In late March, Congress adopted an unprecedented $2 trillion package to address the economic damage caused by the COVID-19 pandemic.
Among the industries now suffering is the fracking industry, which is reeling from both a drop in oil demand resulting from the coronavirus crisis and a raging oil price war between Saudi Arabia and Russia. Plummeting oil prices are wreaking havoc on heavily indebted fracking companies, which were already in deep trouble before the latest series of events.
Despite lobbying for funds, the fracking industry, along with other fossil fuel interests, did not appear to receive any direct bailout money in the latest package, with congressional negotiators eliminating an early proposal to give a $3 billion gift to the industry in the form of purchases of oil for the strategic petroleum reserve. There is still a chance that the industry will get to take advantage of assistance dedicated to businesses “critical to maintaining national security,” while the confusing, opaque nature of other stimulus programs may leave the door open for other bailouts as well.
But just because the industry didn’t receive a direct payout in this COVID-19 spending package doesn’t mean it’s not being generously subsidized by taxpayers, with many of those subsidies coming not from the federal government, but rather from the states.
Indeed, a 2017 report by Oil Change International found that of the $20.5 billion in subsidies provided each year to encourage fossil fuel production in the United States, more than a quarter - $5.8 billion - came in the form of state-level incentives.
The example of one gigantic petrochemical plant in Pennsylvania is illustrative.
Shell’s $6 billion ethane cracker plant in Monaca, Pennsylvania, is currently under construction and expected to start operating next year. Ethane is a fracking byproduct that connects the fate of the natural gas and plastic industries. Huge furnaces “crack” the ethane into smaller ethylene molecules, which are then turned into polyethylene pellets, the building blocks of a wide range of plastic products.
Pennsylvania knew that Shell was also considering sites in nearby West Virginia and Ohio, all located in the heart of Appalachia’s fracking boom and overflowing with cheap fracked gas. Democrats and Republicans in Harrisburg managed to work together and in 2012 passed a lucrative package of incentives and tax breaks worth an estimated $1.6 billion, which successfully enticed Shell to land in Pennsylvania.
The most targeted giveaway was the Pennsylvania Resource Manufacturing Tax Credit, which offered large Pennsylvania ethane crackers (of which there’s only one) a tax credit of $2.10 per barrel of ethane purchased locally from 2017 to 2042. These credits can then offset up to 20% of much of the facility’s state tax liability, or could be sold to other buyers to offset 50% of theirs. State legislators estimated these credits would be worth $66 million a year, or $1.6 billion over 25 years. But there is no annual or cumulative cap in the law for the total value of credits for ethane cracking plants.
The most lucrative giveaway may be the Keystone Opportunity Zone (KOZ) program, which was designed to spur development of specific, underutilized parcels by waiving various state and local taxes – including corporate income tax, sales and use tax (including on construction materials), and property tax. The site of the Shell plant wasn’t located within a KOZ at first, but during the courtship process with Shell, Pennsylvania passed a law expanding the zones. The commonwealth then expanded the existing KOZ to cover the project site – so fast that they failed to ask the local township to approve the local tax exemption.
Local officials had concerns about hosting a major, polluting industrial plant for free, but state officials brokered a PILOT, or “payment in lieu of taxes” agreement. For a couple hundred thousand dollars a year in total to the local township, county, and school board, Shell had themselves a deal.
And it is a steal. The facility’s placement in an opportunity zone zeroed out its required local tax burden and effectively exempted the plant from its first 15 years of state corporate income tax. With potentially little to no state tax liability to offset, Shell may be able to sell all of its resource manufacturing tax credits to third parties. For good measure, Shell also received a $10 million Pennsylvania First state grant to help pay for site development and related infrastructure.
None of these tax breaks and grants went directly to fracking. But they supported it nonetheless. Fracking is only profitable on the upswing of boom and bust cycles, and even then only by endangering public safety and the environment. By facilitating and supporting a plastic manufacturing boom, governments offer a lifeline for one destructive industry to support another.
Plastic production is one of the only uses for ethane. Without governments like Pennsylvania’s subsidizing industries that provide a reliable source of demand for fracking byproducts, fracking’s rickety façade of profitability would likely fail. Some fracking executives say they would not be able to operate many of their wells if not for the extra cash from selling ethane for plastic production.
If Pennsylvania hadn’t subsidized the Shell plant so generously, another state might very well have done so. Big corporations are getting more effective at sparking bidding wars between states to wring larger subsidies and incentives. The promise of jobs seems to blind many public officials from investigating the cost not only of economic development subsidies themselves, but also of air pollution, the harm to public health, and the risk of a long-term partnership with an unsustainable industry.
All of these dangers should alert lawmakers to an impending reality: the fracking industry may not be here to stay - at least, not without extraordinary subsidies and bailouts. With the nation in crisis, we will likely need to set priorities for how we spend public money. Providing further bailouts to an industry that harms our health and environment should not be one of those priorities.
And that’s true whether the money comes from Washington or from a state capital.
Photo: Construction of the Shell ethane cracker plant along the Ohio River, January 2019. Credit: Drums600 via Wikipedia (CC BY-SA 4.0)]