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Subsidizing Big Oil (1995)

Drawn from the 1995 UCS report "Money Down the Pipeline: The Hidden Subsidies to the Oil Industry"

There is growing awareness in this country that the full cost of using oil for transportation is "subsidized" -- that is, gasoline prices paid by consumers do not reflect the full economic cost to society. The true cost is hidden by myriad direct and indirect public subsidies, which include

  • reduced corporate income taxes for the oil industry
  • lower than average sales taxes on gasoline
  • government funding of programs that primarily benefit the oil industry and motorists
  • "hidden" environmental costs caused by motor vehicles, namely air, water, and noise pollution

This hidden system of oil subsidies has created an energy policy by default—a policy that is actually the reverse of stated national priorities. Oil industry subsidies further our dangerous dependence on foreign oil supplies and burden taxpayers with unacceptable costs to human health, the environment, and the economy. In the 1990s, oil imports equaled almost half of US oil consumption and half of the trade deficit. The situation is likely to worsen with US refineries running at full capacity and all of the remaining inexpensive oil reserves lying outside US borders. This de facto energy policy also discourages private investments in new, cleaner technologies such as electric vehicles. Furthermore, hidden subsidies waste taxpayer dollars by undermining government programs to promote fuel efficiency, alternative fuels, and environmental protection.

The purpose of this report is to allow the public and policymakers to make informed decisions on policies that affect the ability of the United States to meet energy and environmental goals by providing up-to-date cost estimates of these hidden subsidies. We identify and quantify three general categories of subsidies to oil and motor vehicles: tax breaks for the oil industry, government expenditures on oil and motor vehicle infrastructure and services, and hidden environmental costs of oil consumption.

Tax Benefits

Government directly subsidizes oil consumption through preferential treatment in tax codes. A multitude of federal corporate income tax credits and deductions results in an effective income tax rate of 11% for the oil industry, compared to the non-oil industry average of 18%. If the oil industry paid the industrywide average tax rate (including oil) of 17%, they would have paid an additional $2.0 billion in 1991. Our results are consistent with a report by the Alliance to Save Energy that estimated the benefits of individual federal corporate income tax provisions. Their results showed that in 1989 preferential treatment yielded $1.8 billion to $4.6 billion in individual income tax benefits to the oil industry (Koplow, 1993).

At the state and local levels, sales taxes for general revenues on petroleum products are lower than the average sales tax rates, and consequently, motorists underpay for general government services. (Sales taxes are charges on petroleum products above user fees [highway fuel taxes, tolls, and fees earmarked for infrastructure and services] that are used for general revenues.) Another study by the Alliance to Save Energy found that state and local governments taxed gasoline at about half the rate as other goods -- approximately 3% versus 6% (Loper, 1994) -- resulting in an estimated $2.7 billion revenue loss from gasoline sales alone in 1991. When home, industry, and office petroleum products are included, the total state and local revenue loss sums to $4.1 billion.

 

Net Government Expenditures

Federal, state, and local governments provide a variety of oil- and transportation-related infrastructures and services. Some of these expenditures are financed through earmarked user fees, such as dedicated highway fuel taxes and vehicle registration fees. What we refer to as "net government expenditures" (i.e., government expenditures not financed through user fees) are either direct subsidies or indirect subsidies. Direct subsidies include government-funded energy research and development. Indirect subsidies include the Strategic Petroleum Reserve, military expenditures related to the Persian Gulf, and police and fire protection related to highway use. Although "user fees" in the form of gas taxes, registration fees, and tolls pay for a portion of the infrastructure services, large government outlays remain that must be covered by general revenues. Delucchi and Murphy (1995) estimated the net government expenditures at the federal, state, and local levels to be from $25 billion to $45 billion in 1991. (Delucchi's [1995] estimates were only for transportation and ignored the portion of expenditures that subsidized oil not used for motor vehicle fuels. Total oil industry and motor vehicle subsidies would consequently be larger.)

Based on a report by the Alliance to Save Energy (Koplow, 1993), we estimated that the total expenditures by federal agencies alone amounted to between $1.4 billion and $2.0 billion in 1990. (Unlike Delucchi [1995], Koplow [1993], this estimate does not include state and local government outlays directly benefiting the oil industry or government expenditures on non-oil motor vehicle infrastructure and services. It does, however, include federal expenditures for infrastructure and services related to the shipping of oil. The first two factors far outweigh the third. Consequently, the direct federal outlays are an order of magnitude smaller than the total net government expenditures.) The five largest agency outlays were the Army Corps of Engineers Civil Program, the US Coast Guard, the Maritime Administration, the Strategic Petroleum Reserve, and the Department of Energy. The first three outlays total about $1 billion annually and benefit the oil industry through infrastructure and services related to oil shipping. The Strategic Petroleum Reserve's existence is a direct result of our overdependence on imported oil and is intended to reduce the impacts of a severe supply disruption. In the 1990s, it cost $320 to $400 million annually to maintain. Finally, during the 1990s, the Department of Energy spent over $100 million annually on developing and improving oil production techniques.

 

Environmental Costs

Oil and motor vehicle use are responsible for enormous hidden environmental costs. Economists term these costs "externalities" because they are not included in the private costs of transportation. Nevertheless, these costs are real and they are borne by society at large. They include the economic costs of air, water, and noise pollution. Reducing the costs of externalities requires government attention.

Transportation is responsible for most of the major air pollutants emitted in our urban areas, including particulate matter, carbon monoxide, and hydrocarbons and nitrogen oxides, which form ground-level ozone. In addition, motor vehicles are responsible for carcinogenic chemical emissions, carbon dioxide emissions (the principal greenhouse gas), water pollution (leaky underground storage tanks, oil spills, and road runoff), and noise. Pollution costs are borne by society in the form of increased health care costs and loss of wages due to illness and premature death (i.e., morbidity and mortality costs), reduced agricultural output, loss of visibility, and damage to buildings.

Delucchi (1995) estimates the total cost in 1991 of environmental externalities to be $54 billion to $232 billion. Human mortality and morbidity due to air pollution accounts for over three-quarters of the total environmental cost and could be as high as $182 billion annually. For the Los Angeles area, Hall et al. (1992) estimates that the annual health-based cost from ozone and particulate exposure alone to be almost $10 billion.

 

References

Delucchi, M.A. 1995. Summary of Non-monetary Externalities of Motor Vehicle Use, Report 9 in the series The Annualized Social Cost of Motor Vehicle Use in the US, Based on 1990-1991 Data: Summary of Theory, Methods, and Data. Draft prepared for the Union of Concerned Scientists. Institute of Transportation Studies, University of California, Davis.

Delucchi, M.A., and J. Murphy. 1995. Government Expenditures Related to the Use of Motor Vehicles. Report 7 in the series The Annualized Social Cost of Motor Vehicle Use in the US, Based on 1990-1991 Data: Summary of Theory, Methods, and Data. Draft prepared for the Union of Concerned Scientists. Institute of Transportation Studies, University of California, Davis.

Hall, J., et al. 1992. Valuing the Health Benefits of Clean Air. Science 255 (February): 812-817.

Koplow, D. 1993. Federal Energy Subsidies: Energy Environmental, and Fiscal Impacts. Washington, D.C.: Alliance to Save Energy.

Loper, J.W. 1994. State and Local Taxation: Energy Policy by Accident. Washington, D.C.: Alliance to Save Energy.

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