US Revenues from Fossil Fuels, Responsible for $138 Billion Annually, Expected to Fall Regardless of Climate Action
Fossil fuels provide substantial revenue to the US federal government and many states, tribes, and localities—but changes to government tax policies can help replace declining revenue and help communities adapt.
A new RFF working paper, currently under review at a peer-reviewed economics journal, finds that between 2015 and 2020, fossil fuels generated roughly $138 billion each year for US localities, states, tribes, and the federal government. But as fossil fuels’ hold on the energy market begins to slip and clean energy development picks up, the loss of these revenue streams will have major implications for the communities that rely on them.
The multi-institutional team pulled from hundreds of data sources to estimate the baseline revenues from upstream (production), midstream (transportation and processing), and downstream (consumption) fossil fuel use in United States. The team then estimated future revenue under three scenarios: a “business-as-usual” (BAU) case and pathways that limit global temperature rise to 2°C and 1.5°C by 2100.
The headline results are depicted in this graph:
The authors find that government revenues are expected to decline under all scenarios, even in the absence of new climate policies. Petroleum product taxes, which represent the single largest revenue source, decline under all scenarios. Oil and gas extraction, the second largest revenue source, is relatively stable under business-as-usual and 2 °C conditions but declines more rapidly under a 1.5°C scenario.
Notably, coal revenue falls dramatically under all scenarios, declining to zero by 2040 under the 2°C and 1.5°C scenarios.
Wyoming, North Dakota, Alaska, and New Mexico are the states most dependent on fossil fuel revenues. There, more than 14 percent of total state and local revenues comes from fossil fuels—in Wyoming, that number rises above 50 percent. This money is vital for funding services like schools, public health, and infrastructure.
“For society as a whole, the costs of fossil fuel use far outweigh the fiscal losses that we estimate in this paper,” lead author and RFF Fellow Daniel Raimi said. “But we can’t forget that for some communities, these industries are economic backbones. We hope that our research will help decisionmakers understand the scale of the challenge, then work toward solutions to support communities in transition."
For some regions, particularly where oil and gas extraction can be done at low cost and with low emissions, major changes may not happen for another decade or two. This lag provides a window of opportunity for decisionmakers to begin investing existing revenue into savings funds, adopting new tax policies, and diversifying local economies.
Notably, this paper does not estimate future revenue growth from the clean energy sector. Clean energy may be a significant driver of future government revenue, but the places where these emerging industries may boom will not necessarily be the same places that have historically relied on fossil fuels.
“The name of the game will be adaptation,” coauthor and RFF University Fellow Gilbert Metcalf said. “And to adapt, communities will need support, especially from the federal government. Our research shows that the energy transition will create fiscal challenges, but the scale of those challenges will depend on whether policymakers plan ahead by adopting smart tax policies and investing in new economic sectors, including clean energy.”
For more, read the paper, “The Fiscal Implications of the US Transition Away from Fossil Fuels,” by RFF Fellow Daniel Raimi, Georgia Institute of Technology Assistant Professor Emily Grubert, Environmental Defense Fund (EDF) Senior Analyst Jake Higdon, Tufts University Professor and RFF University Fellow Gilbert Metcalf, RFF Research Analyst Sophie Pesek, and EDF Post-Doctoral Economist Fellow Devyani Singh.
Be sure to check out the related blog post, “More Than Just Jobs: Assessing the Public Finance Implications of the Energy Transition," and lead author Daniel Raimi's TikTok that has some fun summarizing these findings.
Resources for the Future (RFF) is an independent, nonprofit research institution in Washington, DC. Its mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. RFF is committed to being the most widely trusted source of research insights and policy solutions leading to a healthy environment and a thriving economy.
Unless otherwise stated, the views expressed here are those of the individual authors and may differ from those of other RFF experts, its officers, or its directors. RFF does not take positions on specific legislative proposals.
Daniel Raimi is a fellow and director of the Equity in the Energy Transition Initiative at RFF where he works on a range of energy policy issues with a focus on tools to enable an equitable energy transition.
Sophie Pesek is a research analyst at RFF. She currently supports projects concerning development of a new land use model and ongoing research on a just energy transition.
Working Paper — Jan 13, 2022
The Fiscal Implications of the US Transition Away from Fossil Fuels
This working paper estimates the fiscal risk posed by the energy transition for governments dependent on fossil fuels, while examining policies to address this risk to revenues.
Common Resources — Jan 13, 2022
More Than Just Jobs: Assessing the Public Finance Implications of the Energy Transition
When assessing the potential benefits and costs of the energy transition, most elected officials, advocates, and media outlets focus on jobs. But another economic issue may be just as important in the energy transition: public finance.