When President Trump made a speech a few weeks ago to kick off his push for an overhaul of the tax code, he chose a telling backdrop: An oil refinery in North Dakota, a state that over the past decade exploded from backwater to boom town thanks to a massive spike in oil production.
“I want all of America to be inspired by what’s happened in North Dakota and the North Dakota example,” Trump said. Standing with him on the podium was Harold Hamm, the North Dakota oil billionaire who has helped shape Trump's views on energy. So when Trump said he wanted to “restore America’s competitive edge by passing tax cuts,” he seemed to have at least one particular industry in mind: oil.
When the Republican tax plan came out last week, it was short on details, leaving much of the nitty-gritty for Congress to hash out. It limits some benefits that oil companies traditionally rely on, such as deductions for interest payments that make it easier to raise money for expensive infrastructure like pipelines.
But the oil industry is still calling it a win, citing proposals that would make it easier for oil companies to recover their investments in exploration and to shield profits earned from drilling overseas, in addition to lowering the corporate tax rate to 20 percent.
The oil and gas producers lobby group, Independent Petroleum Association of America, called it a “positive step forward,” while the American Petroleum Institute said the reforms would “strengthen the U.S. energy renaissance.”
The tax blueprint also expands Trump’s reversal of Obama-era climate measures.
In 2009, President Barack Obama joined other Group of 20 leaders in a pledge to eventually phase out fossil fuel subsidies.
The GOP tax plan gives little indication of keeping that commitment — and that could have significant implications for U.S. oil production and the climate.
Already, the U.S. oil industry benefits from a dozen specialized subsidies adding up to about $4.6 billion per year, according to a 2015 review by the Obama administration. Among other things, the subsidies reduce the costs of labor and equipment involved in drilling — and shield some of the profits earned on the oil itself.
Those tax breaks and other subsidies don’t just help the industry a little bit. In many cases, they determine whether it’s even worth drilling in the first place, according to a study earlier this year from the Stockholm Environment Institute, a nonprofit research organization.
Without federal and state subsidies, nearly half of U.S. oil production — about 45 percent — would be unprofitable at current prices, the researchers found.
So, unless oil prices go rocketing up, reducing or eliminating those subsidies would likely lead to a significant reduction in oil production over time.
In other words, tax reform can help fight climate change — just not the kind of tax reform Trump and Republicans are proposing.
In a new study Monday in Nature Energy, SEI researchers looked at newly discovered U.S. oil fields that have not yet been put into production — all 800 of them.
The researchers found that about half of these undeveloped fields would never go into production, (assuming an oil price of $50 per barrel, close to where it is today) — if oil company tax breaks are taken out of the picture. The study is based on the current range of subsidies and doesn’t account for changes that could result from the new GOP plan.
But if the range of subsidies offered today remain, those new wells could produce up to 17 billion barrels over the next few decades, SEI found, which in turn would produce around six gigatons of carbon dioxide.
To meet the goal set out under the Paris climate agreement to keep warming “well below 2 degrees C above pre-industrial levels,” the United States can emit no more than 30 to 45 gigatons of CO2 between now and 2050.
So the oil produced as a result of subsidies could eat up 13 to 20 percent of the U.S. “carbon budget” — not that Trump, who pulled out of the climate agreement in June, seems intent on meeting the Paris targets.
“It’s very much underappreciated how these subsidies ultimately tilt the balance to increasing oil production and increasing CO2 emissions,” Peter Erickson, the study’s lead author, said in an interview.
The study found that if the price of oil were to climb above $70 per barrel, subsidies would have less impact on production because revenue would be high enough to justify drilling. But in that case, the subsidies just become an additional source of profit for oil companies — possibly not the best use of taxpayer dollars given that the tax plan could cost $2.2 trillion by 2027, according to the Committee for a Responsible Federal Budget, a watchdog group.
“These subsidies are really a lose-lose,” Erickson said.
The Republican tax proposal offers a vague promise to “modernize” tax rules that apply only to specific industries, presumably including oil.
But if the president’s enthusiasm for oil drilling in North Dakota is any indication, that reform seems unlikely to proceed in a way that will reduce the nation’s future carbon footprint.