Do we need energy subsidies?

What would happen if the government eliminated all subsidies for the energy industry?

It’s a radical notion, but an overwhelming vote by the Senate last week to eliminate billions of dollars in support for the U.S. ethanol industry sent a strong message that the era of big taxpayer support for biofuels is ending,. Reuters reported.

Given that about $1.3 trillion of this year’s $3.5 billion federal budget is being borrowed–and must ultimately be paid by future taxpayers–Congress may take a hard look at the vast array of tax breaks, tax credits, loan guarantees and liability protections that flow to virtually every segment of the energy industry.

As well it should.

Energy industry leaders howl every time anyone wants to take any of their subsidies away. But as Adam Smith once wrote (and I love this quote)…

The proposal of any new law or regulation which comes from [businessmen], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

Figuring just how much energy subsidies are costing taxpayers, and who’s getting them, isn’t easy. Some subsidies are obvious. Buyers of electric cars–even a $100,000 Tesla—get a $7,500 tax credit.

Others are less visible. In a recent report, the Union of Concerned Scientists tallied up the costs of government support for nuclear power from uranium mining to waste disposal concluded that

subsidies to the nuclear fuel cycle have often exceeded the value of the power produced. This means that buying power on the open market and giving it away for free would have been less costly than subsidizing the construction and opera­tion of nuclear power plants.

Shocking, if true.

Along with nuclear power, well-established energy sources like coal and natural gas enjoy subsidies, as this table shows. I came across it in a report from the Hamilton Project, called A Strategy for America’s Energy Future: Illuminating Energy’s Full Costs.

Do some simple long division, and you see that refined coal – which apparently means coal-based synthetic fuels – wind, solar and nuclear power get very generous subsidies per unit of energy generation. For every per billion KWH of generation, coal gets $30 million in subsidies, wind gets $23 million, solar gets $14 million and nuclear gets $1.5 million.

It would be interesting to see another column on the chart showing tons of CO2 displaced by the fuel–assuming that’s a key goal of the subsidy–to see what, exactly, we are getting for our tax expenditures.

If the goal is to reduce CO2, should we be spending on  wind or solar or nuclear? Which holds the greatest future promise? What about geothermal? Or wave power? Will electric cars decarbonize transportation for effectively than advanced biofuels? Of course no one knows the answer to those questions, which is why industry-specific subsidies are potentially so wasteful. We’re surely betting on some of the wrong horses.

By the way, some people think the EIA’s numbers are low. According to this article in the Christian Science Monitor, Doug Koplow of the energy-consulting firm Earth Track in Cambridge, Mass., estimates that the the US spent between $49 billion and $100 billion on energy subsidies in 2007, with oil and gas getting the biggest share, followed by nuclear and coal.

Let me be clear about something:  I’m not arguing here that we should deregulate energy markets. That’s because the prices we now pay energy are distorted not only by subsidies, but even more by the environmental and health costs of energy production and use.

Put simply, the price of gas at the pump or coal-generated electricity on our utility bills does not capture the full cost of that energy. Nor does the price of nuclear, solar or wind.

Here’s how the Hamilton Project report, by Michael Greenstone and Adam Looney, puts it:

Almost all energy sources have significant social costs that are not reflected in their prices but nonetheless have a real impact on well-being—not just in the United States, but globally. These costs include the economic and geopolitical consequences of reliance on oil, the pollution and changes in climate patterns that result from burning high-carbon fuels, the health effects of pollutants, and the risk of major accidents.

Pricing energy sources—carbon and oil in particular—to more fully reflect their social costs would give firms and consumers a strong incentive to change their energy consumption patterns and make better-informed decisions. Pricing also would give firms an incentive to research and invest in low-carbon technology and alternative fuels, helping to pave the way for a low-carbon future.

Of course, this is easier said than done. The very modest effort to price the cost of carbon emissions into energy embodied by the Waxman-Markey climate legislation failed in Congress.  A revenue-neutral carbon tax would be a simpler approach; a revenue-raising carbon tax might even emerge as Congress tries to deal with the debt.

Indeed, if Congress eliminated all subsidies and taxed carbon emissions instead, it would put the country on a sounder fiscal footing and on a path to reducing CO2 emissions.

One thing is clear: the complex and opaque industry-specific subsidies we now have are inefficient and wasteful.

They are more likely to be about the political clout of the oil, coal, nuclear, wind, solar or ethanol industries than about the actual benefits–if any–that they deliver.

[Photo credit: Dana Robinson on flickr]

Comments

  1. Marc,
    This is one of the best summaries of our country’s energy situation that I’ve ever seen. (and in under 1000 words!) It should be required reading for everyone in the country, particularly students and lawmakers.
    Well done.

  2. Lewis E. Ward says:

    Brilliant as is to be expected of Marc! I will share.

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