The Federal Energy Subsidy Scorecard: How Renewables Stack Up

Reprinted from Renewable Energy World, November 3, 2009

by Matthew Slavin, PhD

In a speech at the United Nations and afterward at the G-20 summit meeting in September, President Obama called for elimination of government subsidies for greenhouse gas (GHG) emitting fossil fuels. Said the President "I will work with my colleagues at the G20 to phase out fossil fuel subsidies so that we can better address our climate challenge."

The President’s pronouncement, the essential role solar and wind energy have to play in the fight against global warming, the critique that renewables are overly reliant upon government assistance and congressional debate over a national cap and trade energy and climate bill make this a good time to take stock of how renewables stack up in terms of federal energy subsidies. A short primer on the different types of federal energy subsidies at work provides a useful point of departure.

Types of Federal Energy Subsidies

Federal energy subsidies come in many different shapes and sizes. However they can be broadly divided into three main categories.

Tax credits constitute the largest source of federal assistance to the energy sector. According to a prepared by Washington D.C. consulting group Management Information Services Inc. (MISI), tax credits accounted for an estimated 45 percent of all federal energy support between 1950 and 2003. An analysis by the Texas Comptroller of Public Accounts put this number at 65 percent for 2006. Tax treatment also comprises one of the earliest ways by which the federal government subsidized energy development and production, dating to 1917, when income tax credits were established to encourage oil drilling.

Investment and production tax credits for solar, wind, and geothermal energy fall into this category as do tax incentives for ethanol and other biofuels. So does the oil depletion allowance, established by the Revenue Act of 1926 that allows downstream fossil fuel producers to make deductions from their gross income and the Foreign Tax Credit, the largest single energy subsidy, which allows U.S. oil and gas companies to claim a credit against revenues derived from overseas production that would be taxed at a higher rate if produced domestically.

Another type of subsidy encompasses direct cash grants, loan guarantees and similar targeted disbursements. These accounted for about 20 percent of federal energy support from 1950 through 2003 and 29 percent in 2006. The renewable energy cash grants authorized under the American Recovery and Reinvestment Act (ARRA) fall into this category.

Also included is federal spending that began in the 1930s to construct the Columbia-Snake River and Tennessee Valley hydroelectric systems and the $1 billion authorized under ARRA for FutureGen, the coal-carbon sequestration pilot project slated for construction in Illinois with uncertain prospects for success.

A third subsidy platform revolves around regulation: creating a regulatory climate that encourages energy investment. Regulatory subsidies are as old as tax incentives, dating to 1917 when the U.S. Fuel Administration moved to ensure sufficient oil to fuel America’s entry into World War I by creating a petroleum quasi-cartel that boosted oil prices and profits only six years after the breakup of Standard Oil. Shortly thereafter the oil industry formed the American Petroleum Institute to lobby for additional federal largess.

Some critics argue that regulation should not be characterized as a subsidy. However, a key feature of government subsidies is that they influence investment behavior by lowering risk or by raising demand, and in this, regulatory provisions play a substantial role. The $10 billion cap federal law imposes upon corporate liability for a commercial nuclear generating accident is an example of a regulatory subsidy. This cap insulates the nuclear energy industry from the financial risk of a catastrophic accident. Absent this, sufficient capital could not be attracted to build nuclear plant. Ethanol additive requirements likewise constitute a regulatory subsidy, as will a federal renewable energy standard (RPS) when one comes into effect.

Cap and trade would place a steadily declining ceiling on GHG emissions, allowing power plants, refineries, and other large industrial emitters to trade allowances that give them flexibility in meeting GHG reduction targets and provide capital to fund development of new low carbon technologies. It seeks to price fossil fuels at a level that reflects the externalized cost of their GHG emissions upon the environment. This approach combines a regulatory and a market-based mechanism to promote climate friendly technologies and create increased demand for clean renewable energy.

How Do Subsidies for Renewables Rank?

Evaluating federal energy subsidies is something akin to alchemy. The myriad of ways in which they are funded, managed, and monitored, and year-to-year changes in legislation and budgets make an exact accounting difficult. This said, the Environmental Law Institute (ELI) recently completed a study for the period 2002 through 2008 in conjunction with the Woodrow Wilson International Center for Scholars which, coupled with the MISI study, illuminates how federal energy subsidies affect renewables and other competing fuels.

These studies confirm conventional wisdom that fossil fuels have been the primary beneficiary of federal energy subsidies. Oil and gas garnered 60 percent of an estimated total of $725 billion in federal assistance between 1950 and 2003, with oil alone taking 46% of the total. Coal took 13 percent. Next was hydroelectric at 11 percent and nuclear at 9 percent, not counting the liability cap subsidy which is an implicit avoided cost and impossible to quantify. At the back of the pack are wind, solar, geothermal, and bio-fuels, recipients of only 6 percent of total energy sector spending during this period.

Given the recent vintage of renewable technologies, use of a 1950 baseline for breaking down how federal energy subsidies have been parceled out may not paint a fair picture. However, the more recent 2002 – 2008 period continues to show fossil fuels as dominant. According to ELI, subsidies to fossil fuels totaled $72 billion, with most going to oil and then gas.

Support for coal-carbon capture and storage received $2.3 billion of this total. Fossil fuels took almost two-and-a-half times more in subsidies than renewables, which received $29 billion. Furthermore of this $29 billion, $16.8 billion went to corn-based ethanol whose climate friendly credentials are increasingly open to question.

Only $12.2 billion, or 16.6 percent of what fossil fuels received went for wind, solar, geothermal, hydropower, and non-corn based biofuels and biomass. This is better than in preceding years but much less than what is needed in the face of global warming, a point understated by ELI Senior Attorney John Pendergrass when he introduced the ELI study’s results by saying “These figures raise the pressing question of whether scarce government funds might be better allocated to move the United States towards a low-carbon economy.”

Rejoinder to the Rap Against Subsidies for Renewables

Critics argue that renewable energy technologies cannot compete on price with fossil fuels without public subsidies. It’s true to date that renewables’ return per dollar of federal assistance remains higher than for fossil fuels. According to the U.S. Energy Information Administration (EIA), federal subsidies for conventional coal generated electricity production in 2007 equaled $0.44/MWh (megawatt-hour). The equivalent figure for wind was $23.37 and for solar, $24.34 per MWh.

But these critics miss the mark. Commercial scale federal subsidies for renewables are less than twenty years old, dating to production tax credits enacted under the Energy Policy Act of 1992 to bolster national energy security in the aftermath of the first Gulf War. Furthermore, production tax credits for renewable energy have been subject to on again, off again congressional approval. This contrasts with fossil fuel subsidies, recipients of largely continuous and predictable subsidies since 1917.

Nor are the costs of subsidies for renewables out of line with other emerging and evolving clean energy technologies. For example, federal subsidies for refined coal technology that removes moisture and certain pollutants from sub-bituminous and lignite in 2007 equaled $29.81/MWh. If refined coal and FutureGen are any indication, yet untested clean-coal carbon sequestration will require vast federal expenditures on a scale probably surpassing what has been directed to wind and solar.

Renewables do not export environmental externalities such as drinking water contamination stemming from coal mining in West Virginia and other states, as recently reported in the New York Times. There is no need for a liability cap with wind and solar of the sort needed to fuel investment in commercial nuclear generation.

The reality is that federal subsidies for renewables have played an important role in generating economies of scale and investment capital for improved technology that have driven down the cost of photovoltaic solar energy by 50 percent to about $3 per watt in the past decade and dropped the cost of wind generated electricity to as low as 4 cents/kWh per in some areas today. These costs will only decline further as the market for renewables grows and technology improves.

Former longtime Saudi oil minister Sheik Zaki Yamani once famously said "the Stone Age did not end for lack of stone, and the oil age will end long before the world runs out of oil". Now would be a good time for critics of renewable energy subsidies to get the rocks out and for the U.S. to put in place long term federal subsidies that will provide the stable and predictable investment climate needed to accelerate America’s transition to a modern and clean renewable energy economy.

This article brought to you by the Indiana Renewable Energy Association.