Severance Tax on Natural Gas Can Help Fund Clean Energy Investment in Pennsylvania - But Must Not Prolong Reliance on Fossil Fuels

In March, my colleague Jackson Morris wrote on Switchboard about several forward-looking clean energy measures in Pennsylvania Governor Tom Wolf's proposed budget.

Among other things, the proposed budget includes:

  • $50 million for the Pennsylvania Sunshine Program, which will enable the Commonwealth Financing Agency to make grants and loans for solar energy projects;
  • $20 million to facilitate the construction of new wind farms, and their interconnection to the electricity grid;
  • $50 million to fund grants for energy efficiency projects; and
  • $30 million for the Pennsylvania Energy Development Authority, which is authorized to finance energy efficiency and renewable energy projects.

These budget items were good news - especially as we approach this summer's release of the final Clean Power Plan, the first-ever national standards to reduce carbon pollution from existing power plants. Before Governor Wolf took office, the clean energy trends in Pennsylvania were largely in the opposite direction: towards less emphasis on clean energy programs and more support for natural gas.

If funded, the clean energy programs in Governor Wolf's budget will create jobs, reduce air pollution, and give Pennsylvania a head-start on compliance with the Clean Power Plan.

The catch? Under the Governor's budget, as proposed, funding for the clean energy programs - as well as for funding increases for public education and the state Department of Environmental Protection (DEP) - relies on the General Assembly's passing a severance tax on the production of natural gas in Pennsylvania. And the gas industry and its supporters fiercely oppose a severance tax.

Like sales taxes, severance taxes on gas are volumetric: the more gas is sold, the more money is raised. The theory behind severance taxes is that even when resource extraction activities are regulated, they have significant environmental, health, and social impacts, and therefore impose significant costs on the public and on state and local governments. The point of a severance tax on natural gas is to ensure that such costs are paid by the industry and reflected in the price of its product - to reduce the costs that are "externalized" and borne by the public through health and community impacts.

Currently, Pennsylvania is the only major gas-producing state in the country without a severance tax. Texas has one. So does Alaska, and Louisiana, and Colorado, and - well, you get the picture. In lieu of a severance tax, since 2012 Pennsylvania has had an "impact fee," which gives counties the power to impose annual, declining flat fees on gas wells. The revenue these fees generate is distributed to state and local government agencies according to a complicated statutory formula that is supposed to help government mitigate local drilling-related impacts.

Governor Wolf has proposed a 5 percent tax on gas produced in Pennsylvania, plus 4.7 cents per thousand cubic feet of gas produced. According to testimony from the director of Pennsylvania's non-partisan Independent Fiscal Office, the impact fee has generally amounted to a very low effective tax rate of between 2 and 4 percent. The severance tax would raise much more money - about $1 billion next year, the Wolf administration has estimated.

Under Governor Wolf's proposed plan, a portion of revenue from the severance tax would flow to local governments that currently receive impact-fee revenue, at 2014 impact fee rates. Additional revenue would be used to fund a variety of other programs, including clean energy, more funding for DEP, and education.

Of course, regardless of the fact that every other major oil and gas producing state has a severance tax, the oil and gas industry stridently opposes a severance tax in Pennsylvania.

Many citizens of Pennsylvania support a severance tax, however, and NRDC does as well - albeit with the recognition that a severance tax on the natural gas industry is hardly a solution to Pennsylvania's energy puzzle. Critically, the governor must make clear that the imposition of a severance tax to satisfy immediate fiscal needs does not represent a long-term budgetary solution that locks the state into continued reliance on gas production for its financial health. Moreover, the Commonwealth must not go soft on its ongoing - and much-needed - efforts to strengthen regulation of gas production and transmission activities because of the new revenue. Many of our partners in Pennsylvania are calling for a moratorium on the issuance of new permits for fracking in the Commonwealth - and NRDC supports states that are able to put halts like this in place. Without a moratorium yet in place in Pennsylvania, our support for the severance tax is premised on our expectation that this is a short-term solution to address an immediate budgetary crisis, at a time when gas extraction is currently active, but that other solutions should and will be explored in the future.

NRDC's top priorities in Pennsylvania continue to be working with the Wolf administration to scale up energy efficiency and renewable energy generation as rapidly as possible - including through the Clean Power Plan - and to clean up existing natural gas production activities, both by strengthening the Chapter 78 regulations already on the books and by taking new steps to crack down on methane leaks from natural gas production and transmission equipment.

By generating new funds for clean energy projects and the Pennsylvania DEP, a temporary severance tax can help serve both of those priorities in the short-term, while other long-term funding mechanisms that are not dependent on fossil fuel production are implemented.

When the unconventional gas industry started drilling wells in the Marcellus Shale some ten years ago, the Commonwealth was badly unprepared.

First, Pennsylvania lacked (and still lacks) an equivalent to New York's State Environmental Quality Review law, and therefore had no legal obligation to conduct a cumulative-impacts study on unconventional gas drilling, as New York did. That study led to New York's moratorium.

Second, most of Pennsylvania's laws governing oil and gas development activities were decades-old and designed for gas drilling activities that do not involve high-volume hydraulic fracturing. The Commonwealth has been playing catch-up since, with mixed results, at best.

Third, Pennsylvania had no severance tax.

Clearly, a severance tax on natural gas production is not a substitute for aggressive policies to expand energy efficiency and renewable generation, which must be our top priority. Nor does it alleviate the need for more stringent regulation of the industry's current, on-going production.

But the reality is that the industry pays a severance tax everywhere else, and the lack of a tax on natural gas produced in Pennsylvania today amounts to one more exemption for an industry that already enjoys too many, from the "Halliburton loophole" to the exemption of toxic gas production wastes from the federal Resource Conservation and Recovery Act. A severance tax won't plug these holes. But it can help the Pennsylvania DEP and local communities manage them better - and help Pennsylvania expand its clean energy economy as we move to a future where fossil fuels play an increasingly smaller role.

About the Authors

Mark Szybist

Senior Advocate, Energy & Transportation Program

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