With all the debate about energy jobs, wind power tax breaks, and oil subsidies, it’s hard to see what federal incentives do for energy in America.
Last week, the Wall Street Journal reported on a study by the Institute for Energy Research (The Energy Subsidy Tally) that calculated the subsidies for each energy source normalized to the amount of energy produced, in $/MWhr. It stated that last year $0.64/MWhr was given for fossil fuels, $0.82/MWhr for hydro, $3.14/MWhr for nuclear, $56.29/MWhr for wind and $775.64/MWhr for solar.
Of course, solar doesn’t produce much energy so the absolute amount wasn’t all that much. Still according to the Congressional Budget Office (CBO study), federal energy-related subsidies in 2011 totaled $24 billion, of which $16 billion was spent on renewable energy and energy efficiency and $2.5 billion on fossil fuels in fiscal year 2011.
(Note that these are federal subsidies, states also provide various incentives particularly to the oil industry. Not sure how they calculated nuclear’s share as nuclear doesn’t actually get any subsidies. DOE’s budget supports the nuclear industry about as much as EPA’s supports the oil industry. And fossil fuels get much more than $2.5 billion in subsidies, over $20 billion, somehow not included in this tally.)
The complaint is that this is way too much for renewables as they don’t produce much energy, less than 3% of all U.S. electricity production last year, compared to over 65% from coal and gas. Of course, the whole point of incentives is to change these numbers, so you have to decide if these subsidies are effectively moving these numbers closer together over some time period. Oil got subsidies for decades. Renewables haven’t had the same time.
But what is that time frame? Unless one expects the subsidies to continue forever, there needs to be an endpoint where they have done as much good as they can, and are phased out. And this endpoint takes into account the parallel costs to the planet that are impossible to quantify but must be addressed somehow. Usually we look to carbon constraints to capture those costs.
We can either tax carbon or incentivize non-carbon. Debate rages about which is better, but it has always been more effective to tax what you don’t want, rather than to pretend to know what will work in the future. Just look at the fallout from Spain’s outrageous tax breaks on renewables (Spain Energy Tax; KPMG International).
A 2007 law passed by the government of Prime Minister Zapatero guaranteed producers a solar tariff up to 44¢/kWhr for 25 years, ten times the average wholesale price paid to mainstream energy suppliers (Bloomberg - Spain). Spending that amount on energy efficiency would have saved ten times the energy that was produced by the renewables, and billions of euros that could have been used to address Spain’s deficit.
Or look at America’s subsidies for ethanol from corn. Corn ethanol is a horrible fuel from every environmental and ethical perspective, yet one that received $6 billion in subsidies last year, fueled by state mandates that put legislation ahead of science. But it sounded green ten years ago.
It would have been more effective to tax carbon and spur increased efficiency and development of biofuels that don’t compete with food and whose life-cycle emissions are truly much lower than either corn-ethanol or petroleum fuels.
A carbon tax is much more in keeping with market forces than incentives because everyone tries to develop ways to avoid a tax. That, in turn, decreases emissions. Conversely, people try to take advantage of incentives, which don’t necessarily result in lower emissions.
For decades, the federal government has employed a variety of incentives to support research, development and deployment of energy sources. The types, amounts and targets of federal incentives have changed substantially over time, especially in the last few years, making it difficult to follow where these expenditures have gone and what they have done for the nation’s energy supply.
These incentives take several forms, including tax policy, regulation, research and development (R&D), market activity, government services and disbursements. According to the Management Information Services, Inc., federal subsidies have amounted to almost a trillion dollars and from 1950 to 2010.
It is debatable whether these incentives made us a fossil fuel nation or we would have done so anyway, but the majority of incentives have gone to fossil fuels, followed by renewables (including hydro) with nuclear last (see figure).
Most nuclear subsidies have been for R&D, and most of those prior to 1975. For the last 30 years, utilities that operate nuclear power plants have had to pay a tax into what’s called the Nuclear Waste Fund. So far these payments have totaled over $35 billion and have offset much of nuclear’s previous subsidies.
Tax policy, which accounts for about half of all subsidies, includes special exemptions, allowances, deductions, production and construction credits, etc., related to the federal tax code. Regulation involves federal mandates and government‐funded oversight of, or controls on, businesses employing a specified energy type. Federal regulations contribute to public confidence in, and acceptance of, facilities such as nuclear power plants and hydroelectric dams.
Market activity includes direct federal government involvement in the marketplace, mostly to the benefit of hydro and a little to the oil industry. These incentives prorate the costs of federal construction and operation of dams and transmission facilities, and apply to hydro because dams are multi‐purpose. They provide flood control, navigation, recreation, irrigation, regional development and other benefits in addition to hydroelectric power.
Government Services refers to all services traditionally and historically provided by the federal government without direct charge to the industry such as providing ports and inland waterways that handle the relatively large ships like oil tankers and coal barges. Disbursements involve direct financial subsidies such as grants.
So are these incentives helping things? Since our electricity costs last year totaled over $400 billion, these subsidies are relatively small. The incentives ultimately come from the taxpayers and the benefits of the energy produced are sporadic and localized.
Thus far, these incentives have not changed our energy mix much nor decreased our emissions much. We are still two-thirds fossil fuel and emit over 5 billion tons of CO2/year. The recent decrease in electricity consumption and CO2 emissions resulted from the recession. The recent decrease in coal and increase in gas has resulted from the latest environmental regulations that favor shutting old coal plants.
And these two have done more for the environment than all the incentives of the last ten years.
