Climate Change / Global Warming Discussion

[mspohr]

Accounting for real cost in determining profit is not a "tax break". I guess you've never run a business.

Here's a thorough analysis of fossil fuel subsidies. About $5 trillion a year.

Fossil Fuel Subsidies

Subsidies are intended to protect consumers by keeping prices low, but they come at a high cost. Subsidies have sizable fiscal costs (leading to higher taxes/borrowing or lower spending), promote inefficient allocation of an economy’s resources (hindering growth), encourage pollution...

www.imf.org

 

[Norbert]

If you stop penalizing the public, you will gain Republican support. You will also gain Republican support if you don't package green energy proposals with huge welfare programs.

You don't know how many people wish that were true.

It's not all black and white, considering some previous Republican presidents have done things in favor of electric cars and renewables. But the Trumpian position is much more one-sided, and the Senate follows.

Subsidies are met with the objection that they are "picking winners and losers", and such. That they are against a free market, and so forth. That it would be irresponsible to spend any large amount of money on a pointless matter (since it is a "hoax").

That's one way how the argument about the $20 billion tax break came into the larger discussion: By pointing out that Republican politicians claim to be against subsidies in principle, but then don't want to remove the oil subsidies (see also below).

All kinds of variations have been tried. With and without "packages". Without packages, the criticism was that such measures would destroy jobs, so the idea was to help any affected.

Recently I have been arguing for a separate measure just to support solar specifically.
I guess I would get your approval. So it's two of us now.

Accounting for real cost in determining profit is not a "tax break". I guess you've never run a business.

Maybe the Treasury Department has never run a business? This is an article from 1985 (not necessarily reflecting the latest understanding, just an example):

"Objectively speaking, the oil depletion allowance is just a tax break. But for more than fifty years no one has been able to be objective about it. To Texans, the depletion allowance is as much a part of the state’s heritage as the horse and the cowboy and the oilman himself."

and:

"After World War II, when the IRS began taxing income at rates as high as 90 per cent, the depletion allowance became a raging national controversy. Suddenly many of the most visibly wealthy people in the country were investing in oil wells purely to avoid high tax rates, and when that became known, there was an uproar in Congress."

and:

"Today the depletion allowance, in its much emasculated form, is the least important of the various oil-related tax breaks. And yet many people are unwilling to give it up. When the Treasury Department recently called for its elimination, the oil lobby in Washington trotted out all the old threats about how exploration would dry up if the allowance was taken away. That’s not remotely true, of course, but it hardly matters."

(Again, to avoid confusion, this is from 1985.)

Texas Primer: The Oil Depletion Allowance

Assailed by presidents, skewered by senators, decried by the New York Times, the oil depletion allowance has survived it all. It helps to have friends in high places.

www.texasmonthly.com

 

[Norbert]

By the way, interesting also this quote from above article from 1985:

"Whenever some East Coast senator rose in righteous indignation to denounce the oil depletion allowance, oil-state senators seethed, seeing in that act an attempt to keep Texans in their place."

Same kind of arguing as we have today, complaining about "righteous indignation" as malicious attempts to keep someone in place.

 

[cpa]

Depreciation and percentage depletion are not the same. Depreciation is the writing off of the cost of assets that will benefit for more than one accounting period. Recent tax legislation has permitted anywhere from 50% to 100% of the cost of acquiring personal property in the year acquired. (Real property is a different matter.) Depreciation on assets cannot exceed the cost basis.

Percentage depletion, on the other hand, is continuous from day one, generally at 15% of the value of the product extracted. If an oil well that was drilled in 1965 is still producing oil, the producer still gets to write off 15% of the product extracted. Maybe it is a stripper that is only pressed into service when the price of crude is high enough. Maybe it has been given a second life through hydraulic fracking. Regardless, this deduction can continue on indefinitely until the well is capped and abandoned. I really don't know how many 50+year old wells are out there, but I am sure that they exist. Moreover, the producers can still depreciate the personal property that is involved in the construction of the well plus intangible drilling costs.

Percentage depletion is an accounting fiction of the tax code. Generally, ordinary (book) depletion estimates how much material or ore is within the project, and a per-unit amount is determined based upon the estimated amount remaining versus the costs to acquire or establish the well or mine. This is subjective, this is an estimate, and is revised periodically based upon engineering and other studies.

Depreciable assets are subject to recapture (reported as income) of any depreciation taken when the asset is sold. So, while the tax code giveth, the tax code taketh away when you sell the asset. No such provision exists when oil wells are disposed of. There is no depletion recapture.

Personally, I have no problems with the tax code aligning with GAAP and permitting a depletion deduction for the estimated amount of petroleum and gas that will be pumped out of the ground with revisions as necessary. We are using a finite cost, and dividing by estimated production. This approach is similar to depreciation. Instead, we have an arbitrary percentage applied to revenue that can continue as long as something is pulled out of the ground.

To equate depreciation to percentage depletion is sophistry.

 

[Norbert]

Furthermore, as far as I can tell from the following report, the "depletion" allowance is just one of many subsidies, with $1.5 billion of the $20 billion:

"Excess of percentage over cost
depletion ($1.5 billion): allows
independent fossil fuel producers to
deduct a percentage of their gross
income from production, rather than
writing off the real cost reflecting how
much of the reserve has been depleted
as a result of the oil, gas, or coal
produced that year."

Emphasis is mine, the authors seems to disagree that this is about the "real cost".

Then there seem to be additional subsidies on the consumption side of fossil fuels:

"CONSUMPTION SUBSIDIES:
$14.5 BILLION ANNUALLY
U.S. federal and state governments provide
an estimated $14.5 billion annually in
consumption subsidies that reduce the cost
of fossil fuel energy use by end-users."

So together, actually $35 billion per year, in the US.

Described in detail in this report:

http://priceofoil.org/content/uploads/2017/10/OCI_US-Fossil-Fuel-Subs-2015-16_Final_Oct2017.pdf

EDIT:
This is somwhat summarized in this article:

America spends over $20bn per year on fossil fuel subsidies. Abolish them | Dana Nuccitelli

Dana Nuccitelli: While we need to leave fossil fuels in the ground, America is giving the fossil fuel industry billions to extract more

www.theguardian.com

...which also has this paragraph about the coal industry, written in 2018:

"And as David Roberts notes, federal policy is also propping up the coal industry. Were they forced to meet modern pollution standards, 98% of currently operating coal power plants would be unprofitable compared to an equivalent natural gas plant. Coal power plants only stay open through regulations allowing pollution exemptions, and by forcing taxpayers to pick up the climate change bill."

 

[patmurphey]

Depreciable assets are subject to recapture (reported as income) of any depreciation taken when the asset is sold. So, while the tax code giveth, the tax code taketh away when you sell the asset. No such provision exists when oil wells are disposed of. There is no depletion recapture.

Depreciated assets that that have no sale value generate no income. What is the value of a depleted oil well? The sophistry in all of the purported oil subsidy claims is remarkable. Oil companies are just businesses, mostly publicly held and the profits don't mysteriously disappear into Scrooge McDuck money bins. If they are so unfairly profitable maybe y=everyone should just buy their stock. The point remains that driving oil and gas prices up is counterintuitive to generating support for green energy.

 

[mspohr]

Depreciation and percentage depletion are not the same. Depreciation is the writing off of the cost of assets that will benefit for more than one accounting period. Recent tax legislation has permitted anywhere from 50% to 100% of the cost of acquiring personal property in the year acquired. (Real property is a different matter.) Depreciation on assets cannot exceed the cost basis.

Percentage depletion, on the other hand, is continuous from day one, generally at 15% of the value of the product extracted. If an oil well that was drilled in 1965 is still producing oil, the producer still gets to write off 15% of the product extracted. Maybe it is a stripper that is only pressed into service when the price of crude is high enough. Maybe it has been given a second life through hydraulic fracking. Regardless, this deduction can continue on indefinitely until the well is capped and abandoned. I really don't know how many 50+year old wells are out there, but I am sure that they exist. Moreover, the producers can still depreciate the personal property that is involved in the construction of the well plus intangible drilling costs.

Percentage depletion is an accounting fiction of the tax code. Generally, ordinary (book) depletion estimates how much material or ore is within the project, and a per-unit amount is determined based upon the estimated amount remaining versus the costs to acquire or establish the well or mine. This is subjective, this is an estimate, and is revised periodically based upon engineering and other studies.

Depreciable assets are subject to recapture (reported as income) of any depreciation taken when the asset is sold. So, while the tax code giveth, the tax code taketh away when you sell the asset. No such provision exists when oil wells are disposed of. There is no depletion recapture.

Personally, I have no problems with the tax code aligning with GAAP and permitting a depletion deduction for the estimated amount of petroleum and gas that will be pumped out of the ground with revisions as necessary. We are using a finite cost, and dividing by estimated production. This approach is similar to depreciation. Instead, we have an arbitrary percentage applied to revenue that can continue as long as something is pulled out of the ground.

To equate depreciation to percentage depletion is sophistry.

Depreciation applies to capital goods which the business has purchased.
Depletion is an accounting fiction. It is based on the value of the oil which is pumped out of the ground, not on the "purchase cost" of the oil reserve.
In other words, oil companies get a generous tax deduction for something that they didn't purchase. It's free money.

 

[Norbert]

The point remains that driving oil and gas prices up is counterintuitive to generating support for green energy.

Insofar as you are saying this in the context of the discussing the fossil fuel subsidies of $20 billion or $35 billion per year :

These subsidies are paid for by the taxpayer. Which means that removing them might increase oil prices a bit, but at the same time it reduces the burden on the taxpayer. They are an advantage for those who use more oil than the others (and for the oil companies themselves), and a disadvantage for those who use less oil. Those who use less oil have to pay for those who use more oil. That's just wrong.

What if, for example, those $35 billion per year were used for EV rebates? In 2021 in the US, about 630,000 EVs plus plug-in hybrids were sold.
So that would have been $55,555 per vehicle in rebates. In other words, many electric cars would have been for free.

 

[patmurphey]

Tax accounting measures for calculating profit for taxing is not money "paid" by the taxpayer. You don't tax gross income, you tax net income. The "magical" money that you all think you are entitled to is property of the corporations and therefore shareholders and does mysteriously disappear into "money bins". It is used for general corporate purposes or paid as dividends. If these mystical profits were so huge the stock in those companies would be through the roof.

The money remains in the economy rather than for the government to use. Until renewable energy is in place and electrification of transportation has made significant progress, we need viable and efficient fossil fuel companies to satisfy energy needs without unfair pricing or worse dependence on hostile foreign entities.

 

[RSpanner]

So, again, why do oil companies need huge subsidies when their profits are also gigantic?

 

[mspohr]

Tax accounting measures for calculating profit for taxing is not money "paid" by the taxpayer. You don't tax gross income, you tax net income. The "magical" money that you all think you are entitled to is property of the corporations and therefore shareholders and does mysteriously disappear into "money bins". It is used for general corporate purposes or paid as dividends. If these mystical profits were so huge the stock in those companies would be through the roof.

The money remains in the economy rather than for the government to use. Until renewable energy is in place and electrification of transportation has made significant progress, we need viable and efficient fossil fuel companies to satisfy energy needs without unfair pricing or worse dependence on hostile foreign entities.

Stop unfair fossil subsidies

 

[Norbert]

Insofar as their business models depend to such a degree on CO2 and other forms of pollution, the fossil fuel companies are operating on borrowed time. They are not genuinely, independently "entitled" to anything.

 

[cpa]

Depreciation applies to capital goods which the business has purchased.
Depletion is an accounting fiction. It is based on the value of the oil which is pumped out of the ground, not on the "purchase cost" of the oil reserve.
In other words, oil companies get a generous tax deduction for something that they didn't purchase. It's free money.

A nuanced difference between percentage and cost depletion is warranted, mspohr. You are correct that percent depletion is a tax accounting fiction. On the other hand, cost depletion is based upon the cost to acquire X units of extractable product. If a company pays $1 million for an estimated 100,000 troy ounces of gold, then for each ounce of gold that is mined, they can deduct $10. The units are estimates, so are revised from time-to-time.

 

[patmurphey]

You are correct that percent depletion is a tax accounting fiction...

Your word not mine, method of accounting would be more appropriate.

The debate here entirely misses the point, devising ways to increase the cost of doing business in fossil fuels, ergo cost to customers, is totally counterproductive to garnering support for green energy.

 

[cpa]

Depreciated assets that that have no sale value generate no income. What is the value of a depleted oil well? The sophistry in all of the purported oil subsidy claims is remarkable. Oil companies are just businesses, mostly publicly held and the profits don't mysteriously disappear into Scrooge McDuck money bins. If they are so unfairly profitable maybe y=everyone should just buy their stock. The point remains that driving oil and gas prices up is counterintuitive to generating support for green energy.

You are correct that fully depreciated assets that are scrapped have no sale value. I doubt that a 20-year-old forklift that Chevron has will be sold for anything other than scrap. But Chevron will decide to sell off assets on occasion when they have outlived their useful purpose to the company (if they have value) or if they have constructed newer equipment to take their places. I suggested above not to conflate depletion with depreciation. Maybe that depleted well is like the forklift. Maybe it is like the cavernous areas beneath parts of Southern California that ran its natural gas supplies out in the '60s, instead. Today the Gas Company stores product in these large areas under long-term leases. Cheaper for a business to pay annual rent instead of constructing ugly storage facilities in areas where real estate is pricey.

Businesses exist solely for themselves. They will decide what to do with all their profits and excess cash. If dividends are paid, they are a tiny fraction of their profits in dividends. So, from that perspective, I agree, that money gets recirculated in the economy. But companies also pay down debt and repurchase their stock to increase market value. Those transactions do not directly stimulate the economy. They merely transfer funds without an exchange of tangible property.

I think the point is that what is sauce for the goose is sauce for the gander. If it is important to subsidize fossil fuel companies so that the unwashed masses can afford to drive cars and heat homes, then it is equally feasible to offer alternate methods of providing means for locomotion and heat.

The point is to let the market decide which method of producing electricity and fuel is better. But the "free" market is not so free with billions of dollars in government breaks for the oil and gas industry.

 

[Norbert]

The debate here entirely misses the point, devising ways to increase the cost of doing business in fossil fuels, ergo cost to customers, is totally counterproductive to garnering support for green energy.

Would you then welcome subsidies of $70 billion per year, or more, for renewables and electric cars?
(This amount is meant for the sake of discussion, 70 being 35 + 35, not actually my idea for a proposal.)

 

[Norbert]

The point is to let the market decide which method of producing electricity and fuel is better. But the "free" market is not so free with billions of dollars in government breaks for the oil and gas industry.

And not without pricing in the indirect costs of climate change and the loss in quality of life.

 

[Norbert]

Percentage depletion is an accounting fiction of the tax code.

Wikipedia describes this concisely: with "percentage depletion", unlike with "cost depletion",
"claiming the allowance makes it possible to write off more than the whole capital cost of the asset.""
and
"It is possible under this scheme for the total deductibles (or indeed the annual deductible) to exceed the original capital investment."
Does sound like "fiction".
Hence, I guess, the term "Excess of percentage over cost depletion ($1.5 billion)", that I quoted above from that report.

 

[Norbert]

You can disagree or consider it FUD much like AOC's FUD that the world was going to end in 12 years.

I just found what you were talking about. I then looked up the original video. I have to tell you, it was an obvious exaggeration especially for anyone slightly familiar with IPCC reports or climate science (like me). These well-known deadlines (so to speak) often come in a form like "in nnn years we have to reduce CO2 emissions by x percent in order to stay below y degrees Celsius". They don't actually talk about the end of the world. It was also obvious from the direct context in that video. AOC happens to be one of the few politicians who are kowledgable about climate science, in a way that I think should be appreciated no matter your political persuasion.

In that case, she was in a sense making fun of herself, but FoxNews was happy to miss that and make it a cornerstone of their climate change reporting, along with references to Al Gore and Bill Gates using airplanes. (Which might be what prompted Greta to make a point of crossing the Atlantic by sailing boat.)

 

[patmurphey]

...Businesses exist solely for themselves...

Ahh, the myth of the business entity that doesn't consist of thousands of people and investors working and contributing to the greater good to profit and/or earn a living in a market economy supported by capital investment.