Before the House Democratic Policy Committee:

Are Some Natural Gas Subsidies Better Than Others?

Testimony of Robert C. Altenburg

Director, PennFuture Energy Center

March 21, 2016

Good afternoon Chairman Sturla and members of the Committee.

My name is Robert Altenburg and I’m the director of the Energy Center at Citizens for Pennsylvania’s Future (PennFuture). We are a statewide non-profit environmental advocacy organization focusing on land, air, water, and energy issues that impact Pennsylvania. I’m very happy to be here today to discuss fossil fuel subsidies.

Last year, PennFuture released a report identifying over $3.2 billion dollars in fossil fuel subsidies provided by Pennsylvania during fiscal year 2012 – 2013.^[1]  Although a large number, this is still a conservative estimate because we limited our calculations to subsidies for which data was readily available. We also excluded federal fossil fuel subsidies, which are large, numerous, and have been in place for decades.

We recognize that energy subsidies present complex issues, and have been implemented for different reasons. To be clear, we are not calling for a blanket end to all energy subsidies as some analysts and media sources have suggested. Instead, as our report indicates, we need greater transparency and ongoing evaluation to ensure these subsidies provide the Commonwealth overall benefit.   This is particularly true in the case of fossil fuel subsidies.

Pennsylvania’s Constitution states that “Pennsylvania's public natural resources are the common property of all the people, including generations yet to come. As trustee of these resources, the Commonwealth shall conserve and maintain them for the benefit of all the people.”^[2]  At the very minimum, the Legislature has a duty to ensure that any fossil fuel subsidy enacted upholds both the letter and the spirit of this Constitutional guarantee.

How do we define subsidies and why are they an issue?

According to the International Energy Agency, a subsidy occurs when a government makes a financial contribution that confers a benefit on energy producers.^[3]  In Pennsylvania, this may include grants, loan guarantees, the assumption of environmental liability, tax expenditures, or other preferential policy treatment. Some of these lower the cost of production or raise prices, others lower consumer prices or otherwise influence purchasing decisions.

Subsidies may be effective tools to achieve particular objectives, but like any tool we must be aware of the risks.  We can divert limited resources to favored recipients based on political influence rather than a well-reasoned justification, or we find that by masking the real price of goods and services there are unintended consequences resulting in more harm than good.

Examples of Pennsylvania fossil fuel subsidies

Tax expenditures

The majority of fossil fuel subsidies in Pennsylvania come in the form of tax expenditures.   This is government spending through the tax code in a manner that favors or promotes fossil fuel use over other alternatives. Rather than the government appropriating money through the budget to promote a result, the government achieves the same goal by forgoing revenue. For example, instead of appropriating additional funds to support volunteer fire and rescue squads, Pennsylvania choose to forgo revenue by providing an exemption from taxes on motor fuel.

Sales tax

Tax expenditures can be revenue neutral, but favoring one product over another often has side effects that work against our policy goals.  Pennsylvania’s sales tax rules provide incentives for fossil fuel based energy use rather than conservation. For example, practically all purchases of electricity are exempt from sales and use tax. Yet, purchases of items that save electricity like LED light bulbs, insulation, and solar panels are taxed.  While we want to ensure that citizens have access to affordable energy, promoting energy efficiency furthers that same goal of making energy less expensive to the consumer.  Providing a tax exemption for energy purchases and not energy efficiency favors energy consumption over conservation, which incentivizes the waste and pollution associated with energy production.

Property tax

Pennsylvania’s property tax rules also favor particular fossil fuel energy sources over others. While property taxes are a key source of revenue for our counties, municipalities, and schools, we have made policy decisions to exempt churches, hospitals, schools and nonprofits. These exemptions subsidize non-commercial entities that provide critical services to our communities. Pennsylvania property taxes also subsidize some energy sources over others. For example, oil and gas reserves and operating wells are exempt from property taxes, whereas coal reserves and coal mines are subject to these taxes. As a result, Pennsylvania property tax policy directly favors the development of natural gas over coal and, as a result, makes it more difficult for clean energy alternatives to compete.

The natural gas industry is currently facing financial challenges caused by oversupply and record-high stockpiles, resulting in low market prices.^[4] In this situation, additional incentives to further expand natural gas production are counterproductive.

Lack of a natural gas severance tax

If the natural gas industry does not fully compensate state and local governments for the external cost of their activities, a subsidy exists equal to the costs to the government to pay for those externalities.  The Pennsylvania Budget and Policy Center has calculated that the effective rate of the current impact fee may be the equivalent of a severance tax of less than 2 percent.^[5] That combined with a very low effective corporate tax rate for drillers^[6] means that there is significant risk that the public is subsidizing external costs associated with natural gas development, including enforcement, road damage, housing shortages, and harm to public health and the environment.

Plainly, in the energy field as in other areas, Pennsylvania’s tax expenditures reflect specific policy choices that promote particular items and activities. PennFuture believes that it is good public policy to periodically evaluate the billions of dollars in tax expenditures being made under existing tax policy, and reassess the effects of those choices to determine if they continue to further reasonable policy choices, or whether there are better choices available.

Preferential Policy Treatment

In addition to tax expenditures, there are laws on the books that create other forms of preferential treatment that effectively subsidize fossil fuels.

In 1990, two years after Dr. James Hansen made his address to Congress saying global warming had already begun,^[7] Pennsylvania passed a law that said “Any heating system or heating unit installed in a facility owned by the State...shall be fueled by coal.”^[8]  The law allows the Department of General Services (DGS) to use other fuels in some cases, but there remains a clear bias towards use of fossil fuels. Scientists from Stanford and UC Berkeley have shown that with each degree of warming that a country experiences, its economic production drops, and if it begins at a warmer temperature, then it suffers a greater drop in economic performance for each degree of warming.^[9] Considering the current state of knowledge about the economic impact of climate change, it is ludicrous for the state to perpetuate a policy mandating that DGS use coal fired heat or fossil fuels in state-owned buildings.

Most business owners in the state, understand that if they cannot afford liability insurance, to protect their neighbors and community, they cannot afford to be in business.  Unfortunately, this does not always apply to possible environmental damage.  When activities are too risky for private insurers, the government may step in with bonding programs or other mechanisms where the government assumes risk and responsibility for mitigating harms associated with the activity.  If the government is not fully compensated for its expenses, a direct transfer of wealth exists.  If the government provides insurance below market rates for certain industries, that once again creates a situation where it is more difficult for other alternatives to compete.

Conclusion

Pennsylvania has a legacy of environmental damage from extractive industries including timber, oil, coal, and gas. In response, we passed a Constitutional amendment requiring that the government act as a trustee with the duty to conserve and maintain our environment and our resources.  The threats associated with climate change only add to the urgency of this duty.  

Pennsylvania must work to reduce dependence on fossil fuels and promote alternatives such as energy efficiency and clean renewable energy.   To do so, we must align our investments with our goals and avoid unintended side effects that promote pollution. This is a significant undertaking, but as a start PennFuture recommends the following:

• Greater Transparency: To make informed decisions, policymakers and the public need to have ready access to the magnitude of existing subsidies and their impacts.  We recommend that a non-partisan, governmental organization should develop and periodically update a comprehensive report on Pennsylvania’s energy subsidies.
• Regular and ongoing evaluation of the costs and benefits of the subsidies: As time and technology changes, subsidies that were once justified may no longer make sense. Regular reconsideration of existing subsidies is needed to ensure we are spending money wisely and working towards our goals.

We believe Pennsylvania can build a vibrant and growing economy on clean and renewable energy.  We ask our Legislature to help lead us to that future.