US fossil fuel subsidies a brake on sustainable transport

Low fuel taxes and subsidies for oil production are deterring investment in sustainable transport.

On-going subsidies paid to oil and gas companies are costing the US government billions of dollars in potential revenue and making the transition to low carbon alternatives much more difficult, particularly in the transport sector, which generates 26 per cent of US greenhouse gas emissions.

American fossil fuel companies receive at least US$21 billion (155 yuan billion) a year in subsidies while consumers benefit from some of the lowest fuel taxes in the world.

“If we paid the true cost of gasoline everyone would own an electric vehicle and the US would have a high-speed rail network powered by clean energy,” says Stephen Kretzmann, executive director of Oil Change International, a US-based non-governmental organisation working on energy issues.  

Fuel tax failure

The cost of fuels like gasoline vary significantly by country. The average price of gasoline in the US on December 5 was US$0.65 per litre at the pump; Canada $0.88; UK $1.45; and China $0.94. Hong Kong topped the list at $1.94, according to

Oil is priced on the global market so price differences are largely the result of national and local taxes. Richer countries tend to tax fuels more than poorer ones. The US, however, is a notable exception to this.

“The US has lower energy taxes than many developing countries from Ethiopia to Turkey,” said Ivetta Gerasimchuk, an energy expert at the International Institute for Sustainable Development (IISD) in Geneva.

This means the US government is foregoing significant tax revenues. In 2015, the US consumed 529 billion litres of gasoline according to the US Energy Information Administration.

If we paid the true cost of gasoline everyone would own an electric vehicle and the US would have a high-speed rail network powered by clean energy.

Stephen Kretzmann, executive director, Oil Change International

If that fuel had been taxed at the same rate as Canada, it would have generated an additional US$121 billion in government revenue. In fact, the IMF estimated that the US under-taxed energy use by US$699 billion in 2015 alone, said Gerasimchuk.

Fuel taxes help to offset the additional costs of using fuels that are not included in the price and are instead paid for in other ways by the public. These include, for example, health impacts resulting from air pollution and the cost of adapting to changing climate.

Under-taxation also limits the attractiveness of greener transport alternatives and broader progress toward a low carbon economy. Cheap fuel encourages the sale of larger vehicles and encourages people to drive more because running costs are low; it discourages manufacturers from improving fuel economy standards and from producing new energy vehicles such as electric cars.

The low cost of driving is a factor contributing to urban sprawl and a disincentive for investment in mass transit systems, effectively limiting actions that reduce pollution and CO2 emissions, and locking the US into an unsustainable economic model.

The incoming Trump administration is expected to reduce the pressure on automakers to roughly double vehicle fuel efficiency by 2025, a plan agreed under President Obama in 2011.

In fact, according to Reuters, the country’s biggest trade group has asked Trump to roll back the targets, which would remove incentives for companies such as General Motors and Ford to shift consumers away from SUVs toward smaller vehicles and electric vehicles.

The threat of rolling back these targets exposes a clash at the heart of America’s future transport strategy. Federal investment in fossil fuel subsidies is at odds with state and industry targets to reduce dangerous vehicle emissions, improve energy efficiency and push the adoption of electrics vehicles.

Needless production subsidies

While consumers benefit from low fuel taxes, oil production and exploration is subsidised by government. Production subsidies reduce the cost of finding and producing oil and can make the difference between whether production and exploration is economically viable or not.

Estimating US oil and gas subsidies is challenging though because subsidies rarely involve direct cash payments to producers. Instead, they take the form of wide ranging tax breaks for energy companies, interest-free loans, free or low cost access to resources like water and land, and governments assuming the legal risks of exploration and development.

The first US subsidies were put in place nearly 100 years ago to help the nascent oil industry meet the energy needs of a growing nation. Some of the first programmes are still in place today.

In 2009, President Obama, along with other leaders of G20 nations, made a commitment to phase out subsidies. Many countries have started doing so but in the US such action has been consistently blocked by Congress, said Kretzmann.

This story was originally published by Chinadialogue under a Creative Commons’ License and was republished with permission. Read the full story.

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