Reforming Fossil Fuel Subsidies, New Fuel Economy Standards, and More

Earlier this year, President Joe Biden pledged to “eliminate tax preferences for fossil fuels” with infrastructure legislation, which could both reduce emissions and generate much-needed revenue for the administration’s ambitious spending plans. Longstanding subsidies that could be targeted include a credit that allows companies to deduct costs for drilling new wells and the percentage depletion allowance, which helps some oil and gas companies reduce their taxable income. Much of the Democratic caucus supports such reforms. Dozens of House Democrats signed a letter addressed to Democratic leaders that calls for the elimination of a variety of fossil fuel subsidies with infrastructure legislation, and Senate Finance Committee Chair Ron Wyden (D-OR) reportedly favors overhauling energy tax incentives in the reconciliation package. Developing legislation that can pass with 50 votes could prove tricky, however, given skepticism from some moderate senators about another major bill. Plus, Speaker of the House Nancy Pelosi (D-CA) has promised to vote on the bipartisan bill that passed the House by September 27, after which moderates could resist efforts to approve more infrastructure spending.

On a new episode of the Resources Radio podcast, Harvard Kennedy School Professor and RFF University Fellow Joseph Aldy explores why fossil fuel subsidies have historically proven so challenging to reform. Aldy clarifies that the very definition of a subsidy is contested: forgone tax expenditures in the United States from oil and gas subsidies amount to about $3 billion to $5 billion per year, but factoring in the social costs of climate change and air pollution brings that estimate to $500 billion annually. While reforms could come in infrastructure legislation, Aldy notes that the tax code inherently privileges fossil fuels. For instance, the production tax credit for renewable power needs to be reauthorized regularly, whereas many provisions that boost fossil fuels—such as the percentage depletion allowance and credits for intangible drilling costs—have no expiration date. “The way Congress works (or doesn’t work), it rewards the status quo,” Aldy contends. “If the status quo is that there’s no sunset provision, then it makes it a lot easier for these kinds of fossil fuel tax expenditures to persist.”

Related research and commentary:

• Podcast: When Will the Sun Set on Fossil Fuel Subsidies?, with Joseph Aldy
• Testimony: Testimony on the Elimination of Fossil Fuel Subsidies to the US Subcommittee on the Environment
• Magazine: Money for Nothing: The Case for Eliminating US Fossil Fuel Subsidies

Last month, the Biden administration proposed new fuel economy standards for passenger vehicles, doing away with relatively weak Trump-era standards and hewing closely to standards announced during the Obama administration. The US Environmental Protection Agency (EPA) is targeting a 10 percent boost in fuel efficiency for the 2023 model year and then 5 percent increases annually through 2026—significantly more ambitious than the Trump administration’s standards, which required only 1.5 percent increases each year. The administration also soon plans to announce more far-reaching standards that will apply beyond the 2026 model year, but since these updates likely will be more “technically complex and legally ambitious” than historical standards, officials opted to first announce the more near-term rules. But big emissions reductions through Biden’s approach to fuel standards may not materialize too easily: transportation is the largest source of greenhouse gas emissions nationally, and emissions have only grown over the past 30 years.

In a blog post from a new series about the Biden administration’s approach to fuel economy standards, RFF’s Benjamin Leard, Joshua Linn, and Virginia McConnell find that the recently announced standards will significantly reduce emissions rates of new passenger vehicles sold in the coming five years, compared to previous standards. However, the standards will only modestly reduce emissions from the on-road vehicle fleet in the near term, because total emissions depend on a variety of factors, including how much people drive and the emissions rates of vehicles that are still on the road. Total vehicle emissions also would decline if more cars were electric. While Biden has set the goal that half of all new vehicles sold in the United States by 2030 will be plug-in hybrid, all electric, or fuel cell, these vehicles make up just a small share of the vehicles currently on the road. As such, the scholars conclude that fuel economy standards and policies to promote electric vehicles are essential for meeting long-term climate goals; while progress in the short term is likely to be slow, the benefits of these policies will accelerate over time.

Related research and commentary:

• Blog: How Much and How Quickly Will Biden’s Proposed Fuel Economy Standards Reduce Emissions?
• Magazine: Federal Climate Policy Toolkit: Transportation
• Issue Brief: Reducing the Costs of Federal Fuel Economy and Greenhouse Gas Standards by Accurately Estimating Lifetime Vehicle Miles Traveled

As President Biden targets a 50 percent reduction in greenhouse gas pollution relative to 2005 levels by 2030, controlling emissions of methane—a potent greenhouse gas with more than 80 times the warming power of carbon dioxide—will be a priority. EPA has taken the lead and plans to announce more ambitious methane rules later this month. At an RFF event last week, EPA Administrator Michael Regan signaled that EPA’s methane controls have “never been done as aggressively as we plan to do it.” Congress has taken action on methane as well, using its authority under the Congressional Review Act earlier this year to revoke a Trump-era rule that relaxed requirements for companies to monitor faulty equipment for methane leaks. Given that existing controls on methane pollution have not provided sufficient incentive for companies to make efforts to reduce leaks, policymakers have reason to consider more ambitious measures, too.

Specifically, Senate Democrats are considering a fee on methane pollution for inclusion in a future infrastructure bill designed around the Senate’s reconciliation procedure. In a new issue brief, RFF Fellow Brian C. Prest estimates the possible impact of several potential fees for methane pollution on the costs of gas production, methane leak rates, and wholesale natural gas prices. Prest finds that even just a modest fee on methane pollution incentivizes gas producers to invest more time, effort, and resources to reduce methane leaks, which ultimately leads to substantial emissions reductions. A relatively low fee of $500 per additional ton of methane pollution could cut the methane leak rate nearly in half, for instance. Prest also notes that the price impacts of a methane fee are relatively low across the board, so consumers would not be substantially burdened by higher energy costs if methane fees were implemented.

Related research and commentary:

• Issue Brief: Methane Fees’ Effects on Natural Gas Prices and Methane Leakage
• Event: Policy Leadership Series with EPA Administrator Michael Regan
• Blog: The Trump Administration Ignores Key Alternatives with New Methane Regulation Rollback