Texas’s Oil and Gas Industry Is Defending Its Billions in Subsidies Against a Green Energy Push

On a spring morning more than three decades ago, Don Henderson took the microphone in a hearing room at the Texas Capitol and urged his fellow state senators to give the oil patch some more love. The Houston Republican, a lawyer closely allied with the fossil-fuel industry, had introduced a bill to slash the tax on natural gas wells deemed particularly tough to develop. “They can be huuuuuuge wells,” he told the finance committee.

If these wells were so alluring, why did taxpayers need to offer Texas drillers a handout? Because, Henderson explained, the wells were “expensive and chancy.” So much for the image of risk-taking and self-sufficiency that the state’s oil and gas industry liked to tout. The federal government had long given producers of these wells a tax break, but that was to be phased out the following year. Henderson insisted that the state act to keep its oilmen competitive. “We need to continue to give an incentive to Texas producers,” he warned, noting that the type of wells targeted by the subsidy accounted for “a large part of the natural gas reserves of this state.”

The committee unanimously approved the tax break, which was easily passed by the full Legislature. At first, the largesse spread slowly. In 1997 it applied to wells producing just 3 percent of Texas gas, costing the state a paltry $23 million. But then the fracking revolution hit, unleashing unimaginable quantities of gas from previously tough-to-crack rock. The many wells that could be tapped by the high-dollar technology qualified gas producers for a gusher of a handout. Of course, fracking ballooned not just expenses but also profits. By 2009, with the fracking frenzy in full swing, 61 percent of all the gas produced in Texas benefited from the tax break. Its cost to other state taxpayers that year, according to a University of Texas study: $1.5 billion, or $169 per household in the state.

Since then, continued tech improvements have made producing fracked gas ever cheaper. Yet tax breaks, like old soldiers, seldom die, and Texas’s so-called high-cost gas-well subsidy hasn’t even faded away. Passed in 1989, the year Madonna’s “Like a Prayer” hit the top of the charts and China’s Tiananmen Square protests made news, the subsidy for no-longer-so-hard-to-get Texas gas remains on the books. 

All of which made a bit rich the supposedly righteous fury aimed during this spring’s state legislative session at subsidies for wind and solar energy. That anger, expressed through a handful of bills intended to raise the costs of renewables, blamed the death and economic devastation wreaked by the statewide February blackouts on lapses in wind and solar power. Never mind that state inquiries have shown that the major culprit in crashing Texas’s main electricity grid was the freezing not of renewable energy equipment but of the system that distributes gas to fuel power plants. And never mind that Texas is well positioned to profit from renewables, thanks to its ample wind and sun, its investment in transmission lines to move clean electricity, and the applicability of much of its oil and gas expertise to new challenges such as installing offshore wind turbines and drilling for geothermal energy. 

Indeed, at least one of these attempts by legislators to punish wind and solar energy sparked return fire from some of the biggest names in capitalism—including Amazon, BlackRock, General Electric, Google, and Morgan Stanley. “Our companies have invested tens of billions of dollars in the state partly because of our confidence in Texas’ historically friendly business environment,” a group representing the titans, the Partnership for Renewable Energy Finance, wrote to state leaders in April. It rejected as “erroneous” the notion that the February disaster was the fault of renewable energy. 

In President Joe Biden’s Washington and in capitals across the world, officials are pushing to reorient subsidies from high-carbon to low-carbon energy. In Texas, the world’s tenth-largest economy, the country’s top carbon-emitting state, and a petri dish for the global energy transition, the subsidy shuffle is splitting big business. A segment of the state’s oil and gas industry—mainly large independent gas producers from West Texas—sees the rise of clean energy as a threat. But elsewhere—in, for instance, the offices of Houston’s business elite—a very different subsidy stampede is underway. 

Reasoning basically that if you can’t beat them you might as well join them, these executives want more support for cleaner alternatives, a category that includes not just renewables but also greener fossil fuels. “As Houston transitions, we have to think about what are the new drivers of the Houston economy,” said Brett Perlman, CEO of the business-friendly nonprofit Center for Houston’s Future. 

The question of how governments subsidize energy and how that should change involves existential stakes for the Texas economy. Counting subsidies is more of a philosophical exercise than a mathematical one. The answer turns mostly on what’s included in the tally.

Several studies say renewable energy is subsidized more highly than oil and gas, but they define subsidies narrowly. They typically include only tax breaks and other direct government payments and are limited to subsidies focused on electricity production. 

Yet a view taking hold from the White House to Wall Street and even, reluctantly, in the C-suites of certain Texas-based oil and gas giants contends that subsidies should be defined more broadly, or at least soon will be. According to this school of thought, the fossil-fuel industry benefits not just from tax breaks such as Texas’s provision for high-cost gas wells but also from not having to reimburse society for the myriad social and environmental costs of its products. Chief among those dispensations is the freedom to send skyward, without being taxed for them, the carbon emissions that scientists say are a primary cause of climate change. Economists have a word for such costs that should be accounted for but aren’t: externalities. Adding a carbon price to the calculation of energy costs renders fossil fuels much more expensive than they now appear to be.

Ten blocks north of the Capitol, in Austin, sits UT’s Energy Institute, which a couple of years ago undertook a comprehensive assessment of energy subsidies. The funders of the multiyear, multivolume deep dive spanned the ideological spectrum, from Houston-based oil giant ConocoPhillips to the Environmental Defense Fund. One report in the study concluded that federal subsidies for renewables and fossil fuels are roughly equal in absolute terms across the gamut of energy uses. Released in 2017, it projected that in 2019 direct federal energy subsidies would total $6.3 billion for oil and gas, $1.6 billion for coal, $4.7 billion for wind, $3.7 billion for solar, and $1.3 billion for nuclear. (UT hasn’t crunched new numbers since.)

But direct federal subsidies for renewables appear vastly higher compared to fossil fuels, UT concluded, when the count is narrowed in two ways: when it’s restricted to electricity and when it’s tabulated per unit of electricity cranked out. In part that’s because the biggest renewable sources, wind and solar, are used almost entirely for electricity. (Oil, by contrast, is used mostly for transportation, not electricity.) In part it’s because even though wind and solar have surged in popularity over the past fifteen years, they remain a small part of the nation’s electricity mix. The UT study projected that in 2019, for every megawatt-hour of electricity generated, natural gas use for power would get about $1 in direct federal subsidy, wind about $15, and solar about $43. (The average Texas household used 13.7 megawatt-hours of electricity in 2019.) But the UT researchers noted that wind and solar subsidies are quickly declining, both as renewables’ capacity balloons and as federal subsidy rates ramp down.

Uncle Sam isn’t the only source of energy subsidies, of course. A separate UT study, released in 2018, found that the state of Texas’s direct subsidies for fossil fuels far exceed those for renewables. For 2020, UT projected those subsidies as roughly $1.8 billion for oil and gas ($170 per household), $1 billion for wind ($104), and a comparatively small $19 million ($2) for solar. 

The state government’s biggest wind subsidy by far has been $6.9 billion spent on massive transmission lines to ferry power from West Texas wind turbines to the state’s big metros. The corridors through which the lines run are known as Competitive Renewable Energy Zones—or, in the lingo, CREZ. (I can’t utter the acronym without thinking of the rhyming name of a fruity, rectangular candy I used to pop out of a plastic dispenser as a kid.) Just as new housing subdivisions aren’t marketable without roads, fewer wind turbines would have sprouted across rural Texas, cranking out nearly 25 percent of the state’s electricity last year, without lines bankrolled by the CREZ program.

The UT study put the projected cost of CREZ at $976 million for 2019. That’s still less than the roughly $1 billion pegged as the figure that year for Texas’s high-cost-well subsidy for the gas industry.

A Level Playing Field? Not Exactly.

These numbers can seem dizzying. But the takeaway is unambiguous: for all the recent fulminating by critics of renewable energy that wind and solar are the swamp creatures of a subsidized political morass, so are oil and gas. Carey King, the assistant director of the UT Energy Institute, summed it up this way when he and I talked: “If you’re going to build something, then Texas likes you. If that something is wind farms, we helped wind farms by the CREZ lines. If you want to build oil and gas, Texas will help you with that too.”

And, yes, help comes not just through subsidies granted but also through charges not assessed on the social and environmental costs of fossil fuels. A study published in the prestigious Proceedings of the National Academy of Sciences in April by Matthew Kotchen, a Yale University professor, concluded that such “implicit” subsidies in the United States to fossil-fuel producers are prodigious, averaging $62 billion a year between 2010 and 2018. The study stated that for the median oil and gas producer at that time, the implicit subsidy accounted for a whopping 18 percent of the net income from its U.S. operations. “The results clarify what the domestic fossil fuel industry has at stake financially when it comes to policies that seek to address climate change” and other effects of pollution, noted the paper, which went on to name names, pinning specific implicit-subsidy sums on specific fossil-fuel producers. Kotchen told me he calculates that Irving-based ExxonMobil, the biggest U.S.-based oil company, in 2017 and 2018 averaged implicit subsidies equivalent to 36 percent of its annual net income from its U.S. operations. More than half of the fifty oil and gas firms the Yale paper called out by name are headquartered—or, in the case of foreign firms, have their U.S. bases—in Texas. 

Such calculations are useful to a Biden administration determined to fight climate change. In early April, as part of a tax plan undergirding its $2 trillion infrastructure investment package, the administration proposed axing “long-entrenched subsidies to fossil fuels” and shifting the money to more support for clean energy, including wind, solar, batteries, and CREZ-style long-distance, renewables-focused transmission lines. 

Fossil-fuel companies “benefit from substantial implicit subsidies” that “are concentrated within a handful of large firms,” the Treasury Department declared, citing the Yale study. Shifting subsidies to decarbonized energy, it projected, would boost federal tax receipts by $35 billion over a decade. “The main impact would be on oil and gas company profits,” it yawned, in what surely will go down in the annals of bureaucratic brush-offs. Yet the administration’s brash language contained a major caveat: the White House will cut only direct fossil-fuel subsidies and only as “consistent with applicable law.” The reality is that a president can trim just some subsidies; larger cuts require action from Congress, many of whose members represent constituents whose livelihoods depend on the oil and gas and coal industries.  

Which helps explain the furious tilting at windmills—and at solar panels and electric cars—during this spring’s session of the Texas Legislature. One bill sought to disqualify large-scale solar and wind farms from one of the state’s main economic-development tax breaks. Another bill aimed to order state government investments, including public-employee pension funds, to “divest” from any company deemed to have been “boycotting” the oil and gas industry, a slap against global asset-management firms that are pulling back from fossil-fuel producers, deeming them bad bets. And another bill would require wind and solar producers to pay to keep Texas’s main power grid stable amid fluctuations in the electricity supply—costs that, for generators using fossil fuels, are spread among the state’s energy consumers. The first of these measures hasn’t made it past a committee, but the divestment bill appears to be moving steadily toward passage, and the bill regarding grid stability costs has been approved by the Senate and could still be enacted before the session’s end.

One of the baldest attempts to kneecap renewable energy—that is, to indirectly subsidize fossil fuels—was a bill to add a penny-per-kilowatt-hour surcharge to electricity customers’ bills for power from any source except natural gas. “Since when does Texas try to make energy more expensive?” Michael Webber, a UT mechanical engineering professor who specializes in energy, wondered when he and I spoke recently. “That is very anti-Texan.” (The bill remains stuck in committee.)

For Texas, the opposition to wind and solar on display in the Capitol was “a remarkable legislative effort to shoot ourselves in the foot,” declared Webber, who in addition to his UT job is chief science and technology officer of the French diversified energy company Engie, whose North American headquarters is in Houston. He and his UT colleagues are preparing to release a study in the coming weeks charting how Texas could slash its net carbon emissions to zero by 2050, or by 2035 with even more aggressive measures. He declined to discuss details, saying the supercomputer his team is using hasn’t finished running its models. But, he said, “it’s clear the results will show the low-carbon path is cheaper” for Texas than preserving a high-emitting economy. The reason: his study factors in an estimate of the cost to society of the damage caused by carbon emissions.

How to accurately assess that societal cost is much debated. The answer informs governments’ decisions about what prices—in essence, taxes—to put on carbon emissions. Yet a growing segment of the Texas business establishment is including a carbon price in its projections—and pushing for additional, targeted clean energy support. It wants money not just for renewables but for technologies that could help the state’s oil and gas industry decarbonize, and thus destigmatize, both its fossil fuels and the infrastructure it’s built up to produce them. They include carbon capture, a way to shoot emissions underground for safekeeping instead of sending them into a warming atmosphere, and hydrogen, a way to transport clean energy that could leverage the industry’s existing tankers and pipelines. 

Carbon capture, hydrogen, renewables, and greener petroleum-based plastics constitute “four pillars of what could be the new economy of Houston over the next fifteen years,” said Perlman, the head of the Houston business group, whose conservative credentials also include a stint as an appointee to the state’s Public Utilities Commission by then-governor George W. Bush. But making that pivot won’t come cheap. As his group maps paths to decarbonize a region that’s a global hub for fossil fuels, it’s doing what Texas energy players have done since the discovery of oil at Spindletop. It’s angling for more subsidies.

Jeffrey Ball, formerly a Dallas-based Wall Street Journal reporter and editor, is a scholar-in-residence at Stanford University.

This article originally appeared in the June 2021 issue of Texas Monthly with the headline “Subsidy Shuffle.” Subscribe today.