Adam N. Michel
You’ve probably heard the claim that fossil fuels are heavily subsidized by the federal government. The Biden administration estimated there were at least $35 billion of fossil fuel subsidies in the tax code alone. Elon Musk recently expressed a similar sentiment, insinuating that oil and gas receive subsidies comparable to those received by electric vehicles and solar.
This common refrain simply doesn’t hold up. Official government data show that renewables are subsidized 30 times more than fossil fuels. Most of the subsidies are in the tax code, where 94 percent of the fiscal cost goes to green energy technologies. And even this breakdown is overstated. Most of what critics label as fossil fuel subsidies are standard tax treatments available to many industries.
In reality, the claim that fossil fuels are heavily subsidized simply doesn’t withstand scrutiny. While a few narrow subsidies exist and should be eliminated, the real outlier in the tax code isn’t fossil fuel subsidies but the scale of preferential treatment granted to renewable energy technologies.
Fossil Fuels Are Subsidized the Least
The US Department of Energy’s Energy Information Administration (EIA) tallies all federal energy subsidies, including direct expenditures, tax expenditures, research and development, and loan guarantees. The result? Fossil fuels received the smallest share of federal subsidies on every metric.
In 2022, fossil fuels (coal, natural gas, and petroleum liquids) received $3.2 billion in federal support (11 percent of the total), compared to nearly $15.6 billion for renewables and nuclear (54 percent). Figure 1 also reports spending on conservation and end use, which make up the remaining 35 percent and are not distributed to specific energy sources.
The subsidies are even smaller when scaled by the energy produced by each source. By this measure, renewables and nuclear are subsidized at a rate 19 times higher per unit of energy produced than coal, oil, and natural gas. Looking at renewables alone, the subsidy is 30 times larger than for fossil fuels. It is likely that fossil fuels received a larger share of subsidies before recent federal spending; still, when scaled by electrical consumption, average federal energy incentives for renewables were about 6 times larger than for oil, gas, and coal between 1950 and 2016.
The Real Subsidy Story Is in the Tax Code
The tax code is where most federal energy spending happens. About 77 percent of all the EIA-tabulated subsidies come from tax provisions. The tax code provides 90 percent of the oil and gas subsidies and 98 percent for renewables.
According to the US Treasury Department’s Office of Tax Analysis, the federal government is projected to forego nearly $1.2 trillion in revenue over the next 10 years due to energy-related tax provisions. Of that total, 94 percent goes to renewable energy and clean technologies (Figure 2). The remaining 6 percent includes provisions that benefit fossil fuels. For a more thorough accounting of the renewable subsidies in the tax code, see “The Budgetary Cost of the Inflation Reduction Act’s Energy Subsidies.”
However, most fossil-related tax expenditures are not subsidies in the traditional sense. They reflect standard tax treatment available to many other industries, including renewables. (Read more about different definitions of tax expenditures here.) On the other hand, most non-fossil fuel tax subsidies are distortionary tax credits providing spending-like subsidies.
The following three tables list the 16 fossil fuel tax provisions that the Biden administration proposed changing in its FY2025 budget, along with the carbon capture credit, which primarily benefits fossil fuel producers. The total fiscal cost of these provisions is larger than reported in Figure 2 because the official Treasury tax expenditure report does not classify many of the Biden-proposed changes as subsidies. The tables include a short description of each provision, its fiscal cost, and an assessment of whether it qualifies as a true subsidy.
Non-neutral credits to repeal. Three provisions are non-neutral subsidies and should be repealed. These include credits that directly incentivize fossil fuel production or usage.
Expensing and percentage depletion. Five provisions allow immediate or accelerated deductions for investments like drilling or development costs. Similar treatment exists for many clean energy investments, and under Sections 168 and 179 of the tax code, businesses across the economy can fully deduct most capital investments (except structures, subject to phaseout under current law). Any disparity here should be fixed by expanding full deductions to all industries, not by repealing proper treatment for fossil fuels.
Two percentage depletion provisions allow small, independent oil and gas producers (not large, integrated firms) to deduct a fixed percentage of gross income. Similar treatment is available in other extractive industries. The better tax policy would allow full expensing of acquisition costs. The Tax Foundation explains that, compared to expensing, it’s unclear if percentage depletion is a relative subsidy or penalty, as it can allow total deductions greater than or less than the original cost.
Excise taxes and other proper tax treatment. Two provisions exempt certain crude sources and exports from oil spill and Superfund excise taxes. Whether justified or not, the exemptions don’t preference fossil fuels over renewables, since the excise tax is a penalty relative to other energy sources.
The remaining provisions, including passive loss rules, capital gains on royalties, the master limited partnership (MLP) structure, and two international tax rules, reflect normal or desirable features of the tax code. While their selective application may benefit fossil fuels, the correct fix is to expand this treatment to other industries. Business losses should be fully deductible, royalty income from sales should face lower rates like other capital gains, and MLP-style pass-through treatment should be more broadly available (or better yet, implement full corporate integration). The international provisions are consistent with standard principles of cross-border taxation.
Critics of fossil fuel tax provisions are right about one thing: some forms of favorable tax treatment, like full expensing or MLP status, aren’t available to all energy types. But the answer isn’t to punish fossil fuels by denying proper tax treatment to industries that currently benefit. The right answer is to repeal the true subsidies targeted at all energy sources and ensure that neutral, pro-investment tax rules apply across the board.
Conclusion
The narrative that fossil fuels are massively subsidized by the federal government doesn’t match the data. Yes, some targeted provisions benefit oil and gas, but they are generally broadly available (or should be) or dwarfed by the tax preferences and direct support flowing to renewable energy. Regardless, true subsidies should be repealed. Supporting the repeal of fossil fuel subsidies doesn’t require exaggerating their size or significance.
There are certainly other implicit subsidies not discussed here, like the Strategic Petroleum Reserve (which Congress should sell). Also, regulatory subsidies such as the easier permit application process for natural gas wells compared to geothermal exploration, even though both involve drilling into the earth. By all means, permitting systems should be eased and equalized across economic sectors if they must exist at all (they shouldn’t exist).
Some argue that fossil fuels receive a subsidy because their environmental costs go unpriced. But this use of the term subsidy stretches it beyond accuracy. A lack of taxation is not the same as direct government support. By that logic, every untaxed externality in the economy would count as a subsidy, including environmental damage from solar panels, batteries, and other green infrastructure.
Fossil fuels also face innumerable regulatory penalties and compliance costs. From methane fees and climate disclosure mandates to emissions standards and permitting delays, the industry operates under heavier regulatory burdens than many others.
Policymakers should aim for tax neutrality, regulatory fairness, and a level playing field across all energy sources. That means repealing true subsidies and expanding neutral tax treatment for all energy sources. Let the best technologies compete on their merits.