State budgets linked to fossil fuels are slowing the energy transition and leaving workers and communities behind


Achieving America’s net zero energy future and avoiding the worst impacts of climate change requires a rapid transition from fossil fuels to clean energy. But a major source of state funding for important programs, including schools, public health, and infrastructure, is the continued extraction of oil and natural gas on federal lands. Simply put, direct payments from the federal government to states are higher when more oil and natural gas is extracted from public lands and waters, creating a perverse incentive to drill more. These payments are at odds with public policy goals: The federal oil and gas program creates political opposition to climate policy and undermines efforts to build a more equitable economy that works for all Americans.

Dependence on oil and gas to fund state budgets means the country cannot simply end production on public land. It would devastate communities whose economies and public revenues are tied to the extraction of fossil fuels. Short-term credits to move budgets away from dependence on fossil fuels are not enough either. Rather, the country needs structural and institutional transformation to invest in rural prosperity.

Dependence on oil and gas revenues can be resolved by replacing direct payments from fossil fuel extraction with a model that conserves and strengthens public wealth in oil and gas communities over time. Saving and reinvesting fossil fuel revenues advances the energy transition by decoupling state budgets from annual extraction and realigning public revenues to climate, labor and rural development goals. Oil and natural gas will remain part of the energy mix for a decade or more, but reforms are needed now to allow time for transition strategies to take hold.

Reforms are needed now to allow time for transition strategies to take hold.

States are too dependent on oil and gas revenues

The federal fossil fuel program – which gives states 50% of revenues from drilling on public lands – has led to a reliance on continued production of oil and gas. This means that states rely heavily on the fossil fuel industry to fund essential services, including education, public health, and infrastructure. As a result, and without a plan to sever the link, stopping fossil fuel production on public lands would have significant budgetary impacts.

This income dependence is intentional. For years, oil and gas industry lobbyists have supported federal and state policies that tie their operations directly to the services, tax cuts, and out-of-the-box spending that politicians and the public want. For example, Representative Doc Hastings (R-WA), former chairman of the United States House Committee on Natural Resources, said during a committee hearing on the FAIR Act (an effort to open up offshore areas for the rental of oil and gas):

I believe it is crucial to recognize that revenue sharing will increase US energy production by creating new incentives for opening new offshore areas for drilling.

In Utah, state property tax rules prohibit local governments from keeping revenues from new renewable energy projects. Oil and gas, on the other hand, continues to send money directly into local coffers from taxes and royalties, rewarding politicians and taxpayers for supporting oil and gas development while discouraging l ‘clean energy. The oil and gas industry enjoys political support when state and local governments depend on continued drilling and extraction to pay for ongoing services. Meanwhile, politicians are enjoying the popular act of lowering taxes allowed by revenues from the oil and gas industry. This system is broken, traps communities in dependence on fossil fuels and must be reformed.

States will find it difficult to shift their budgets to a new economy because, once taxes are lowered or eliminated in favor of narrow sectoral taxation, it is difficult – and sometimes impossible due to constitutional limitations of states – to rebuild a state. diversified tax structure. For example, new jobs in tourism, technology, or health care aren’t paying the bills in Wyoming because the state’s tax structure is so tightly focused on fossil fuels. Other industries in Wyoming, such as recreation, high tech, or healthcare, do not pay enough taxes to support schools, highways, police, or social services.

Taken together, dependence on fossil fuel revenues and limits on tax increases represent significant political and economic obstacles to a just transition from fossil fuels to clean energy. The oil and gas industry understands the power to encourage dependence on its operations to protect the status quo. Congress must help climate and just transition communities meet this challenge by adopting solutions to realign government revenues with climate and rural development goals.

Congress must help climate and just transition communities meet this challenge by adopting solutions to realign government revenues with climate and rural development goals.

A key point to start is to end federal revenue sharing which distributes half of onshore oil and gas revenues – $ 2 billion on average – directly into state budgets each year. This system exacerbates dependence on fossil fuels and directly undermines efforts to meet climate goals.

We must save and reinvest in people and communities

Congress must first end direct oil and gas revenue sharing payments, and then replace them with a permanent solution: a new model that includes an endowment to capture and save fossil fuel revenues. New institutions, such as a national development corporation, can provide autonomy, long-term vision and the capacity to enable rural and resource-dependent communities to lead local transition and development strategies. States must also act to remove barriers to increasing revenues from renewable energy savings, conservation and recreation. CAP will explore these policies – and how they build strong and resilient communities – in detail in an accompanying report.


Breaking the immediate link between fossil fuel extraction and essential services and replacing it with a new approach to wealth creation that reinvest one-time fossil fuel income into permanent assets is essential to ensure a just transition for states, communities and workers dependent on fossil fuels. State and local governments benefit when public wealth is captured and reinvested directly in the areas where that wealth is produced and when those communities are empowered to build a better future. Most importantly, decoupling the community’s needs from fossil fuel income will pave the way for advancing climate and conservation goals.

Mark Haggerty is a Senior Fellow at the Center for American Progress engaged in research and policy analysis related to climate, conservation and rural prosperity. Nicole Gentile is the Centre’s Senior Director of Public Lands.


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