Fossil Fuel Subsidies Explained
Simple guide to what fossil fuel subsidies are, the top U.S. tax breaks, why they matter, and what citizens can do next.
Quick answer
Fossil fuel subsidies are rules or payments that make oil, gas, and coal cheaper for companies or people. In the U.S., direct tax breaks for oil and gas add up to about $20 billion a year by some counts, while worldwide measures are much larger. See links below to learn the main types and why they matter.
What are fossil fuel subsidies?
A fossil fuel subsidy is any government action that helps oil, gas, or coal companies or lowers prices for buyers compared with alternatives. Subsidies include direct money, tax breaks, lower fees, and rules that shift costs to the public.
Types to know
- Tax breaks: Special deductions or credits that cut a company's taxes.
- Price support or consumer rebates: Programs that keep fuel prices low for people or businesses.
- Indirect support: Things like government loans, military protection of shipping, or not charging for pollution harms.
For a short definition, see the Fossil Fuel Subsidy Tracker.
How much do subsidies cost?
Different groups count subsidies differently. The IMF counts large global costs and includes hidden harms, estimating trillions worldwide. For U.S. federal tax preferences, the EESI points to roughly $20 billion a year in direct subsidies. The Tax Policy Center lists the biggest U.S. tax breaks and estimated revenue losses of about $12.9 billion over a multi-year window for key items.
Top U.S. oil & gas tax breaks (simple table)
| Name | Why it exists | Origin | Rough annual $ |
|---|---|---|---|
| Intangible Drilling Costs (IDC) | Let companies deduct drilling and setup costs now | Long history, used since early 1900s | Part of large deductions (see Investopedia) |
| Percentage Depletion Allowance | Let small producers deduct a share of gross income for depletion | Tax rules for small producers | ~$3.3B (Tax Policy Center) |
| Expensing of exploration & development | Accelerates write-offs for exploration | Modern tax code | ~$2.4B (Tax Policy Center) |
| Publicly Traded Partnership (PTP) rules | Allow certain pass-through firms to be listed like corporations | Tax code carve-out | ~$2.7B (Tax Policy Center) |
| Pollution control & other credits | Tax treatment for cleanup equipment etc. | Various laws | ~$2.5B (Tax Policy Center) |
| Domestic Manufacturing Deduction (impact) | Lowered tax rates for some domestic energy firms | 2004 IRC | Historical impact (see EESI) |
| 45Q Carbon Capture Credit | Credit for storing CO2 or using it in enhanced oil recovery | Recent expansion in climate bills | Variable; funded amounts noted in policy notes) |
Sources for table items: Tax Policy Center, EESI, and explanatory coverage like Investopedia.
Why do people defend these subsidies?
- Jobs: Supporters say subsidies keep investment and jobs in energy-producing states.
- Energy security: Some argue domestic production reduces dependence on foreign supplies.
- Historical reasons: Many rules date back decades and were created for specific times and needs.
The New York Times explains how tax rules have evolved and why some lawmakers resist change.
Why critics want to end them
- Climate harm: Subsidies make fossil fuels cheaper and slower to replace with clean energy.
- Market distortion: They can keep failing fossil fuel businesses alive and block fair competition from renewables (see FracTracker).
- Cost to taxpayers: Lost tax revenue could fund schools, health care, or clean energy.
Policy moves and debate
Lawmakers have introduced bills to repeal some tax breaks. For example, the End Oil and Gas Tax Subsidies Act has been reintroduced to remove several breaks. Others argue reform should be gradual to avoid sudden job loss or price shocks.
One trend insight
Many recent budgets and climate bills include both cuts to old subsidies and new incentives for carbon capture or clean energy. That means policy is shifting, not ending; some fossil fuel help is being replaced by targeted climate incentives. See the policy brief at EESI's proposals.
What can citizens do?
- Ask your representative to support transparency and phase-out plans (contact info on your member's website).
- Read simple summaries before deciding; use balanced sources like Tax Policy Center or the IMF for global context.
- Vote and speak at town halls when budgets or energy laws are discussed.
FAQ
Do subsidies make fuel cheaper for drivers?
Sometimes. Consumer price supports or low taxes in some countries cut pump prices. In the U.S., most large benefits go to producers through tax rules, not direct price cuts.
Are all tax breaks unfair?
Not all. Some tax rules help small businesses or match rules used in other industries. The debate is about which rules are special favors and which are standard tax treatment.
Will ending subsidies raise gas prices?
It could raise costs a little, especially in the short term, but savings could fund clean energy and reduce long-term climate damage.
Takeaway
Fossil fuel subsidies are a mix of long-standing tax rules, targeted credits, and indirect supports. In the U.S., direct tax preferences are large enough to shape markets and politics. If you want to act, ask for clear numbers, careful phase-outs, and investments in clean jobs. For deeper reading, start with Tax Policy Center, EESI, and the IMF.
Phoenix tracks environmental policy developments and their real-world impacts. Former congressional staffer who now analyzes climate legislation and corporate environmental commitments.
