House Democrats sought to make the case for repealing fossil fuel subsidies Thursday while Republicans said it would threaten U.S. energy independence, eliminate high-paying jobs and increase costs for consumers.

The debate came during a hearing of the House Oversight and Reform Subcommittee on Environment titled, “The Role of Fossil Fuel Subsidies in Preventing Action on the Climate Crisis.”

Joseph Aldy, professor of public policy at Harvard University, and Peter Erickson, climate policy program director for the Stockholm Environmental Institute, cited research that they said showed fossil fuel subsidies do little to increase fuel production while undermining U.S. efforts to demonstrate leadership on climate change.

The Office of Management and Budget estimated in 2016 that tax preferences for fossil fuels cost the federal government almost $37 billion in foregone revenue over 10 years.

While companies investing in a capital project such as a new factory typically depreciate the costs over the life of the investments, oil and gas firms expense all or most of their drilling-related expenditures that do not have salvage value. This provision, referred to as intangible drilling costs, carries a 10-year cost of $10 billion, according to OMB.

Aldy cited several studies that concluded that the subsidies had little impact on production, including a National Research Council report that concluded eliminating percentage depletion for domestic natural gas production would reduce domestic extraction by about 0.5%.

Another study found that eliminating oil and gas tax expenditures would reduce domestic production by 26,000 barrels per day, 0.2% of 2019 production. “If an oil company spent that much money for such a small amount of production, it would go out of business,” Aldy said.

Erickson agreed, saying “the vast majority of the value of subsidies goes to new oil and gas wells that are already expected to be profitable and would be developed anyway.”

At current prices of about $64/barrel for oil and $2.60/MMBtu of gas, Erickson said his research finds that 96% of the subsidy value “would flow directly to excess profits, over and above the profits that would be required to satisfy minimum investment hurdles.” The extra cash flow can also fund “political activities that can result in further favoritism towards the fossil fuel industry,” he added.

“A recent review of fiscal policy measures found that spending in renewables infrastructure would generate almost three times as many full-time jobs compared to spending on fossil fuels,” Erickson said in his written testimony.

In addition to explicit tax preferences, Aldy said there are also implicit subsidies through liability rules and federal leasing programs. Aldy said the Oil Pollution Act of 1990, which limits the liability for oil spill damages to $75 million — barring cases of gross negligence or the violation of federal regulations — weakens companies’ incentive to mitigate the risk of accidents.

He also cited the Bureau of Land Management’s lease auctions for coal. Of 113 coal lease auctions between 1990 and 2014, he said, 104 had only one bidder, and only one auction had more than two bidders. “One does not need to work through the extensive economics literature on auction theory to recognize that one-bidder auctions may not maximize auction revenue for the government,” he said in his written testimony.

At the 2009 Pittsburgh G-20 summit, the U.S. helped reach an agreement to phase out fossil fuel subsidies, but Congress has taken no action to do so. “Eliminating these subsidies would empower the United States to encourage other large developed and developing economies to reduce their subsidies,” said Aldy, who said he has been advocating for repeal of the subsidies for more than a decade.

API: Do No Harm

Frank Macchiarola, senior vice president of policy for the American Petroleum Institute, said Congress and the Biden administration should not take any actions to harm U.S. competitiveness.

He cited the economic impact of the U.S. oil and natural gas industry, saying it supports more than 10 million jobs and more than 7% of the U.S. economy. Oil and gas workers earn an average of $108,000 annually, nearly double the average private sector salary, he said. In the electric industry, fuel-switching from coal to natural gas “has been the primary factor in emissions reductions” in the U.S., he said.

“Even under the International Energy Agency Sustainable Development Scenario, which outlines a major transformation of the global energy system and is fully aligned with the Paris Agreement objectives, oil and natural gas are projected to provide 46% of the world’s energy in 2040,” he said. “The critical question for Congress is whether more of this energy will come from right here at home or from overseas.”

Unlike tax credits for renewables, which reduce tax obligations outright, he said, the petroleum industry’s tax rules are not subsidies because “they do not affect how much our industry pays in taxes, but rather the timing of such payment.”

That led to a testy exchange between Macchiarola and subcommittee Chair Ro Khanna (D-Calif.), who said the subsidies should be repealed as part of the Biden administration’s infrastructure bill. (See GOP Senators Grill Biden Cabinet over Infrastructure Bill.)

“You’re under oath. How are you possibly saying that?” Khanna asked. “Do you understand the concept of the present value of money?

“I certainly do understand that,” Macchiarola responded.

Khanna asked Macchiarola if the petroleum industry should be treated like other industries that use a standard seven-year deduction for property such as office furniture and appliances.

“We are certainly fine being treated like every other industry,” responded Macchiarola. “There’s no question about that. If you want to take the entire tax code and treat the oil and gas industry the same as every other industry, we’re happy to do that.”

‘Eco-anxiety’

Republicans in the hearing expressed support for continuing current tax policies for the industry.

“I’m so thankful for the fossil fuel industry,” said Rep. Yvette Herrell (R-N.M.), who said that more than half of fuel production is used to make plastics and other items “that we take for granted every day.”

“Medical devices, eyeglasses, pantyhose, asphalt, roads, shoes, tires, bottles for water, iPhones, cosmetics. I could go on and on,” she said.

Rep. Pat Fallon (R-Texas) said eliminating tax provisions for fossil fuels would save about $3.2 billion a year, about one-third of the incentives he said renewables receive.

He referenced testimony earlier in the hearing by Swedish activist Greta Thunberg, who said members of Congress would be judged harshly by history if they fail to take decisive action on climate. “The Democratic majority in the House, they’re going on a wild, multitrillion deficit spending binge, and they’re saddling future generations with crushing debt … so we have to be consistent here,” he said.

Rep. Ralph Norman (R-S.C.), the top Republican on the subcommittee, also took on Thunberg, asking her to explain remarks in a previous speech, in which she said, “I want you to panic. I want you to feel the fear I feel every day.”

“Those are metaphors. In speeches you often use metaphors,” Thunberg responded. “Of course I don’t mean literally that I want people to panic. … By that I mean I want people to step out of their comfort zones, and to not just see the climate crisis as a far distant threat, but rather as something that is impacting people already today.”

Norman said rejoining the Paris Agreement was a mistake because it fails to hold China accountable for their increased use of coal. At President Biden’s virtual Leaders Summit on Climate Thursday, Chinese President Xi Jinping said his country would “strive to peak carbon dioxide emissions before 2030 and achieve carbon neutrality before 2060.”

“Unless China stops its continued growth of emissions, any actions we take would be offset several times over,” he said. “This does not sound like a good deal for American workers or American energy independence.”

Norman accused Democrats of using “fear tactics to scare people into action regarding climate change,” citing reports of children “increasingly suffering from eco-anxiety.”

“I hope eventually that our committee can move past doomsday scenarios and headlines and focus on the energy policy steps we should be taking and what the cost impacts are,” he said.

If observers needed more evidence that Republicans and Democrats continue to talk past each other in Washington, there was this exchange, when Khanna completed his opening statement and recognized “our distinguished ranking member, Ralph Northam,” mistakenly using the surname of the governor of Virginia.

“Thank you, Chair Khanna. It’s ‘Norman.’”