This is the second in a three-part series of commentaries about how better regulation of the oil and gas industry should be a part of Colorado’s response to climate change.

The three biggest wildfires in Colorado history all occurred last year. The biggest fire in 2020 — that is, the state’s biggest fire ever — was more than 50% bigger than the biggest fire in any other year in the state’s history. The 20 biggest fires in state history have all occurred in the past 20 years.

And it’s no secret why: climate change.

Fire officials say a decades-long regional drought and forests plagued by bark beetles were largely to blame for the ferocious fire season, and those conditions, according to scientists, in turn are attributable to rising average temperatures. Many parts of Colorado have gotten hotter by almost 4 degrees Fahrenheit above pre-industrial levels.

Climate change has battered the state in other ways. Warming can cause river flows to decrease, and nowhere is this phenomenon a greater emergency than in the Colorado River, the headwaters of which are near Grand Lake. The river supplies water for more than 5 million acres of farmland and about 40 million people in seven states, including Colorado. But it’s drying up. It could lose a quarter of its flow by 2050, scientists say. So little water is expected to run down through the Southwest states this year that the U.S. Bureau of Reclamation could declare the first official shortage for the river.

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Wildlife populations throughout the country are suffering from drought and other climate change impacts. In Colorado, climate change threatens deer, bighorn sheep, pronghorn, birds and other familiar creatures. Birds are especially vulnerable. Half of the birds in Colorado are said to be in decline because of changing climate conditions.

This is all due to human activity, mostly related to oil and gas extraction and consumption, which releases greenhouse gas emissions into the atmosphere. Colorado is one of the country’s top five oil-producing states and among the top natural gas producing states. The scale of fossil fuel production that occurs in Colorado gives the state a colossal carbon footprint.

That’s why Colorado has an administrative and moral duty to rigorously regulate oil and gas extraction. Available to Coloradans are at least three avenues by which to better resist this toxic industry — local fracking bans, robust severance taxes, and more money for environmental clean-up. Each of the commentaries in this series discusses one of these topics.

Fossil fuel extraction infrastructure is pictured in Frederick on June 24, 2020. (Andy Bosselman for Newsline)

If oil and gas companies are going to rip natural resources from the Earth and pollute public spaces, it’s only fair for the public to ask those companies for just compensation. “What we are talking about is the oil and gas industry’s social license to operate — if they are using public resources and polluting a public good, our environment, our communities, they need to be paying into the system,” said Jessica Goad, the deputy director of Conservation Colorado, according to The Colorado Sun

But these companies don’t pay a fair amount. Not in Colorado.

The minimal sums Colorado collects from oil and gas companies in the form of severance taxes was detailed in stark terms early last year when the Colorado Office of the State Auditor released a report on severance taxes. For years extraction companies have received hundreds of millions of dollars in savings due both to government leniency and systemic problems. The audit found that Colorado offers enormous gifts to fossil fuel interests in the form of exemptions, credits and deductions.

When a company takes something of nonrenewable value from the Earth, such as oil and gas, coal and metals, that value is lost to the public and accrues to private interests in the form of profits. Governments apply severance taxes to capture some of that lost wealth.

Colorado’s severance tax system imposes rates between 2% and 5%, depending on gross income, against oil and gas sales. These rates roughly align with those found in other comparable states. However, the state’s severance tax system is objectionable in ways that go beyond the base rates. The auditor’s office found that the Colorado Oil and Gas Conservation Commission failed to collect from extraction operators tens of thousands of required monthly well production reports, and some submitted reports were incomplete. The reports are a key component in the severance tax calculation system.

Furthermore, state rules call for a fine of $200 a day per well for missing reports, but for the years reviewed — 2016 to 2018 — the commission demanded no fines. The auditor’s office estimated that the failure to fine companies for delinquent reports alone amounted to a loss of more than $300 million.

A bigger giveaway to oil and gas companies comes in the form of an ad valorem tax credit, which allows company owners to claim a credit against their severance tax bill at a rate of 87.5% of the ad valorem property taxes they paid to local governments. Only two other oil and gas-producing states allow for this type of credit against the severance tax. And Colorado’s method of calculating the credit is extremely complex, which itself leads to problems. The auditors wrote that “the application of the ad valorem tax credit is the most problematic aspect of severance tax returns and frequently contributes to taxpayer noncompliance.”

This table from the January 2020 severance taxes audit from the Colorado Office of the State Auditor shows the average effective oil and gas severance tax rates from 2016 to 2018 in Colorado and eight other peer states. Colorado’s, at 0.54%, was the lowest. (Colorado Office of the State Auditor)

Colorado allows a severance-tax exemption for low-producing wells, also known as “stripper” wells. This equates to a massive gift to the industry. The auditor’s report found that 70% of the wells in Colorado in 2016 met state law’s definition of a stripper well. Exempting all these producing wells cost the state up to $55 million that year. This isn’t some industry norm — few states offer such special treatment of polluters, according to the report.

All together, the exemptions, credits and deductions that Colorado grants to industry meant the state’s effective severance tax rate was estimated in the report at only 0.54%. That was the lowest effective severance tax rate among nine oil and gas-producing states analyzed by the auditor.

Some lawmakers have long understood the untenable state of severance taxes in Colorado, but a combination of ineffective leadership, complications foisted by the state’s Taxpayer’s Bill of Rights, and the deep-pocketed industry lobby so far has put reform out of reach. Early last year members of the General Assembly had planned to convene a study committee to examine oil and gas taxes. But such committees were canceled due to COVID-19, and none are planned for this year, according to a spokesperson for Colorado Senate Democrats.

Following the audit, the oil and gas commission implemented an automated system that sends an email to operators when a well production report is overdue. But the commission has yet to issue any fines for delinquent reports. In the current state legislative session, House Bill 21-1312 and Senate Bill 21-281 propose improvements to the way the severance tax is applied. But even if they become law they’re tweaks, not reform. The stupendously generous ad valorem tax credit remains Colorado law, as does the freebie on stripper wells.

It is intolerable for the state to behave with such generosity and permissiveness toward a whole industry, but it is also self-destructive when that industry is responsible for planet-wide ruin. State lawmakers must not put off severance tax reform any longer. 

On Thursday: Orphaned wells.

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