Tax Revenue and Profitability: Oil & Gas Compared to Renewable Energy (Some Thoughts and Speculations)

Tax Revenue and Profitability: Oil & Gas Compared to Renewable Energy (Some Thoughts and Speculations)

I was going to compare fossil fuels as a whole to renewables in this regard but since the coal industry is contracting or will contract in many places I would rather focus more on oil & gas. All U.S. energy-related companies pay corporate taxes, property taxes, and many others and their workers pay income and sales taxes. However, only fossil fuel companies producing companies pay production taxes set by states. Even consumers of gasoline and other petroleum hydrocarbons and associated products pay applicable state and local taxes that significantly exceed normal taxes. The specter of carbon taxes looms in the horizon as well. State oil and gas production taxes may take the form of percentage taxes or in the case of Pennsylvania there is are ‘impact fees’ based on production that are utilized by the counties where the drilling and production takes place. Large pipelines also pay very significant local and state taxes. 

Oil & Gas companies are among the most profitable companies. Thus they also provide massive tax revenues since profits are taxed. Oil & Gas companies are also subjected to many other taxes. Typically there are state taxes on production, which are significant, or in some places there are local impact fees. By comparison, renewable energy companies are not known for their high profits. Another consequence of this difference in profits is a difference in salaries. Oil & Gas companies generally provide high pay for workers at all skill and educational levels. Solar Energy companies generally cannot compete in this regard. Wind Energy companies generally promote higher salaries for the more technical and dangerous conditions of installation for wind compared to solar. 

Manufacturing and installation in solar, wind, and hydro is the main cost, with maintenance being secondary, so upfront costs are very high. Once facilities are built, the need to maintain them requires far less people. In oil & gas, the focus is on developing new supply and the process is the same regarding drilling, completion, pipelining, processing, refining, and marketing. As long as new supply is needed there is the same need for workers. The same will be true for renewables especially if there are stronger pushes to expand development. Installation for solar is not highly technical and requires mostly roofers and to a much lesser extent electricians and planners/designers.

By some estimates U.S. oil and gas companies provide tax revenue of well over $100 billion per year and possibly nearly twice that. While there are arguments that oil and gas subsidies to the tune of $4 billion should be eliminated, most of those so-called subsidies are tax deferments and write-downs. The oil and gas industry is certainly one of the most, if not the most, taxed industry in America so complaining about tax deferments that might add up to about 3% of what they actually pay in taxes is really kind of nonsensical. In contrast, renewable energy is incentivized with tax credits, production credits, state energy credits, and more. These are direct payments from governments to the industry. It should also be pointed out that many of the taxes paid by oil and gas companies are state and local taxes. Theoretically, if renewable energy were to replace fossil fuel energy today, there would be a massive loss of tax revenue at the federal, state, and local levels.

Profitability and tax revenue capabilities are related. Until renewable energy sources are on par economically and without subsidies with oil and gas sources there will be more profitability and tax revenue from oil and gas. That transition might take quite a long while so any quick demands for a transition to renewable energy would lead to less tax revenue, less profitability, and higher energy prices. While that could boost the competitiveness of renewables, significantly higher energy prices would be unavoidable. Carbon pricing can be seen as market manipulation to increase energy prices to stimulate renewables by forcing them. Perhaps that makes mandates like Obama’s Clean Power Plan a better approach at present.  

I stopped to get gas recently in West Virginia on a return trip from a geology meeting and noticed it was $2.18 per gallon and a note on the pump that said the total includes about 54 cents of taxes, 36 cents being state taxes and 18 cents being federal taxes. 54 cents makes up about ¼ or 25% of each gallon of gas at that price. If I were instead driving a plug-in electric car I might be getting up to 4 times the gas mileage in cost terms – about 100 miles per gallon compared to 25 mpg for my old SUV. It would cost me about $8.72 in gas (and $2.16 in taxes) to go 100 miles vs. the $2.18 in electricity (and paid maybe 8 cents in tax). My point is that when the real revolution in EVs comes which is predicted in the 2030’s the state and federal tax revenue provided by gasoline will drop significantly. What will take its place? Will electricity be taxed? Will other taxes come about to make up the difference? These are significant questions that exemplify how the profitability of the oil & gas industry benefits society. 

 

As energy is transitioned from fossil to renewable there will be loss of tax revenue and that will have to be taken into account. The state of Alaska shares tax revenue from oil production with its citizens, who also do not pay state income taxes. When the resources are gone or no longer used that will go away. Oil and gas companies are able to practice significant philanthropy due to their profitability. Renewable energy companies for the most part have yet to be considered large growth and profit companies. That could change in the future. The combining of Tesla and Solar City may be the start of better profitability if planned increases in EVs and renewable energy happen. Energy that is profitable can be taxed while energy that is not profitable must be subsidized. We tax fossil fuels but renewable energy taxes us. It is a “double whammy.” So when one replaces the other there is less profit combined with more subsidization. This makes the silly claims of renewables achieving “economic parity” with fossil fuels doubly silly. Now renewable energy does have some benefits other than lower carbon emissions such as no fuel costs, lower operation and maintenance costs, and lower pollution but the very high upfront costs are what limits it. 

Carbon pricing schemes of any sort have been called a tax. The Clean Power Plan (CPP) and the various state renewal energy percentage-time plans and standard portfolios have also been called taxes, since utility rate-payers will end up paying for their implementation. Some have noted that the attributed costs to implement such plans and portfolios do not take into account the required grid upgrades and significant required (non-renewable) backup power. In typical U.S. solar power economics about 37% of a system is directly subsidized, about 30% with an immediate tax credit and maybe 7% give or take, of gradual annual state subsidization for 10-15 years. One issue is that with subsidization of rooftop solar those who install get the credits but costs of state credits are paid evenly by all rate-payers and federal credits by all tax-payers. Rate-payers and tax-payers also foot the bill for the renewable sources forced to be built by the utilities to meet various standards. Rate-payers pay for upgrades and tax-payers pay for government subsidization. The people are the rate-payers and the tax-payers so it is a double “taxation,” albeit currently a small one per citizen. But that would change to a higher “taxation” per citizen if renewables were vastly expanded.

Recently, in the state of Wyoming, the state determined that they owned the wind as a resource, unlike other resources that are owned by the property owners. The current law which taxes wind production at $1 per MWh has only brought in $15 million in the last four years. It is widely seen as a retaliatory law against renewable energy, and since the fed tax credits pay the wind producers $23 per MWh, one can see it as a state recovering federal money. My guess is that it has slowed wind development in Wyoming. Some legislators want to tax it at up to $12 per MWh which would likely put wind out of business in the state, perhaps the goal in a state that is tops in the nation in coal production. Similar state measures such as the net metering charges for rooftop solar producers in Nevada have also countered renewable energy subsidization not with state taxes but with utility company fees that the utilities say help them pay their fair share for grid maintenance. These developments can be seen as retaliation for renewables incentives by countering with disincentives. My guess is that more of these battles will happen in the future. Renewables are nowhere near being competitive without subsidization and the hope is for high fossil fuel prices and a price on carbon which will further incentivize them by effectively disincentivizing fossil fuels by taxing them more and promoting their scarcity and depletion. But renewable companies sell a relatively carbon-free product that has ecological value, and though currently comparatively quite low in economic value, that value continues to have slow, small, incremental, but steady improvement.

The economic dependency of renewable energy on government subsidy gives it a socialistic aspect: the controls the means of production in a limited sense by providing subsidy. One might see it similar to a monopoly utility in the part where profits are guaranteed. Industries that provide necessary public services should be able to profit enough to continue to provide those services, says common sense. That is one component of how utilities are regulated and one might see subsidization of renewables and clean tech in a similar light – reasonable guaranteed profits in recompense for providing low-carbon energy. Cost is the biggest barrier to widespread renewables implementation and loss of tax revenue from competing fossil fuel sources is yet another component of that cost that might otherwise be overlooked.

   

References:

State Now Claims It Owns the Wind – Taxing Renewable “Out of Existence” – by Matt Agorist, @ thefreethoughtproject.com, Aug 14, 2016

Analysis: New York’s Clean Energy Standard Could Pad Utility Bills By $3.4B – by Robert Walton, in Utility Dive, Sept. 29, 2016