Bishop Hill Valuing "subsidies"
Dec 4, 2014 Economics Energy: gas Energy: oil A couple of weeks ago, I mentioned the report by the Overseas Development Institute and Oil Change International, which claimed implausibly that the UK was delivering considerable subsidies to the oil industry.
Since then, I have been having a useful exchange of emails with Sam Pickard, one of the report's authors in which I attempted to understand how these figures had been arrived at. Sam pointed me to the section in the report on definitions of subsidies (p.23-27), which turns out to be four pages of masterly obsfuscation in which they never really quite get round to explaining how they define a subsidy.
Interestingly, the authors do note that the OECD definition:
Estimates. In a number of cases, a national subsidy can be identified but the specific subsidy value has not been published by the national government or independent research institutions. In this case, the total national subsidy values for exploration are likely to be underestimates as the values for these subsidies are not included.
Comparing countries. Caution is required in direct comparison of national subsidy values between countries. As the OECD emphasises in its Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels, a significant number of subsidies take the form of tax expenditures that are calculated using a country’s benchmark tax regime, which can vary widely by country (OECD, 2013).
The wording doesn't quite make sense, but I think what this is trying to say is that estimates of the value of subsidies are based on the country's benchmark tax regime. If so then it makes it quite clear that the ODI/OCI report authors knew exactly what they were doing when they decided that they were going to assess the value of the alleged subsidy relative to the double taxation rate that has been applied to the oil industry in recent years. Not good.
I had also seen it suggested that the report also counted as a subsidy tax deductions that would be seen as normal business expenditure and I came across some support for this idea on p.29:
...many subsidies that benefit fossil fuel extraction more broadly, like tax deductions for drilling and investment costs, also promote exploration activities...
I queried this with Sam, whose answer left me none the wiser:
[our definition] focuses on ‘foregone revenues that are otherwise due’
But by way of an example he referred me to a US Treasury analysis that spoke of allowing oil companies to write off intangible costs relating to drilling, something that it saids 'provides a tax preference to the oil and natural gas industry…[and]…distorts markets by encouraging more investment in the oil and natural gas industry than would occur under a neutral tax system'.
However, if you refer to the Treasury analysis, it says this:
The expensing, rather than capitalization, of [intangible drilling costs] provides a tax preference to the oil and natural gas industry.
Which then led me to a thought. How does the ODI/OCI report value the expensing rather than capitalisation of these intangibles? The benefit to the company of a million pounds expensed immediately rather than capitalised and written off over several years is the interest earned on an amount equal to the the tax rate applied to a million pounds.
They surely wouldn't have valued the benefit at a million pounds would they?
I asked the question of Sam.
And didn't get a reply. I chased him a few days later.
And still didn't get a reply.
Oh dear.
Reader Comments (45)
It sounds suspiciously like the argument is that oil companies are being subsidised with their own money.
Sam if you are reading this get a reply out and fast or be known as the author of obfuscation and worthless reports
"be known as the author of obfuscation and worthless reports"
Obuscation - yep, absolutely correct.
Worthless reports - 100% wrong! A report written to confirm what the commissioner wanted to hear, to support the concept that fossil fuels are heavily subsidised, so making subsidies for "renewables" acceptable as it's just levelling the playing field.
The authors are just more parasites feeding off us and contributing to The Green Blob.
The banality of the climate obsessed on display. Chilling.
So now we know why they don't use the OED definition:
"A sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low:" [My bold]
The report confused me a little.
It seemed to be an exercise in providing figures which could be used in later propaganda against fossil fuel companies. In brief, it simply lists all the places where money might be spent on extracting fossil fuels, and treats that as 'unreasonable investment', on the grounds that fossil fuels should be banned. I was surprised to see:
"... public finance from banks and financial institutions that amounts to another $16 billion per year..." (presumably investment?)
counted as a subsidy!
In particular, fossil fuel funding (which is mature, and extensive around the world) is compared with renewable funding which, though extensive for the benefit it provides, is not as huge as the established funding for all kinds of oil, gas and coal. This comparison is simplistic, and based on the unstated belief that the two energy sources are equal in capability. The recommendation is that all the money spent on fossil fuels should be withdrawn and given to the renewables industry, and the implication is that then we will have a 'properly balanced' energy strategy.
That proposal is laughable, and not supported by any evidence, beyond the simple statements that more money is spent on fossil fuels than renewables, and that fossil fuels are 'bad'.
So is Nato and it Arab Allies launching massive airstrikes in ISIS controlled Iraq and Syria against its newly erected wind turbines or are they using expensive Paveway Laser guided bombs against Islamic State Oil refineries and fuel supply trucks instead.
No one ever went to war over a windmill.because they,re useless.
A firm is most certainly subsidised when it receives more money from the exchequer than it is obliged to send.
Exxon paid $91.2 billion in taxes and duties to governments around the world in 2013 ($100 billion in the two years previously).
Name another entity that pays roughly $100 billion in taxes to the public purse.
Apple paid $14 billion, Google paid $2.2 billion.
Your Grace asked an embarrassing question when inquiring about the difference between expensing "intangible drilling costs" and capitalizing them (so as to depreciate them later).
I have yet to encounter a whinger who has the foggiest idea what those tax and accounting constructs actually mean.
Perhaps the reverse subsidies for decommissioning costs should also be accounted for. It was certainly a feature of the PRT regime that part of the reason for the high rate was that in effect government collected most of the abandonment reserve through tax - and got to use the money in the mean time - which is then paid out at the end of field life. That is why you now see months where the PRT tax take is negative - see the PRT data here:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/376864/20141112_Octmonthlyreceipts.xls
Part of the idea was to ensure that the reserve was kept in "trustworthy" hands.
Same old, same old.
Direct questions seeking specific, referenceable and factual information get ducked whenever they show up the blather.
But the blather rolls on.
Subsidised or not, oil companies make a huge net contribution to the economy of this, and many other, countries. The same cannot be said for renewables. Could a windmill and solar panel enthusiast explain how those energy sectors would prop up an economy the way oil and gas does.
'The only two certainties in life are Subsidies and Death'.
With apologies to Mark Twain..........
Its entirely reasonable to expense some drilling costs as many wells prove to be dry or uneconomic. There are two major types of drilling, That done during exploration is effectively a Research and Development activity. The capitalization comes in at such time as you invest in production facilities by drilling the production wells and laying the pipelines.
OT but see the article in todays "Times" that scientists with WWF connections decided to "make a case for banning some pesticides", by seeking, in advance, evidence to support such a ban.
Now where have we seen such non-scientific behaviour before?
BH -
As an accounting naïf, I confess that I don't understand "intangible drilling costs." The expenses of renting a drilling rig, salaries of the operators, etc. all seem quite tangible, and there wouldn't appear to be any question that these are current expenses to be deducted from income. Can you enlighten me by giving some examples of intangible costs?
Their definition of subsidies does not tally with the IMF's either
Energy subsidies are made up of both producer and consumer subsidies.
Producer subsidies arise when prices received by suppliers are above a benchmark price or when producers
make losses at the benchmark price.
Consumer subsidies arise when the prices paid by consumers are below a benchmark price
The benchmark price used to calculate subsidies is the international price adjusted for distribution and transportation costs
http://www.imf.org/external/np/fad/subsidies/pdf/note.pdf
Don also see today's posting at Tallbloke on Neonicotinoids and Bees. Step by Step Guide on getting a pesticide banned.
Not taking money from an enterprise is different to giving money to an enterprise. Simple.
One can consider any tax break taken by a fossil fuel company to be a subsidy of that company even when it applies to other types of companies.
The widely-respected Congressional Budget Office did a study of the subsidies available to US energy producers in 2011. They say 15% of subsidies currently went to fossil fuel energy and 68% to renewables, but that more subsidies went to fossil fuel before 2005. Since ethanol subsidies have dropped, these figures are now obsolete.
http://www.cbo.gov/sites/default/files/cbofiles/attachments/03-06-FuelsandEnergy_Brief.pdf
Earlier the Environmental Law Institute published a biased (and widely cited) study showing that far more subsidies went to the fossil fuel industry. That study included even the credit for foreign taxes paid as a subsidy, because royalties paid to foreign countries were formerly treated as taxes paid to foreign countries.
http://www.eli.org/sites/default/files/eli-pubs/d19_07.pdf
Unfortunately, the situation is not black-and-white. In the US, there still are (or were) tax breaks available for "non-conventional" fossil fuels (shale oil, for example) left over from the 20th-century "oil crises" that probably have assisted the resurgence of domestic energy production in the US. That resurgence, of course, was principally caused by oil at $100/barrel and new technology.
Oil industry subsidies?
First oil was overtaxed (maybe excised is a better word) as a luxury. When it became clearly an essential it was noted that it was very lucrative to government and therefore the extortion was continued. It was also observed to be very easy to collect, difficult to avoid, and a largely recession-proof source of revenue. Then through the seventies the tax was further hiked because supplies needed to be conserved. Everybody knew that we were rapidly running out of the stuff, after all, and the country needed strategically to eek out its supplies. Then as it gradually became clear that the supply of oil was rapidly INCREASING, the government could not do without the revenue, and so the hiked hiked tax remained. Then somebody suggested that burning oil caused global warming, which clearly demanded further drastic action, and so the government introduced the fuel tax escalator, and the hiked hiked tax was hiked. I'm not quite sure how much of my GBP1,23 per litre (GBP5,58/ imp.gal) of diesel this morning is taxation or duties of one sort or another, but it is certainly the great bulk of it. And then remember all the exploration and production licences North Sea companies have to buy from the Government, and production levies too.
Subsidies? Which country is the guy talking about? Not UK, surely..
(note to USA readers - yes, it really does cost that over here!)
I've found a lot of of confusion trying to get similar answers about subsidies.
The IEA says the UK doesn't subsidise the FF sector. The IEA's subsidy methodology is here http://www.iea.org/publications/worldenergyoutlook/resources/energysubsidies/methodologyforcalculatingsubsidies/
The OECD take a different approach:
This inventory marks a first attempt to comprehensively list the various direct budgetary transfers and
reported tax expenditures that effectively support fossil-fuel production or use in OECD countries. It may be seen
as a complement to the information on fossil-fuel consumption price subsidies that has been compiled by the
International Energy Agency (IEA). The coverage of this inventory departs, however, significantly from that of
the IEA estimates and from the lists of subsidies reported by some governments. The IEA uses the so-called
“price-gap” approach, which compares domestic fuel prices to an international reference price, in order to provide
one type of estimate of the extent to which different countries support the consumption of fossil fuels. This results
in most OECD countries not being covered since they tend to have domestic prices that are at (or due to taxes,
often above) market reference price parity. The price-gap approach may also not fully capture those measures that
support the production of fossil fuels (to the extent that such support is not reflected in domestic prices). http://www.oecd.org/site/tadffss/INTRODUCTION.pdf
The OECD admit ‘The scope of what is considered “support” is here deliberately broad, and is broader than some conceptions of “subsidy”’'
This shifting of goalposts allows green lobbyists to claim that lower rates of VAT -- a consumer 'subsidy', it is a subsidy -- is a fossil fuel subsidy.
Discussed in context at http://www.climate-resistance.org/2014/10/the-green-blob-in-academe.html
If you look at all taxes paid, alongslide all subsidies how do oil and gas compare against wind and solar? Having looked at a few examples for major oil companies such as Exxon not only do the NET taxes paid to the government exceed any subsidies they exceed the nominal corporate tax rate, and pay taxes at a higher rate than other major companies like Apple.
On Think Progress I found a headline figure of $70bn, the details showed this was over 10 years, so really $7bn / year, and included programmes like low income energy subsidies amongst other things.
Obama's 2012 campaign website accuses Romney of supporting $4bn in subsidies to oil companies, which I suspect excludes the low income energy subsidies.
The corporate income taxes paid by Exxon, Chevron & ConnocoPhillips were $58.9bn on earnings of $120.4bn, so a rate of 48.9%. Looking at the other 7 companies tax = $55.7bn, earnings = $204.5bn, so a rate of 27%.
Looking at the 2010 annual reports of the 20 most profitable U.S. companies the average income tax rate within the group was 25.4%.
From the 2012 annual report corporate income taxes aren’t the only taxes coming out of Exxon’s revenue, there are also sales taxes and duties that are taken before the EBIT figure. Total taxes and duties paid by Exxon Mobil are $99bn.
Dividends to shareholders were $10.1bn - much of which goes in to pension funds.
This suggest that not only are Exxon's taxes and duties massively greater than any "subsidies", but the government takes 10 times as much income from Exxon as the owners/shareholders (pension funds etc).
It should also be remembered that Osborne put up the Supplementary Charge by 12% in 2011. In overall terms taxation has increased on North Sea Oil under this govt
I like to point out in these debates that most - if not all - of your income is subsidised on these measures as you are not paying the top marginal rate.
I think it would be an excellent idea to tax windfarms on the same basis as oil fields. That is, they can write off their costs up front, and then be taxed at 60-80% on revenue less maintenance costs - with revenue being entirely market determined - no CFD guarantees, no ROCs.
If I agree with my mugger that he will only take 75% of what is in my wallet I could look at that he is giving me a 25% subsidy then?
‘worthless report’ , no given all the unquestioning press coverage it got and the credit the authors gained for writing it form those who share their outlook. Lies /BS and hype , nonsense , rubbish and many others words such word could be used to describe it . but not worthless which from the authors point of view its far from.
How much taxes are paid by windmill and solar companies?
In the meantime, our HEAVILY subsidised wind farms are providing a stonking 1% of UK electricity demand....
But I expect that sort of subsidy is alright...
Again, remove all of what the climate obsessed call subsidies from the fossil fuels industries. And also remove all taxes on their revenue, government royalty payments, and then do the same on for the so-calle drenewable industry: No subsidy, and no tax.
Let's see which industry is around in five years.
Let's see which industry is most missed by governments.
The people going on about subsidies for the oil industry are simply to be diplomatic redefining the meaning of subsidy to fit their agenda. In no way are they against subsidy if it pertains to their goals.
They know- unless blinded by ignorance or agenda- that the so-called renewables are incapable of supporting even their basic financial costs unless sustained directly by special pricing and tax payer largesse.
Andy D wrote "It sounds suspiciously like the argument is that oil companies are being subsidised with their own money."
Exactly. It's socialist economics 101. It goes something like this...When the government reduces your tax rate on your pay cheque, you are now receiving a subsidy, as your income is considered government property for tax purposes.
soooo, instead of subsidizing renewables why not decide to stop any subsidies?
the peoples who received subsidies for sure are the tax guys....may be , may be , it is the resaon why they love to subsidize...expecially if you add the money you can get through corruption from the people who may received subsidies..
Meanwhile Ed Davey is promising eve more eye watering subsidies will be paid out:
http://www.libdemvoice.org/ed-davey-mp-writesan-autumn-statement-for-more-green-energy-and-more-help-to-keep-energy-bills-down-43642.html
The Swansea tidal lagoon is in his sights so he can urinate energy bill payers' money up the wall at £305/MWh - the published CFD price for tidal energy - or about twice as much as offshore wind, and six times as much as fossil fuel power. Is this a subsidy record?
Actually, Hunter, I suspect a lot of 'grass roots' proponents really are that blind and ignorant. The people who build, sell and operate the 'renewables' have less excuse, but even they don't need to know anything at all about the fossil fuel side of the equation while their own subsidies guarantee them a net profit.
If I was being kind to the politicians, I would say that they genuinely believed that renewable energy technology could, or had, reached critical mass. With a bit of inducement it would leave the launch-pad and set us all on the golden path.
Of course, a cursory analysis of energy 'densities' suggests that travelling to the moon in a hot air balloon is a more realistic proposition than powering our world with such devices.
The first thing to remember about the renewable industry , is that its a 'industry' therefore out to make money
Sam is quoted as saying
This sounds substantially like the previous claims of massive subsidies that rely on things like the difference between VAT on energy and VAT on other stuff. In short - that not taxing something as heavily as something else means the first thing is receiving a subsidy.
We don't generally consider children's clothes, books or basic foods to be subsidised in this way so why do it for fossil fuels?
Gareth,
You ask, "We don't generally consider children's clothes, books or basic foods to be subsidised in this way so why do it for fossil fuels?"
Only because the climate obsessed have not figured out how to project their inner angst to clothes, books or basic foods yet.
Is this not a bit like the "bedroom tax" argument? Money still flows to the recipient from the government but because it is slightly reduced some call it a tax.
If you define a subsidy as something that pays less tax than something else in the economy then by that definition all industry and commerce is being subsidised relative to the private oil companies, who clearly pay the heftiest taxes. But that would just be silly.
Much easier to leave the definition of a subsidy as 'cash from government' and a tax as 'cash to government' and just ignore all such iffy accounting tricks - they only get give a false picture and thereby encourage people into making the wrong decisions - No doubt the intention with this report.
Moreover since "over 80% of the world's reserves of oil and natural gas are controlled by national oil companies"*, then all of these so-called 'oil-industry-subsidies' from 2nd and 3rd world countries that greens like to quote, are actually more properly defined as welfare benefits - somewhat like the cold-weather heating allowance in the UK - or if you like, subsidies to the population, not industry.
*from http://en.wikipedia.org/wiki/Petroleum_industry
The main problem with most greens and greeny academics is that they work backwards from the desired policy effect to producing faked numbers and dubious assumptions to support that pre-conceived position. I'm not sure whether the mendacity or the innumeracy is more offensive.
If you are running a scam the whole idea is to obfuscate. Never answer a straight question. Don't do or say anything that is unequivocal. Just keep the scam running as long as possible to milk the mugs to the fullest extent.
If an oil company drills a dry hole (ie no hydrocarbons are found) then the hole has zero tangible value after drilling and no capital value. Therefore it can only be regarded as an expense and written off against tax immediately. You certainly cannot capitlise something with zero capital value.
If an exploration well is successful, it still may not be usable in production so in many cases a discovery well should still be written off as it has no asset value.
Any other approach would make a mockery of general accounting principals for industries.
Harold w
BP capitalises exploration and appraisal drilling costs as intangible assets. This is presumably because they have a potential well that is not in actual production. If the appraisal is negative, I presume the costs are written off straight away.
One, hmm, subsidy removed. :)
"UK Chancellor Abolishes Tax Breaks For Renewables Investors
Date: 06/12/14
Annabelle Williams, Investment Week
Renewable energy companies will no longer be able to give investors relief under venture capital scheme rules, George Osborne has announced in today's Autumn Statement.
The change will apply to renewable energy companies already "substantially benefiting" from other government support. This could mean companies already recieving subsidies will no longer benefit from tax breaks as well.
"In order to better target the tax reliefs, the government will exclude all companies substantially benefiting from other government support for the generation of renewable energy from also benefiting from tax-advantaged venture capital schemes," Osborne said.
The exception to this rule will be community energy generation undertaken by qualifying organisations – which could for example refer to local council schemes which encourage residents to take up solar energy."
http://www.thegwpf.com/uk-chancellor-abolishes-tax-breaks-for-renewables-investors/
the best would be to ask the commission for a Sankey diagram and relate it to the Sankey diagrams of overall government finances.
They can skip the blahblah to look good with on wimmin talk shows.
After that we can close the case.