We recently had nationally recognized energy finance expert Richard Caperton in to speak with us about Master Limited Partnerships (MLPs) - the advantageous tax structure that only the oil and gas industries currently get to use. As Caperton pointed out, MLPs don't have a "sunset date," but instead are "a permanent thing." And, as Caperton noted, "that’s a lot of the benefit" to the fossil fuel industries.
Now, a brand-new report by Doug Koplow of Earth Track (appropriately titled, "TOO BIG TO IGNORE: Subsidies to Fossil Fuel Master Limited Partnerships") quantifies exactly just how big of an advantage MLPs provide to the incumbent, highly-subsidized fossil fuel industries. The top-line numbers are eye-popping:
- "The market capitalization of fossil fuel MLPs reached an estimated $385 billion by the end of March 2013, up from less than $14 billion in 2000."
- "Related tax subsidies have been as high as $4 billion annually in recent years."
- "Using a variety of estimation approaches, we estimate that tax preferences for fossil fuel MLPs cost the Treasury as much as $13 billion over the 2009-12 period, more than six times the official estimates."
You'd think that numbers this large would have been noticed long before Earth Track's new report, but apparently not. Instead, according to report author Doug Koplow:
... few of the standard oversight mechanisms used to track federal tax expenditures seem to be picking up this subsidy. The U.S. Department of Energy’s (DOE) 2008 review of federal energy subsidies contains no mention of MLPs at all, despite running to more than 250 pages. Its earlier studies were no better. In fact, not until DOE’s most recent subsidy review (issued in 2011) did MLPs receive any mention at all – and even there only in response to significant Congressional pressure...
... The informational deficit is not limited to DOE. The Congressional Budget Office has conducted two reviews of energy-related tax expenditures (Dinan 2013; Dinan and Webre 2012). Neither includes subsidies from the MLP form.
All the more reason why this new report is so significant. Meanwhile, as if the eye-popping, bottom-line numbers for how much MLP treatment costs the U.S. taxpayer - and tilts the playing field towards the fossil fuel companies - weren't bad enough, the Earth Track report has this ominous news:
Proposed expansion of MLP eligibility to renewables risks disproportionate benefits flowing instead to the fossil fuel sector. Current efforts to expand MLP treatment to renewables (The Master Limited Partnerships Parity Act) are not necessarily a panacea for alternative energy. The expansion will reduce the likelihood that MLP’s tax exempt treatment will be ended for fossil fuel producers, allowing the rapid growth of tax-exempt fossil fuel MLPs to continue unchecked. This legislation also would open MLP-eligibility to power generation for the first time creating risks that this treatment will be extended from the current proposed set of recipients (biomass, solar, wind, geothermal) to all forms of power generation in coming years. This would disadvantage energy conservation, offset hoped for gains from the expansion in renewable sectors, and trigger very large tax losses to Treasury.
It doesn't seem to make any sense, does it? Yet as Richard Caperton pointed out when he spoke with us, fossil fuel companies are masters at "turning conversation around and making renewables less popular than they should be, especially on Capitol Hill." In other words, they're great at gaming the system -- to their own advantage of course. And it turns out that gaining MLP treatment for their industry - and then continually expanding it - is one of their greatest success stories in this regard. For instance, see the graphic below from the Earth Track report, for what we're talking about - "the expansion of the types of firms using the MLP structure over time, as well as a number of key organizational innovations."
The bottom line conclusion, according to this groundbreaking new report?
Special legislative provisions have allowed a select group of industries to operate as tax-favored publicly-traded partnerships more than 25 years after Congress stripped eligibility for most sectors of the economy. These firms, organized as Master Limited Partnerships, are heavily concentrated in the oil and gas industry. Selective access to valuable tax preferences distorts energy markets and creates impediments for substitute, non-fossil, forms of power, heating, and transport fuels.
Understating MLP subsidies does nobody outside of the oil and gas industry any favors. Economic losses, market impediments to renewable energy, and headwinds against activities that can help mitigate climate change are all higher than currently assessed. Political efforts to curb or eliminate the tax preference are muted, and the costs of further expanding eligibility to new energy resources and new stages of the fossil fuel production cycle are understated. Congress eliminated tax-exempt PTPs for most sectors of the economy in 1987; Canada did the same in 2006. In both cases, the sectors adjusted and survived. The time has come to finish the job Congress began 25 years ago by eliminating tax preferences for MLPs.
We couldn't agree more that the extremely profitable, heavily subsidized fossil fuel industries are well beyond the point where they need taxpayer subsidies, such as MLP treatment in the tax code. At the minimum, it's long past time to level the playing field between fossil fuels and clean energy, by allowing the latter the same access to MLPs as oil, gas and coal have received for years.