Equal-Opportunity Energy: The Lopsided State of US Energy Subsidies

Source: Environmental Law Institute

Three of this election cycle’s biggest catchphrases belong to energy. Candidates on both sides of the aisle speak of the need for a “level playing field,” an “all-of-the-above energy strategy,” and a plan that does not “pick winners and losers.” While they may agree on the rhetoric, they usually don’t agree on what the terms mean in practice. One of the areas where the two candidates have significant policy differences relates to subsidies – the assistance given by the government to energy sectors, either by a direct award/grant or tax breaks/deductions. Should renewable energy get government money to help it along? Fossil fuels? Both? How much?

A simple and alluring answer to the “level playing field” issue (actually, to all 3 catchphrases) is, “let’s get rid of all energy subsidies.” If neither side gets help or advantages from the government right now, it must be fair, right? Unfortunately, this is akin to building a soccer pitch on a slope where one side has been built up over many years. Even if there’s no soil being added to the hill right now, it doesn’t change the fact that one half of the field will start off much higher than the other.

Let’s take a look at the numbers. Averaged over the lifetime of a subsidy, fossil fuels receive $4.86 billion annually; nuclear, $3.50 billion; biofuels, $1.08 billion; and all other renewables, $0.37 billion. Somewhat pathetically, the most renewables have ever received in government assistance is still less than oil and gas did during the Great Depression. The difference in subsidy amount is also compounded by the fact that fossil fuels have been receiving government money for almost a century, but renewables weren’t significantly subsidized until the Energy Policy Act of 1992.

In a balance tipped so far to one side, how do you try to correct it? Well, for starters, you maintain the funds going into renewable energy, which is a great example of the types of dynamic newly developing technologies that subsidies are intended to help spur. The renewable energy industry grew at a rate of about 11% from 2003-2010 – well above the national average of 4.2%. The wind industry alone supports 80,000 jobs spread throughout the US and has an annual growth rate of 35%.  Yet it appears that the major subsidy that helps the wind industry – the production tax credit, or PTC – will not be extended by Congress before it expires at the end of this year. The PTC has been allowed to expire three times in the past and wind installations dropped 73-93% in the year following  – with large job losses. The solar industry’s major subsidy, the investment tax credit, also expired at the end of 2011.

Meanwhile, subsidies for fossil fuels – which are permanent parts of the tax code and do not have to be renewed – come in each year for an industry that made a collective $137 billion in profits in 2011. The industry can hardly be considered developing, and it’s therefore appropriate to ask if corporations should be taking tax credits for investments in energy they’d be making anyway when federal assistance for renewable energy is being cut.

Congress must take a serious look at the role and purpose of subsidies in the energy industry when tax reform comes up, most likely in the 113th Congress. They should continue to provide support for developing technologies in the renewable energy industry, while revisiting the effectiveness of subsidies for the mature fossil fuel industry and cutting any wasteful handouts. A “level playing field” won’t be created by designing better catchphrases in debates, but by politicians who are willing to break out the shovels, get a bit dirty, and start filling in the lopsided market themselves.

9 Comments

  1. Allison Donnelly

    October 29, 2012 at 9:19 pm

    Here’s a current example of the politics behind renewable and fossil fuel subsidies. The House Energy and Commerce Committee requested an audit of energy subsidies from the Government Accountability Office, but did not include fossil fuel subsidies in their definition of what the GAO should focus on. The Democratic minority cried foul and is trying to broaden that definition.

    http://www.eenews.net/eenewspm/2012/10/25/archive/6?terms=renewable+subsidies

  2. Totally agree (i think) with what you are saying. The only way to get off of fossil fuels is to have a cost competitive alternative. The only way to have a cost competitive alternative is through investment and continued production in the field. Durring the Deep Water Horizon disaster, the Gulf was in dire need of volunteers to clean up. So what did the government do? It gave A LOT of money to people with boats to go out and clean up–so much money that some of my friends bought boats to clean and by the end had enough to take their paid for boat on a trip. If we are in desperate need of alternative fuel sources, why not give money (or other incentives/benefits) to those investing and using alternative energies. The US says it wants to encourage math and science education to keep up with emerging nations–pay for kids to go to college, pay them to develop cheeper alternative energies–recoup your investment when alternative energy becomes cost effective and we sell it to ourselves and other countries. If someone bought me a boat I might switch to a physics major…

    • Allison Donnelly

      November 1, 2012 at 5:07 am

      That’s the logic behind a subsidy: if you want more of an activity, make it less expensive to happen. A lot of current renewable subsidies are for research & development, but there are others for producing the energy, investing in infrastructure, and setting up a business. The problem, of course, is where the money comes from. And while dollar-for-dollar, investment in green infrastructure yields 4 times as many jobs created as in fossil fuels, we still are sticking a lot of government money into oil and gas while letting those renewable benefits fizzle (BP, by the way, didn’t pay taxes on 70% of the Deepwater Horizon rig). But say the government offered you several hundred thousand dollars in tax credits to build your business in photovoltaics or fuel cells (like in 2010 with the stimulus plan). That’s definitely worth more than a boat…

  3. I completely agree with your blog Allison. Fossil fuel subsidies have been around so long that most people just take them for granted despite the fossil fuel industry’s enormous profits. It is time for Americans to readjust their perspective on what should and should not be subsidized and for politicians to actually pursue a leveled playing field for energy. We should get rid of all fossil fuel subsidies. From there, we can see how competitive all energy sources are without subsidies. At that point, we can readjust subsidies for renewable energy since you are right they are starting at a lower point than the well-established fossil fuels. This concept is especially important with the hopefully upcoming renewal of the PTC.

    In addition, so many renewable energy companies are holding onto capital because of the uncertainty of the industry. The renewable energy industry cannot survive and thrive if there is constant changes in policy when capital investments take years to develop.

  4. Allison, your question of whether or not renewable energy should get government money to help it along, is very compelling. I agree with you and definitely believe that Congress must take a serious look at the role of subsidies; additionally, I think you did an excellent job of providing statistics for your readers. Your fact of renewable energy receiving less government assistance than oil and gas did, is extrememly pathetic and very surprising. The information you presented throughout your blog post was very alarming, and I was clearly very uninformed before reading it. You did an excellent job presenting your topic. You had great organization and strong arguments, which led to a very informative, strong post! I definitely believe that fossil fuels need to go, and it will be our generation that gets that done!

  5. I agree with all of you that subsidies need to be transferred from fossil fuel to renewable energy. But taking into account what Tim Profeta was saying, that environmental climate change measures would be taken up by politicians only if the price of gas/energy didn’t go up, to remove subsidies from fossil fuels may be very tough to pass. And also, Allison, would you know the breakdown of the fossil fuel subsidies because I wonder how much goes towards natural gas, which isn’t renewable but still is more clean.

  6. I agree that the “level playing field” approach will be unable to bring the renewable energy sector up to the size of the fossil fuel industry. To encourage the use of renewable resources, we must end or substantially reduce subsidies to fossil fuels or alternatively implement a tax on their use. Additionally, we must increase the subsidies to renewable energy to move the renewable energy sector even closer to being able to compete economically with fossil fuels because currently there are economic barriers hindering the growth of the renewable sectors while fossil fuels are still available. To get to the point in the market where renewable fuels are equally priced or cheaper than fossil fuels faster and thus increase their production and consumption, the United States should subsidize renewable fuel production substantially more than fossil fuels are subsidized. Yet, even still, the widespread use of renewable fuels seems a long way in the future. Renewables are more expensive and technology is not widely available or affordable to implement the use of these fuels throughout the country. I’m left wondering if even when subsidies increase to support renewables, will we have the resources and technology to use these resources?

  7. That was great! That goes to show how stuck in our ways we can be sometimes. If fossil fuels get tax breaks from investing in green energy then they are definitely not developing as you said. When will we take the training wheels off of the fossil fuel industry and turn our undivided attention to renewable energies? Having participants of the fossil fuel industry invest in renewable energy in order to have carbon offsets would be a great way to incentivize investment and transfer some money from one industry to another. Solar cells are not at maximum efficiency by any means right now but the technology is there and improvements are being made each day. In my opinion, renewable energies such as these have displayed more potential than the ethanol industry has in a lesser amount of time. Investing in renewable energy will not be a gamble. If we put as much money into the industry as we do for fossil fuels, I believe we would have much more efficient wind turbines, solar cells, and the like in no time.

  8. First things first, we’re Americans, so I have no idea what a soccer “pitch” is. I’ll assume that you meant to type “field” or got bored writing about soccer mid-sentence and wanted to throw a baseball term out there.

    Second, I think that your post is spot on. The simple truth is that economic determines which technologies are adopted and which technologies aren’t. In the short term, subsidies to renewable energy production is necessary to allow these technologies to compete with artificially cheap fossil fuels. Over the longer term, I hope that we start to see the true value of renewable energy production: namely, that it doesn’t require fuel. If fossil fuel prices are allowed to be determined by the market, and supply begins to dwindle, renewable will become more attractive on its own merits.

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