On Energy Subsidies

by Richard T. Stuebi

as posted to Huffington Post

To an economist, subsidies are powerful and dangerous things. They are powerful because they work. They are dangerous because they encourage economic actors to take actions that have direct impacts that are often unanticipated and unwanted, and at the expense of other positive actions that could otherwise be taken but aren’t due to resource constraints.

In the case of energy, subsidies are legion, though hard to identify. A recent report by the Environmental Law Institute (ELI), “Estimating U.S. Government Subsidies to Energy Sources”, attempts to do just that.

The ELI report estimates that the U.S. government subsidized energy with $101 billion during the period 2002-2008, with $72 billion to fossil fuels and $29 billion to renewable energy.

$29 billion to renewable energy sounds fairly impressive, particularly when renewable energy represents only about 10% of overall U.S. energy supply. However, underlying these statistics are three important observations:

  1. The fossil fuel industry is over a hundred years old and is still receiving sizable subsidies even though enormously profitable, whereas the renewable energy sector is young, developing and (by most accounts) worthy of encouragement by public support to make more financially attractive to market participants.
  2. Most of the subsidies for fossil fuels are permanently embedded in the tax code, whereas the renewable subsidies tend to have finite durations that undercut their effectiveness in providing clear incentives for long-term investment or behavioral decisions.
  3. About half of the renewable subsidies are for corn-based ethanol, prompted by support from the agricultural community, but at questionable cost-effectiveness and impact on greenhouse gas emissions.

So, the amount of funding support received by renewable energy is less impressive than initial impressions would suggest.

The forces supporting the preservation of fossil fuel energy subsidies are unbelievably strong, so the topic of energy subsidies is a potent political boogeyman that few have dared to touch. However, that may be changing.

In a September 10 statement to the Senate Subcommittee on Energy, Natural Resources, and Infrastructure by Alan Krueger (Assistant Secretary for Economic Policy and Chief Economist) of the U.S. Department of Treasury , the Obama Administration is clearly aiming to unwind several provisions of beneficial tax treatment that the U.S. oil and gas industry receives.

As Krueger concludes, current tax subsidies for the oil and gas industry “divert resources from other, potentially more efficient investments and they are inconsistent with the Obama Administration’s goals to reduce [greenhouse gas emissions] and build a new, clean energy economy….Removing these subsidies will have a very small effect on the price of oil and gas, the production of oil and gas, and domestic jobs. In fact, removing these subsidies could actually make our economy more efficient by reducing distortions in the tax code.”

On a global basis, as widely reported from the recent G-20 meeting in Pittsburgh (see Washington Post article), world leaders pledged to phase out fossil fuel subsidies in the “medium term”. As bad as the situation in the U.S. is, energy subsidies in developing economies are arguably much worse: according to estimates by the International Energy Agency (IEA), $310 billion per year is spent on subsidizing energy, mainly transportation fuels.

Of course, these subsidies are implemented in the name of aiding the poor citizens in these countries, but they cause massive distortions in public sector budgets, national trade balances, private sector investments and behavior, global security, and environmental protection. And, frankly, the main beneficiaries of the subsidies are urban upper- and middle-income citizens, as the poor are much too poor to afford cars anyway.

Removing subsidies on fossil fuels will not, in itself, drive the world economy to full implementation of desirable energy efficiency and renewable energy options. But, it will definitely help: a step in the right direction. Let’s hope that our leaders can summon and sustain the political will to overcome the inevitable opposition and phase these fossil energy subsidies down and out, so we can get on with building the clean energy economy in a more efficient manner.

As the Fellow for Energy and Environmental Advancement at the Cleveland Foundation, Richard T. Stuebi is on loan to NorTech as a founding Principal in its advanced energy initiative. He is also a Managing Director at Early Stage Partners, and is the founder of NextWave Energy.

4 replies
  1. Anonymous
    Anonymous says:

    You missed the largest subsidies of all, the military costs of the Persian gulf, oil wars and imported oil trade deficit of $500B/yr costs. This in our income, other taxes needs to be in the price of oil. Other pollution, land, water, air destruction not included from coal needs to be in it too instead of our income taxes, health care costs.Our national economic, security depends on these being paid by those who use them instead of in our income taxes, etc. Just because they are socialized onto us who use little doesn't mean they are not there. The WSJ, Economist Mag,CIA, others recognize it clearly. CleanTech should too.

  2. Anonymous
    Anonymous says:

    Richard, I believe you meant to say "unwanted", not “wanted” midway through your second sentence.As Senator Schumer recently and belatedly discovered, often parties unintended to be beneficiaries of subsidies are able to take advantage of them. The U.S. Government has been subsidizing foreign manufacturers of wind turbine technology more or less continuously, mostly more, since the early 1980s. They should send us Christmas cards, but instead complain that the subsidies are not large enough and are not into perpetuity.Subsidies stifle innovation and entrench the status quo. But, of course, subsidy recipients whether they are in the coal, or oil, or the wind business are eager to maintain the status quo.Perhaps it is time to remember Pogo’s words of wisdom.

  3. Refrigerator Gaskets
    Refrigerator Gaskets says:

    Great article, very well written. Personally, I am against the overuse of these subsidiaries. I think they promote the wrong methods of support and its just a case of the rich getting richer as far as energy producers go.

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