Green Industrial Policy’s Unfinished Business: A Publicly Managed Fossil Fuel Wind-Down

Executive Summary

Fossil fuel extraction, production, and use must decline rapidly in order to meet even modest climate goals (Stockholm Environment Institute et al. 2023). Leading climate policies today rely primarily on increasing the production and deployment of renewable and zero-carbon energy in the hopes that those will displace fossil fuels throughout the world’s energy systems. While green industrial policies are helping to increase the availability of such fuels and bring down their cost, there are few policies in place to deal explicitly with the much thornier question of winding down the fossil fuel economy: grappling with ongoing, uneven declines and changes in a predominately carbon-based energy system; distributing the burdens of those shifts and of decarbonization equitably; and, perhaps most important of all, ensuring that absolute production declines do actually happen at adequate scale and speed.

The interventionist approach that policymakers have embraced in order to bolster low-carbon industries must be extended to include pathways toward phasing out the fossil fuel economy and repurposing its vital infrastructure and expertise.

Rather than continuing to approach these as two distinct spheres of policies, this paper argues that decarbonization demands that the United States—now the world’s largest oil and gas producer—reconcile its industrial policies (green and otherwise) so as to protect the many people who depend on today’s energy systems, and those whose health, livelihoods, and futures depend on their dramatic transformation.

Fossil fuel producers warn that efforts to limit the production of coal, oil, and gas in order to meet the goals of the Paris Agreement will pose an unacceptable cost to the global economy: sacrificing quality of life, limiting prospects for economic development, and creating generalized, widespread misery. It is climate change itself, though, that most credibly promises to bring about this chaotic future. The storms, flooding, droughts, and other extreme weather events fueled by rising temperatures are on track to inflict $38 trillion worth of losses on the global economy by 2049 (Kotz, Levermann, and Wenz 2024). Without faster action, those damages could balloon threefold through the second half of the century. The fossil fuel industry’s predicament is more discrete. If the world takes action to limit global warming to 2 degrees Celsius and pays that much smaller cost of mitigation, the fossil fuel industry will lose out on many trillions of dollars in future profits—something the industry is eager to prevent. The challenge is to ensure those losses happen so that the rest of the world does not lose much more.

Implementing proactive measures to protect workers and communities amid the energy transition already underway is both a moral necessity and insurance against political blowback that threatens to stymie further decarbonization efforts. What’s more, the US allowing its fossil fuel sector to continue extracting and producing coal, oil, and gas with no limits undermines diplomatic efforts to push other countries that are far more dependent on hydrocarbon revenues to limit unnecessary fossil fuel expansion and pursue alternatives to fossil-fueled development—particularly as financing options for low-carbon energy development remain severely limited in many low- and middle-income nations.

This report will first examine how near-term trends facing the fossil fuel industry threaten to shift mounting private liabilities onto the public. It will then explore the range of tools the US government has historically put behind both the development of the fossil fuel industry and a broader, public-purpose mission of energy independence. This is best understood as industrial policy, defined here as the state-aided and targeted shift of resources toward particular economic sectors and activities. Defining US support for its fossil fuel industry as such is meant both to elucidate the considerable governmental support that sustains conventional energy production and to provide inspiration for what a more robust green industrial policy directed explicitly toward an energy transition—rather than simply energy diversification—could look like. Finally, the report describes a menu of public policy options for leveraging similar tools to manage the declines in US oil and gas production likely to happen as a consequence of ordinary profit-seeking behavior by corporations, including via corporate consolidation, companies’ focus on delivering shareholder returns, and the depletion of prime shale reserves. Recommended measures range from lower-hanging fruit (i.e., changes to agency rules) to the creation of new institutions to handle the financial, administrative, and coordination challenges that the coming decades pose. 

These changes, focused primarily on domestic oil and gas extraction, are intended to set the stage for the US to adopt a more holistic approach to managing its energy transition by expanding the role of the public sector on both sides of the decarbonization ledger.

Rapidly deploying low-carbon energy technologies (through investment) and eliminating fossil fuels (through divestment) are interdependent projects—the ultimate success of which will be measured not by dollars invested but by emissions reduced. 

Protecting against energy shortages, managing price volatility, and ensuring equity throughout that inevitably messy process will require a sizable expansion of state capacity so that the losses of the energy transition do not accrue to the public and spoil the potential for future progress at home and abroad. US industrial strategy—including fossil fuel subsidies—must be aligned behind that mission. 

Recommendations:

Update and Align US Industrial Policy for the 21st Century

• Fill open federal positions that have oversight, financial regulatory, or rulemaking authority over fossil fuel extraction with personnel that have climate expertise —such as the directorship of the Department of Interior’s Office of Surface Mining Reclamation, and including both senior executive service and Senate-confirmed positions.
• Instruct federal agencies to repeal regulatory loopholes, preferential treatment, and discretionary spending, including ending outlays from the Development Finance Corporation and the US Export-Import Bank directed toward oil and gas companies, which distort the price of fossil fuels and their appeal to investors.
• Repeal extensive fossil fuel subsidies allocated by the federal tax code and amend federal statutes granting regulatory exemptions for the fossil fuel industry (see Table 1) via congressional action. Amend subsidies that cannot be eliminated by adding conditionalities that increase climate and environmental standards and federal oversight powers.
• Where appropriate, take back regulatory authority from industry-captured state regulators that was previously delegated by federal agencies.
• Develop contingency plans for the next “bust” to put strings on federal aid when fossil fuel producers ask for bailouts, including mandatory disclosures, emissions reductions, and diversification, as well as equity stakes commensurate with federal support.
• As agencies manage and disburse funds from the Inflation Reduction Act and Bipartisan Infrastructure Law, utilize rulemaking processes and all available federal authorities to ensure that, where possible, state support comes in exchange for a say over how and where vital energy infrastructure is built so as to ensure timely and equitable distribution. Create barriers to fossil fuel industry abuse of these funds, including through Notices of Funding Opportunities.

Designate and Regulate Systemically Important Fossil Fuel Producers

• Mount a blue-ribbon commission of relevant experts and stakeholders to triage existing agency capacities for regulating fossil fuels and determine criteria for systemic importance.
• Create a comprehensive inventory of fossil fuel firms’ physical infrastructure assets and associated greenhouse gas emissions and pollutants so as to track asset ownership transfers and more accurately assess risks and clean-up costs.
• Require fossil fuel producers to conduct regular stress tests for physical and transition risk scenarios and create “living wills” (plans for companies to safely unwind in the event of insolvency) so as to protect consumers, workers, and the broader economy against fuel price shocks and energy sector volatility.
• Establish funding pools for cross-agency fossil fuel infrastructure clean-up, reclamation, and decommissioning efforts through additional fees on producers, similar to the Deposit Insurance Fund.
• Closely scrutinize all mergers, acquisitions, and divestments above a certain size and/or greenhouse gas emissions and pollution intensity for compliance with environmental and fair competition regulations.
• Establish an independent federal agency to protect the public against environmental and financial harms caused by energy infrastructure—potentially, to begin with, as an arm of the Consumer Financial Protection Bureau.

Expand the Public Sector’s Role in Guiding the Energy Transition 

• Establish a cabinet-level office, the Transition Coordination Administration (TCA), to triage relevant federal agencies and authorities for powers, funds, and research that can be used to further an all-of-government approach to managing the energy transition and ensure climate and environmental integrity across federal energy transition efforts, inclusive of fossil and green energy.
• Regional TCA offices will provide technical assistance and facilitate direct community engagement related to transmission and renewable energy siting. 
• Each year, the TCA will publish a detailed inventory of the impact of federal policy on greenhouse gas emissions, co-pollutants, environmental justice, biodiversity, and more.
• Create an independent public benefit corporation wholly or majority owned by the US government, called Energy for America (EFA), to serve as a clearinghouse for managing physical fossil fuel assets that come under federal control and to act as a general-purpose energy developer backed by the full faith and credit of the US government.
• EFA will function as a coordination hub to retrain workers in carbon-intensive extraction (where necessary) and match them with energy sector jobs that fully meet or exceed their previous wages, pensions, and benefits. Those who are unable to find a relevant placement are entitled to full salary and benefits replacement for at least five years. A new federally subsidized retirement system for retirement-eligible workers would be created within the Federal Employees Retirement System (FERS).
• If EFA engages in fossil fuel production as a result of asset acquisitions, all production plans will by charter be made to align with an expert-generated, equity-based timeline for limiting warming to well below 2 degrees Celsius.

Introduction

This report focuses primarily on upstream oil and gas production in the United States, arguing that government subsidies, intervention, and planning have always been the basis for developing and sustaining US energy systems. These market-shaping and creating state functions—industrial policies—were essential to the development of the US oil and gas industry, which, like its counterparts around the world, continues to rely on expensive and elaborate forms of government support. With some notable exceptions, the policies that have built and sustained the US fossil fuel industry have left key decisions over the production, distribution, and pricing of the United States’ most important commodities in the hands of the private sector. But unlike in most other oil-producing countries—particularly wealthy nations—relatively few of the profits derived from US oil and gas are shared with the American public. This creates a structural misalignment: entrusting market actors whose sole obligation is to their managers, investors, and shareholders to accomplish public policy priorities that often run counter to the interests of those same managers, investors, and shareholders.

Troublingly, green industrial policies appear to be adopting the same model. Key decisions about when, how, and where essential low-carbon assets get built remain concentrated in the hands of a private sector whose sole obligation is to generate returns for investors and profits for shareholders (Brusseler et al. 2024; Daly and Chi 2022).

Worse still is the fact that these two industrial policies are at odds with one another: The US continues to actively support and subsidize its fossil fuel industry as it pursues green industrial policies meant to—somehow, on some timeline—transition away from that very industry.

While green industrial policies are already helping to diversify US energy and foster strategic growth industries, decarbonization is too important and audacious a goal to leave up to this idiosyncratic process or to the corporate executives entrusted to drive it forward. There is no collection of incentives that will convince fossil fuel companies to begin euthanizing their core business model in time to limit warming to less than 2 degrees Celsius.

This paper explores several strategies for bridging the dangerous gulf between current US climate policy and the urgent challenge of decarbonization, defined by Brusseler (2023) as “a project to transform and expand fixed capital and infrastructure stocks through investment and divestment.” Its concerns lie on either side of that ledger: investing in the energy systems needed to confront the climate crisis while divesting from those that are driving it. As Grubert and Hastings-Simon (2022) note, high-level government planning is needed to attend to the problems of the “mid-transition,” a relatively under-theorized “transition period where zero-carbon and emitting fossil fuel systems co-exist at scales where each imposes operationally relevant constraints on the other.”¹ 

Failing to insulate voting publics from expected disruptions to energy supply and price swings during this period allows incumbent energy producers and their political allies to capitalize on those events (or even just the idea of them), blame climate-friendly elected officials for sowing chaos, and make the case for building excessive amounts of new fossil fuel infrastructure. As Espagne et al. (2023) note, such mid-transition dynamics could engender alarming amounts of geopolitical fragmentation as every country fights “to capture larger shares of declining markets at the expense of other producers.” Additional, limited investments in fossil fuel capacity will be needed throughout the transition to continue meeting the world’s considerable and growing energy demands. Yet there is currently no mechanism to prevent overinvestment and ensure that newly built carbon-intensive infrastructure does not operate indefinitely (Rystad Energy 2023). 

Though US diplomats pushed aggressively for world leaders to adopt language to “transition away” from fossil fuels at UN climate talks in 2023, the document they created contains no concrete plans nor authority to realize that ambition (United Nations 2023). Only states can compel companies to undertake unprofitable activities or (failing that) initiate, operate, and own those activities directly. Neglecting to do so—only embracing climate policies that incentivize private-sector, low-carbon development—implies an oddly utopian view of how the US and the world will decarbonize: trusting that a properly incentivized private sector will proliferate enough low-carbon energy projects to eliminate the core business model of one of the planet’s most powerful industries—in other words, voluntarily replacing the energetic basis of the global economy in time to meet the goals of the Paris Agreement.

There are many reasons to doubt the market is up to such a fearsome task. The most recent Intergovernmental Panel on Climate Change (IPCC) report finds that about 30 percent of oil, 50 percent of gas, and 80 percent of coal reserves will have to remain unburned to limit warming to 2 degrees Celsius (Pathak et al. 2022). This would come at a tremendous cost to fossil fuel producers. The International Renewable Energy Agency (IRENA) projected in 2019 that limiting warming to 2 degrees Celsius would entail rendering $11.8 trillion worth of fossil fuels assets completely worthless; delaying action by another decade boosts that figure to $19.5 trillion (IRENA 2019). The math here isn’t hard to work out: Either fossil fuel–producing firms lose many trillions of dollars in future earnings, or the world’s governments, people, and companies lose many, many trillions more as the world warms by more than 2 degrees Celsius.² Emerging research finds that the economic damages from climate change are estimated to be six times larger than previously thought, with business-as-usual warming scenarios expected to lead to a 31 percent loss to present value global welfare due to the persistent rise in extreme, economically damaging weather events expected to result from elevated global temperatures (Bilal and Känzig 2024). The climate crisis and fossil fuel production and use are already having destructive effects on public health, fueling displacement and driving geopolitical conflict (Vohra et al. 2021; IDMC 2024; Jaramillo et al. 2023). 

Grounded in exciting recent advancements in green industrial policies, this paper asserts a stronger role for government oversight and management of the speed, quality, and distributional consequences of the chaotic, too-slow energy transition already underway. Crucially, such policies are needed to stop the fossil fuel industry from dumping its current and future losses onto the public. Policies to prevent that transfer of losses onto public balance sheets are meant in no small part to help build the political case for decarbonization—to mitigate the consequences of such a dramatic shift in the world’s energy systems, distribute them equitably, and prevent fossil fuel interests and their political allies from halting future progress. US policy has long recognized the limits of the private sector in meeting energy and public policy goals: The US energy sector is, in reality, a private-public partnership, with benefits accruing primarily to the former. 

Just as important as managing the energy transition is ensuring that the ways the US builds a low-carbon economy do not replicate the unbalanced, inequitable ways that it has subsidized the development of the fossil fuel economy. Energy is a systemically important sector and should be treated accordingly—doing so can build and improve upon best practices put in place after the 2008 financial crisis, including the oversight and accountability mechanisms created by 2010’s Wall Street Reform and Consumer Protection Act. This paper outlines a parallel, complementary regulatory regime to oversee the fossil fuel sector in a similar manner so as to understand and reduce the tremendous risks that business model poses to the American public and US national interests. The final section of this paper suggests ways to begin to construct a holistic regulatory apparatus to manage the energy transition. These range from steps that could be taken using executive powers to an expansion of existing regulatory authorities and the creation of novel coordination bodies and institutions, including a public energy developer.

Footnotes and Suggested Citation

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