1

United States ‒ Progress Report on Fossil Fuel Subsidies

Part 1: Identification and Analysis of Fossil Fuel Provisions

A. Production Fossil Fuel Subsidies

There are a number of tax preferences, described below, available in the United States to producers of fossil fuels. The preferences below are all 

permanent provisions in the tax code. The annual revenue costs estimated for each provision are taken from the Mid-Session Review of the Budget of 

the United States Government, Fiscal Year 2015, which is available here: http://www.whitehouse.gov/omb/budget/msr. Provision descriptions are 

derived from the General Explanation of the Administration’s Revenue Proposal, sometimes referred to as the Treasury Green Book, which is 

available here: http://www.treasury.gov/resource-center/tax-policy/Pages/general_explanation.aspx

In total, the United States government has identified eleven Federal fossil fuel production tax provisions, as shown below. Combined, these 

provisions total USD 4.7 billion in annual revenue cost (nominal annual average figure based on the 10-year revenue estimate). The provisions are 

listed in order of greatest annual revenue cost to least.
2

Production 

Tax Provision

Fossil Fuel 

Targeted Description Analysis Expiration

Annual 

Revenue Cost

(million)

1

Expensing of 

intangible 

drilling costs 

Oil

Natural Gas

Taxpayers may elect to currently deduct 

intangible drilling costs (IDCs) paid or 

incurred with respect to the development 

of an oil or natural gas property located in 

the United States. For an integrated oil 

company that has elected to expense IDCs, 

30 percent of the IDCs on productive wells 

must be capitalized and amortized over a 

60-month period.

The expensing, rather than capitalization, of 

IDCs provides a tax preference to the oil and 

natural gas industry. Requiring capitalization 

of IDCs would place the oil and natural gas 

industry on a cost recovery system similar to 

that employed by other industries and reduce 

economic distortions. This provision, like 

other oil and natural gas preferences the 

Administration proposes to repeal, distorts 

markets by encouraging more investment in 

the oil and natural gas industry than would 

occur under a neutral tax system. This market 

distortion is detrimental to long-term energy 

security and is also inconsistent with the 

Administration’s policy of supporting a clean 

energy economy, reducing our reliance on oil, 

and cutting carbon pollution. Moreover, the 

tax subsidy for oil and natural gas must 

ultimately be financed with taxes that result in 

underinvestment in other, potentially more 

productive, areas of the economy.

None $1,495
3

Production 

Tax Provision

Fossil Fuel 

Targeted Description Analysis Expiration

Annual 

Revenue Cost

(million)

1

Percentage 

depletion for oil 

and natural gas 

wells

Oil

Natural Gas

Depletion is available to any person having 

an economic interest in a producing oil and 

natural gas property. There are generally 

two types of depletion – cost and 

percentage depletion. Cost depletion is 

limited to the taxpayer’s basis in the 

property, whereas percentage depletion is 

not limited by the basis, but is subject to 

other limitations. 

Percentage depletion for producing oil and 

natural gas property (15 percent rate) is 

available only to independent producers 

and royalty owners and is limited to 

average production of 1,000 barrels of oil 

per day or its natural gas equivalent. The 

percentage depletion deduction is further 

generally limited to the lesser of 65 percent 

of the taxable income before the depletion 

allowance or 100 percent of the taxable 

income from the property before the 

depletion allowance.

Percentage depletion effectively provides a 

lower rate of tax with respect to a favored 

source of income relative to cost depletion. 

Cost depletion computed by reference to the 

taxpayer’s basis in the property would place 

oil and natural gas producers on a cost 

recovery system similar to that employed by 

other industries and reduce economic 

distortions. See expensing of intangible 

drilling costs for further analysis of the effects 

of fossil fuel tax preferences.

None

.

$1,343 

Domestic 

manufacturing 

deduction for 

fossil fuels 

Oil

Natural Gas

Coal

Lignite

Oil Shale

A deduction is allowed with respect to 

income attributable to domestic 

manufacturing and production activities. 

For taxable years beginning after 2009, the 

manufacturing deduction is generally equal 

to nine percent of the lesser of qualified 

production activities income for the 

taxable year or taxable income for the 

taxable year, limited to 50 percent of the 

W-2 wages of the taxpayer for the taxable 

year. The deduction for income from oil 

and natural gas production activities is 

computed at a six-percent rate. 

This deduction is widely available and not 

targeted at fossil fuel industries. 

The manufacturing deduction, which is 

available to all taxpayers that generate 

qualified production activities income, 

effectively provides a lower rate of tax for 

income from certain activities, including the 

production of fossil fuels. See expensing of 

intangible drilling costs for further analysis of 

the effects of fossil fuel tax preferences.

None $1,250
4

Production 

Tax Provision

Fossil Fuel 

Targeted Description Analysis Expiration

Annual 

Revenue Cost

(million)

1

Two year 

amortization 

period for 

geological & 

geophysical

expenditures 

Oil

Natural Gas

Geological and geophysical expenditures 

incurred by independent producers in 

connection with domestic oil and natural 

gas exploration may be amortized over two

years. For integrated oil companies, these 

costs must be amortized over seven years.

The accelerated amortization of geological 

and geophysical expenditures incurred by 

independent producers provides a tax 

preference to the oil and natural gas industry. 

Increasing the amortization period for 

geological and geophysical expenditures 

incurred by independent oil and natural gas 

producers from two years to seven years 

would provide a more accurate reflection of 

their income and more consistent tax treatment 

for all oil and natural gas producers. See 

expensing of intangible drilling costs for 

further analysis of the effects of fossil fuel tax 

preferences.

None $305

Percentage 

depletion for 

hard mineral 

fossil fuels

Coal

Lignite

Oil Shale

Percentage depletion is available for coal 

and lignite (10 percent rate) and oil shale 

(15 percent rate). The percentage depletion 

deduction is generally subject to the 

alternative minimum tax at a 20 percent 

rate to the extent it exceeds the adjusted 

basis of the property. The deduction may 

not exceed 50 percent of the net income 

from the mineral property in any year.

Percentage depletion, rather than cost 

depletion, effectively provides a lower rate of 

tax with respect to a favored source of income. 

Cost depletion computed by reference to the 

taxpayer’s basis in the property would place 

these fossil fuel industries on a cost recovery 

system similar to that employed by other 

industries and reduce economic distortions. 

See expensing of intangible drilling costs for 

further analysis of the effects of fossil fuel tax 

preferences.

None $205 

Expensing of 

exploration and 

development 

costs for hard 

mineral fuels

Coal

Lignite

Oil Shale

Mining companies may elect to deduct 70 

percent of domestic exploration and 

development costs. The 30 percent of 

expenses that cannot be deducted must be 

capitalized and amortized over a 60-month 

period. Taxpayers may also elect to 

capitalize mine exploration and 

development expenses and amortize them 

over a 10-year period. If this election is 

made, the expenses will not be tax 

preference items under the alternative 

minimum tax.

The expensing of exploration and 

development costs relating to coal and other 

hard mineral fossil fuels provides a tax 

preference to the these fossil fuel industries.

Capitalization of exploration and development 

costs relating to coal and other hard mineral 

fossil fuels would place taxpayers in that 

industry on a cost recovery system similar to 

that employed by other industries and reduce 

economic distortions. See expensing of 

intangible drilling costs for further analysis of 

the effects of fossil fuel tax preferences.

None $68 
5

Production 

Tax Provision

Fossil Fuel 

Targeted Description Analysis Expiration

Annual 

Revenue Cost

(million)

1

Capital gains 

treatment for 

royalties of coal

Coal

Lignite

Royalties received on the disposition of 

coal generally qualify for treatment as

long-term capital gain and the royalty 

owner does not qualify for percentage 

depletion with respect to the coal. This 

treatment does not apply unless the 

taxpayer has been the owner of the mineral 

in place for at least one year before it is 

mined. The treatment also does not apply 

to income realized as a co-adventurer, 

partner, or principal in the mining of the 

mineral or to certain related party 

transactions. 

The capital gain treatment of coal and lignite 

royalties provides a tax preference to these 

fossil fuel industries. Treating royalties as 

ordinary income would place taxpayers in that 

industry on a cost recovery system similar to 

that employed by other industries and reduce 

economic distortions. See expensing of 

intangible drilling costs for further analysis of 

the effects of fossil fuel tax preferences.

None $53

Deduction for 

tertiary 

injectants

Oil Taxpayers engaged in petroleum extraction 

activities may generally deduct qualified 

tertiary injectant expenses incurred while 

applying a tertiary recovery method to 

increase the recovery of crude oil.

The deduction, rather than capitalization, of 

tertiary injectants provides a tax preference to 

the oil and natural gas industries. 

Capitalization of tertiary injectants would 

place the oil and natural gas industry on a cost 

recovery system similar to that employed by 

other industries and reduces economic 

distortions. See expensing of intangible 

drilling costs for further analysis of the effects 

of fossil fuel tax preferences.

None $10 

Exception to 

passive loss 

limitation for 

working 

interests in oil 

and natural gas 

properties

Oil

Natural Gas

Under normal rules, passive losses that 

remain after being netted against passive 

income generally can only be carried 

forward to offset passive income in future 

years. The exception permits losses from 

working interests in oil and gas properties 

to offset active income. The exception is 

only available if the working interest is 

owned in a way that does not limit the 

taxpayer’s liability. 

The special tax treatment of working interests 

in oil and natural gas properties provides a tax 

preference to the oil and natural gas industries. 

Eliminating the working interest exception 

would subject oil and natural gas properties to 

the same limitations as other activities and 

reduce economic distortions. See expensing of 

intangible drilling costs for further analysis of 

the effects of fossil fuel tax preferences.

None $8
6

Production 

Tax Provision

Fossil Fuel 

Targeted Description Analysis Expiration

Annual 

Revenue Cost

(million)

1

Enhanced oil 

recovery

(EOR) credit 

Oil Provides a 15 percent credit for expenses 

associated with an EOR project in the 

United States. An EOR project is a project 

that involves the use of one or more 

tertiary recovery methods to significantly 

increase the amount of recoverable crude 

oil.

The credit is phased out when the 

reference price of oil exceeds a statutory 

amount indexed to inflation.

The credit provides a tax preference to the oil 

and natural gas industries. See expensing of 

intangible drilling costs for further analysis of 

the effects of fossil fuel tax preferences.

None

Currently phased 

out due to high 

oil prices.

$0

Marginal wells

credit 

Oil

Natural Gas

Production tax credit for marginal wells or 

wells that have an average daily 

production of not more than 25 barrels per 

day. The credit is phased out when the 

reference price of oil exceeds a statutory 

amount indexed to inflation.

The credit provides a tax preference to the oil 

and natural gas industries. See expensing of 

intangible drilling costs for further analysis of 

the effects of fossil fuel tax preferences.

None

Currently phased 

out due to high 

oil and natural 

gas prices.

$0

1 Nominal annual average figure based on the 10-year revenue estimate, Table S-8, Mid-Session Review, Budget of the U.S. Government, Fiscal Year 2015. 
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B. Consumption Fossil Fuel Subsidies

There is one consumption subsidy that is funded by the Federal government in the United States. It is targeted at low-income households, and 

benefits are typically dispersed as a lump sum credit on a household’s utility bill. Because the program is a targeted transfer that helps low-income 

households obtain essential energy services and does not encourage wasteful consumption, this program is not proposed for phase-out. Further 

information about the program can be obtained at: www.acf.hhs.gov/programs/liheap and http://liheap.ncat.org/

Consumption 

Subsidy Description Analysis Expiration

Annual 

Revenue Cost

(million $)

Low Income 

Home Energy 

Assistance 

Program 

(LIHEAP)

A discretionary block grant awarded to States, 

territories, and tribes and tribal organizations to 

provide home heating and cooling1energy 

assistance to low-income households. Grantees 

may use a portion of their LIHEAP funds for 

low-cost residential weatherization services and 

for program administration.

Federal guidelines limit eligibility to households 

with incomes up to 150% of poverty or 60% of 

State median income2. The program typically 

reaches a small share (less than 20%) of eligible 

households.

In FY 2008, the average LIHEAP heating 

benefit (heating and winter crisis benefits 

combined) was $363, representing 43% of 

average home heating expenditures for LIHEAP 

households.3

LIHEAP assistance is targeted to vulnerable 

households (those with elderly, disabled or 

young children) and to the poorest (those with 

the highest energy burdens relative to their 

income). These households are targeted as they 

may face serious health and safety risks if they 

do not have adequate heating and cooling in 

their homes. 

In FY 2008, 32% of LIHEAP households had 

an elderly member, 32% included a disabled 

member, and 21% had a child under 5 years 

old.3 The average energy burden among 

LIHEAP recipient households was 17%, 

compared to 14% among all low-income 

households.4

Authorization expired 

at the end of FY 2007. 

Congress continues to 

provide annual

appropriations. 

$3,400 for FY 

2014

 

1 Home heating and cooling accounts for about 42 percent of residential energy expenditures among low-income households. Source: LIHEAP Home Energy 

Notebook for Fiscal Year 2009, page ii. 

2

States have the flexibility to set lower income limits, define “income,” and adopt other eligibility criteria within Federal guidelines (e.g. asset tests, living in nonsubsidized housing, elderly, young child in household, utility disconnection notice). 

3

From LIHEAP Report to Congress for Fiscal Year 2008: Executive Summary, page vi. FY 2008 figures are from the most recent publically available report to 

Congress on LIHEAP.

4

From LIHEAP Report to Congress for Fiscal Year 2008, page 20.
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Part 2: Implementation Strategies and Timeframes for Phase-Out of Fossil Fuel Tax Provisions 

A. Production Fossil Fuel Subsidies

For all of the production fossil fuel subsidies listed in Part 1, the Obama Administration’s Fiscal Year 2015 Budget proposal would eliminate the 

preferential treatment of fossil fuels in the United States tax code. However, the President is unable to unilaterally alter the tax code. The United 

States Congress must pass enabling legislation for the proposals to become law.

Production Tax 

Provision Strategy and Timeframe Implementation

Expensing of 

intangible drilling 

costs 

The Administration’s Fiscal Year 2015 Budget proposal would repeal 

expensing of intangible drilling costs and 60-month amortization of capitalized 

intangible drilling costs. Intangible drilling costs would be capitalized as 

depreciable or depletable property, depending on the nature of the cost incurred, 

in accordance with the generally applicable rules. The proposal would be 

effective for costs paid or incurred after December 31, 2014.

The United States Congress must 

pass enabling legislation for this 

proposal to become law.

Percentage depletion 

for oil and natural 

gas wells

The Administration’s Fiscal Year 2015 Budget proposal would repeal 

percentage depletion with respect to oil and natural gas wells. Taxpayers would 

be permitted to claim cost depletion on their adjusted basis, if any, in oil and 

natural gas wells. The proposal would be effective for taxable years beginning 

after December 31, 2014.

The United States Congress must 

pass enabling legislation for this 

proposal to become law.

Domestic 

manufacturing 

deduction for fossil 

fuels 

The Administration’s Fiscal Year 2015 Budget proposal would exclude from 

the definition of domestic production gross receipts all gross receipts derived 

from the sale, exchange or other disposition of oil, natural gas or a primary 

product thereof and of coal, other hard mineral fossil fuels, or a primary product 

thereof for taxable years beginning after December 31, 2014.

The United States Congress must 

pass enabling legislation for this 

proposal to become law.

Two year 

amortization period 

for geological & 

geophysical

expenditures 

The Administration’s Fiscal Year 2015 Budget proposal would increase the 

amortization period from two to seven years for geological and geophysical 

expenditures incurred by independent producers in connection with all oil and 

natural gas exploration in the United States. Seven year amortization would 

apply even if the property is abandoned and any remaining basis of the 

abandoned property would be recovered over the remainder of the seven year 

period. The proposal would be effective for amounts paid or incurred after 

December 31, 2014.

The United States Congress must 

pass enabling legislation for this 

proposal to become law.
9

Production Tax 

Provision Strategy and Timeframe Implementation

Percentage depletion 

for hard mineral 

fossil fuels

The Administration’s Fiscal Year 2015 Budget proposal would repeal 

percentage depletion with respect to coal and other hard mineral fossil fuels. 

The other hard mineral fossil fuels for which no percentage depletion would be 

allowed include lignite and oil shale to which a 15 percent depletion rate 

applies. Taxpayers would be permitted to claim cost depletion on their adjusted 

basis, if any, in coal and other hard mineral fossil fuel properties. The proposal 

would be effective for taxable years beginning after December 31, 2014.

The United States Congress must 

pass enabling legislation for this 

proposal to become law.

Expensing of 

exploration and 

development costs 

for hard mineral 

fuels

The Administration’s Fiscal Year 2015 Budget proposal would repeal 

expensing, 60-month amortization, and 10 year amortization of exploration and 

development costs relating to coal and other hard mineral fossil fuels. The costs 

would be capitalized as depreciable or depletable property, depending on the 

nature of the cost incurred, in accordance with the generally applicable rules. 

The other hard mineral fossil fuels for which expensing, 60 month amortization, 

and 10 year amortization would not be allowed include lignite and oil shale to 

which a 15 percent depletion rate applies. The proposal would be effective for 

costs paid or incurred after December 31, 2014.

The United States Congress must 

pass enabling legislation for this 

proposal to become law.

Capital gains 

treatment for 

royalties of coal

The Administration’s Fiscal Year 2015 Budget proposal would repeal capital 

gain treatment of coal and lignite royalties and would tax those royalties as 

ordinary income. The proposal would be effective for amounts realized in 

taxable years beginning after December 31, 2014.

The United States Congress must 

pass enabling legislation for this 

proposal to become law.

Deduction for 

tertiary injectants

The Administration’s Fiscal Year 2015 Budget proposal would repeal the 

deduction for qualified tertiary injectant expenses for amounts paid or incurred 

after December 31, 2014.

The United States Congress must 

pass enabling legislation for this 

proposal to become law.

Exception to passive 

loss limitation for 

working interests in 

oil and natural gas 

properties

The Administration’s Fiscal Year 2015 Budget proposal would repeal the 

exception from the passive loss rules for working interests in oil and natural gas 

properties for taxable years beginning after December 31, 2014. 

The United States Congress must 

pass enabling legislation for this 

proposal to become law.
10

Production Tax 

Provision Strategy and Timeframe Implementation

Enhanced oil 

recovery

(EOR) credit 

The Administration’s Fiscal Year 2015 Budget proposal would repeal the 

investment tax credit for enhanced oil recovery projects beginning after 

December 31, 2014.

The United States Congress must 

pass enabling legislation for this 

proposal to become law.

Marginal wells

credit 

The Administration’s Fiscal Year 2015 Budget proposal would repeal the 

production tax credit for oil and natural gas from marginal wells for production 

in taxable years beginning after December 31, 2014.

The United States Congress must 

pass enabling legislation for this 

proposal to become law.

B. Consumption Fossil Fuel Subsidies

The United States does not currently have any consumption fossil fuel subsidies that it intends to eliminate.

Part 3: Current Status of Phase-Out Strategies

A. Production Fossil Fuel Subsidies

No actions have been implemented to date on any United States production fossil fuel subsidies. The Unites States Congress must pass 

enabling legislation for phase-out of these subsidies to begin.

B. Consumption Fossil Fuel Subsidies

The United States does not currently have any consumption fossil fuel subsidies that it intends to eliminate.