Fossil fuel subsidies are a vexed and peculiar topic. On one hand, everyone seems to agree they’re bad and should be eliminated (it’s in Biden’s jobs bill, for instance). On the other hand, they never go anywhere. In part, it’s because we lack a clear understanding of what constitutes a subsidy and what impact they have. Analysts are forever arguing over exactly what counts, trying to tally up the total subsidies fossil fuels receive, but there are very few bottom-up attempts to document the concrete effects of subsidies on the economics of oil and gas projects.That’s why I was interested in this new paper in Environmental Research Letters, by Ploy Achakulwisut and Peter Erickson of the Stockholm Environment Institute and Doug Koplow of Earth Track. It breaks down the effect of 16 specific, direct US fossil fuel subsidies on the profitability and emissions of US oil and gas production. As for those subsidies, there are three basic categories: “forgone government revenues through tax exemptions and preferences; transfer of financial liability to the public; and below-market provision of government goods or services.” (Note that this study does not get into unpriced environmental externalities like air pollution and greenhouse gases, which are themselves a kind of subsidy.)Subsidies either enrich oil & gas investors or spur new oil & gas projectsOne reason there aren’t many bottom-up analyses like this is that it’s devilishly difficult to pin down the economic effect of a subsidy. Doing so always involves a counterfactual baseline — what would have happened absent the subsidy. Anytime counterfactuals are involved, there lots of assumptions to make and variables to account for.To take just a couple of examples, the effect a subsidy will have on the decision whether to invest in a new oil and gas project will depend on oil and gas prices and the hurdle rate. (The hurdle rate is the rate of return investors require to fully cover risks; more aggressive decarbonization efforts will presumably mean more risk and thus a higher hurdle rate.) The study actually runs several different scenarios based on different values for those variables, producing a cost curve for each region of the US. It gets complicated.For clarity, they chose to highlight two scenarios: 2019’s higher oil and gas prices with a 10 percent hurdle rate and 2020’s lower prices with a 20 percent hurdle rate. Here are the results:We find that, at 2019 average market prices of oil and gas, the 16 subsidies could increase the average rates of return of yet-to-be-developed oil and gas fields by 55% and 68% over unsubsidized levels, respectively, with over 96% of subsidy value flowing to excess profits under a 10% hurdle rate. At lower 2020 prices, the subsidies could increase the average rates of return of new oil and gas fields by 63% and 78% over unsubsidized levels, respectively, with more than 60% of oil and gas resources being dependent on subsidies to be profitable under a 20% hurdle rate. The way to think about this is, subsidies can have one of two negative effects, depending on market circumstances. With higher prices and a lower hurdle rate, “only 4 percent of new oil and 22 percent of new gas resources would be subsidy-dependent, pushed into making profits,” Achakulwisut told me. That means most of the projects didn’t really need subsidies and the extra money is all going to bigger profit margins for oil and gas investors.With lower prices and a higher hurdle rate, “subsidies would matter a lot,” she says, “and 61 percent of new oil and 74 percent of new gas would be subsidy-dependent.” The subsidies would directly lead to more production. Achakulwisut summarizes: “In one case, it's going to profit, amplifying the incumbent status of the oil and gas industry. In another, under more aggressive decarbonization policy and low oil and gas prices, it's actively working against the climate goal by spurring additional production.”Either of those effects is bad. In 2021,