Subsidyscope

Energy

Regulations in the Energy Sector

The federal government provides subsidies to the energy sector through regulations.1 While the subsidies created by some individual regulations have been estimated, unfortunately there is currently no systematic or comprehensive identification and quantification of regulatory subsidies. However, it is evident from the examples presented below that regulatory requirements can dramatically influence specific energy markets by providing large benefits to particular producers or consumers. This section describes a few energy-related regulations and the subsidies they provide. The regulations presented here do not exhaust all the regulations that provide energy subsidies but are intended to illustrate how regulations may significantly impact energy markets.

Oil and Gas Royalty Relief

The U.S. Department of the Interior (Interior) is required by law to ensure that "the United States receive fair market value of the use of public lands and their resources unless otherwise provided for by statute."2 Thus, companies producing oil and natural gas from wells on Interior land or in Interior-administered waters of the outer continental shelf are required to pay the federal government royalties based on a percentage of the value of the petroleum products they extract and sell. Federal royalties are typically in the range of 12.5 percent to 18.75 percent and, in total, result in revenues in the billions of dollars a year.3 In 2007, for instance, the United States collected approximately $9 billion in royalties from oil and gas production wells.4

Notwithstanding the legal requirement that the United States be fairly compensated for the use of its resources, various laws authorize the Secretary of the Interior to reduce the amount of royalties companies would otherwise pay for extracting oil and gas from Interior-administered property.5 The reduction in royalties, also known as royalty relief, is intended to promote domestic oil and gas production, thereby reducing oil and gas imports. The authority to provide royalty relief is executed through regulations promulgated by Interior.

Government estimates of royalty relief in some areas indicate it can be in the billions of dollars every year. For instance, in 2008 the Government Accountability Office (GAO) estimated the cost of royalty relief for deep water areas in the Gulf of Mexico from 1996 to 2000 to be between $21 billion and $53 billion.6

However, demonstrating the complexity of regulatory subsidies, it may be impossible to estimate just how much of these forgone revenues are a subsidy. The federal government auctions off the right to develop oil and gas fields. When companies bid on the right to explore and develop a field, they do so with the expectation that they may receive royalty relief in the future. The higher the expected royalty relief, the higher the bid the company is willing to offer. Thus, as CBO points out, “[o]ver the long run, net receipts to the government might not change much.”7 Royalty relief may only create a positive subsidy if the actual royalty relief eventually provided to the company exceeds the company’s expectations at the time they made their bid.

The Renewable Fuel Standard

The Renewable Fuel Standard (RFS) program provides a subsidy within the energy sector. The RFS mandates that a minimum volume of transportation fuel sold in the United States come from renewable sources.8 This legal requirement is implemented through regulations issued by the U.S. Environmental Protection Agency (EPA).9 Specifically, the law establishes three categories of renewable fuels (cellulosic biofuel, biomass-based diesel and advanced biofuel) with minimum annual volume requirements for each category ramping up to an overall requirement that at least 36 billion gallons of renewable fuel be blended into gasoline and diesel fuel by 2022.10 In addition, each category of fuel must meet certain greenhouse gas emission standards.11 The stated goals of the program include reducing reliance on oil and encouraging the development of domestic renewable fuels that may decrease greenhouse gas emissions.

To the extent the RFS mandate results in greater demand for renewable fuels (predominantly ethanol) and biofuel feedstocks (predominantly corn, soybeans and switchgrass), the RFS regulations provide a subsidy to renewable fuel producers and farmers who grow the feedstocks. Quantifying the value of these subsidies is difficult to do with accuracy given the uncertainty of fuel prices, production technology and crop yields over the next decade. Nonetheless, a 2010 EPA analysis estimates that the RFS program will boost farm income alone by approximately $13 billion through 2022 (in 2007 dollars).12

Environmental Response and Cleanup

Energy development and production activities, particularly the extraction of coal, uranium and oil, can result in environmental harm that, in some cases, is cleaned up by the federal government without compensation from the company that caused the harm. A number of programs, implemented through regulation and funded by the federal government, fit into this category. Such programs include, but are not limited to, the Office of Environmental Management (U.S. Department of Energy),13 Superfund14 and abandoned mine reclamation.15

In some cases the cost of cleanup is at least partially borne by the energy sector even if the responsible party does not bear the full cost of cleanup. For instance, federal grants to states for reclaiming abandoned coal mines are funded through fees paid by existing coal companies. Likewise, a tax on oil has been used in the past to help fund Superfund cleanups. Nonetheless, to the extent that fees, taxes and other revenues collected by the federal government from the energy sector do not cover the cost of federal response and cleanup from energy activities, the difference represents a subsidy to the energy sector.

  1. See section B.1. of Subsidyscope’s methodology for a brief description of regulatory subsidies. Some argue that a government subsidy occurs when the government fails to correct problems through regulations resulting in certain goods or services being under-priced. For instance, they argue that a government’s failure to adequately regulate greenhouse gas emissions results in coal being under-priced; resulting in a subsidy for coal companies. Subsidyscope does not take this approach. In practice, it would be very difficult to identify and measure under-regulated market failures. Deciding the appropriate level of regulation is a central function of government. Subsidyscope makes no judgment regarding whether a particular activity or market is over- or under-regulated.
  2. "Federal Land Policy and Management Act." U.S. Code 43, Section 1701(a)(9). 2007 ed., pg. 472. See also "Outer Continental Shelf Lands Act." U.S. Code 43, Section 1344(a)(4). 2007 ed., pg. 307.
  3. Government Accountability Office (GAO). “Mineral Revenues: MMS Could Do More to Improve the Accuracy of Key Data Used to Collect and Verify Oil and Gas Royalties.” July 2009. p. 3, Footnote 1.
  4. GAO. "Oil and Gas Royalties: The Federal System for Collecting Oil and Gas Revenues Needs Comprehensive Reassessment." September 2008, p. 1. There is some evidence that existing royalties and other compensation may be insufficient to fully compensate the United States. In 2007 the GAO reported that the U.S. federal government “take” from deepwater wells in the Gulf of Mexico was lower than 29 of 31 other similar international and state fiscal systems analyzed. See: GAO. "Oil and Gas Royalties: A Comparison of the Share of Revenue Received from Oil and Gas Production by the Federal Government and Other Resource Owners." Report No. GAO-07-676R. May 1, 2007, p.3.
  5. Such authority is provided by the Outer Continental Shelf Lands Act, as amended, the Deepwater Royalty Relief Act of 1995, and the Energy Policy Act of 2005. The corresponding regulations can be found at: Relief or Reduction in Royalty Rates. Code of Federal Regulations. Title 30, Section 203 (2009).
  6. GAO. "Oil and Gas Royalties: The Federal System for Collecting Oil and Gas Revenues Needs Comprehensive Reassessment." September 2008. p. 6.
  7. Congressional Budget Office. "Letter to Senator Ron Wyden from Donald B. Marron." March 15, 2006. p. 3.
  8. "Renewable Fuel Program." U.S. Code 42, Section 7545(o). 2007 ed., pg. 1864-1867, as amended by Section 1501 of the Energy Policy Act of 2005 and Subtitle A of Title II of the Energy Independence and Security Act of 2007.
  9. U.S. Environmental Protection Agency (EPA). "Fuels and Fuel Additives: Renewable Fuel Standard (RFS)." Last Updated: July 07, 2010.
  10. The volumetric requirements were increased to these levels by paragraph 202(a)(2) of the Energy Independence and Security Act of 2007.
  11. Section 202(c) of the Energy Independence and Security Act of 2007 amended the greenhouse gas requirements such that the Administrator of the Environmental Protection Agency may change the requirements under certain circumstances.
  12. EPA. "Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis." EPA-420-R-10-006. February 2010. Table 5.5-1, p. 967.
  13. U.S. Department of Energy. "Office of Environmental Management (EM)." Last Updated: July 9, 2010.
  14. EPA. "Superfund: Cleaning up the Nation's Hazardous Wastes Sites." Last Updated: May 18, 2010.
  15. Office of Surface Mining Reclamation and Enforcement. "Reclaiming Abandoned Mine Lands: Title IV of the Surface Mining Control and Reclamation Act." Last Updated: February 26, 2010. U.S. Department of the Interior.

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