise the cost of fuels that pollute and strengthen the profit motive for developing alternatives. Many economists think that’s one of the best way to reduce carbon emissions, since market forces, in theory, would determine the most efficient path. But Biden is cool to carbon pricing, probably because political foes could claim it's a tax that raises energy costs for ordinary Americans.
There’s strong public support for action on climate change, but revamping the tax code to promote clean energy will still be a challenge, since Democrats have extremely thin majorities in both houses of Congress and Republicans oppose virtually any change to the tax code. With just a one-vote majority in the Senate, Wyden’s bill or anything like it needs the backing of Democratic Sen. Joe Manchin of West Virginia, a fossil-fuel defender whose state still relies on coal.
Manchin is cagey and hasn’t indicated exactly what kind of clean-energy legislation he’s likely to support. But any bill would probably have to substantially benefit fossil-dependent states such as his own, especially when it comes to jobs. That might mean West Virginia and perhaps a few other fossil states could see a windfall of clean-energy programs meant to assure high-paying jobs are waiting for any oil, gas or coal workers who lose theirs. It may be time for Washington to help a newer industry get on its feet.
Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.
Read more:
Get the latest financial and business news from Yahoo Finance
