Take Your Pick from the Energy Subsidies Tree: Apples, Oranges, or Blossoms

When assessing green energy subsidies, a little history helps.

With Solyndra grabbing headlines (see here and here), “federal subsides” for green energy is beginning to challenge “regulations” as the epithet du jour among those proffering the sacrifice of America’s environment on the altar of the economy and jobs. (A false dichotomy in the opinion of many economists who recognize the high value that ecosystems and biodiversity provide, enriching us though such services as clean water, food, and unique gene pools. But that’s another story.)

In his 59-point “Believe in America” plan [pdf], presidential hopeful Mitt Romney denounces subsidies for “steering investment toward particular politically favored approaches.” Republican Congressmen Mike Pompeo and Jeff Flake, declaring that “the government should not be in the business of picking winners and losers,” propose getting rid of all energy subsidies, along with “regulatory burdens.”

The no-energy-subsidy/stop-the-regs themes came across loud and clear in Rick Perry’s recent energy speech; ditto for the latest Republican front-runner, Herman Cain, who not only wants to slash energy subsidies but proposes having oil company executives — aka “people whose business have been abused by” the Environmental Protection Agency (see video) — set EPA guidelines.

Too Big for Their Renewable Britches or Feeling Growing Pains?

But there’s more, say critics. Subsidies for renewables are too big. Just look at this U.S. Energy Information Agency report: It shows that dollar for dollar, subsidies for renewables in 2010 exceeded those for coal, oil, gas and nuclear by about a factor of two (the comparison is even more lopsided on a dollar-per-kilowatt-hour basis).*

Pretty outrageous, right? Not really, argues Robert Semple in a New York Times op-edNew York Times op-ed. Despite a blip during the Carter administration, large subsidies for renewables didn’t really arrive until after the Energy Policy Act of 1992. If one takes a longer view — one that includes much larger subsidies for fossil fuels in the ‘80s (as well as 2007‘s fairly tasty handout to the coal industry) — present-day subsidies for wind and solar don’t look all that large. In fact they look small. Semple concludes:

“Renewables and efficiency are finally getting the attention they deserve. … [R]obust federal efforts to help develop cleaner — and ultimately cost-competitive — energy makes perfect sense.”

Finding Fossil-Fuel Apples to Compare to Renewable Apples

But even Semple’s argument misses an important point. A comparison of present-day subsidies for fossil fuels to present-day subsidies for renewable energy is not an apples-to-apples comparison — so say Nancy Pfund and Ben Healey in a report published by DBL Investors.

First, let’s recognize that government subsidies are a tried-and-true instrument of public policy in these United States, and, with the exception of the most doctrinaire free-marketers, is the way most of us would have it. Three examples:

• The U.S. Small Business Administration and a host of tax breaks help American entrepreneurs get a leg up and create jobs.
• The government subsidizes education on all levels because it is perceived that an educated citizenry is a better citizenry.
• And highways, railroads, and air infrastructure are aided in myriad ways to keep the flow of commerce going.

(It’s been argued that a significant fraction of the trillions we spend on defense is for all intents and purposes a subsidy, but that also is another story.)

When it comes to technologies, government subsidies are most critical when a technology is in its infancy, struggling to penetrate the marketplace against already entrenched competitors. For new technologies deemed beneficial to society (like the Internet, say), many argue that some form of government help is not only appropriate but imperative.

This is where Pfund and Healey’s argument comes into play. The critical subsidies for oil, gas and coal cannot be found on recent government ledgers — they occurred in the late 19th and early 20th century when these technologies were just getting started. Comparing present-day renewable-energy subsidies to fossil-fuel subsidies is like comparing apples to old apples — or more appropriately mature apples to tiny, new blossoms on the tree.

To get a true apples-to-apples comparison of fossil-fuel and renewable-energy subsidies, the authors carried out a retrospective analysis of government energy policy, comparing total state and federal subsidies for each energy source during its formative years: 1918-1947 for oil and gas, 1947-1976 for nuclear, 1980-2009 for biofuels, and 1994-2009 for wind and solar.

Believe it or not, government was in the business of subsidizing business well before “big bad government” took over in Washington. Pfund and Healey report [pdf] that:

• Tariffs on imported coal date back to 1789.
• In the 19th century the government used land policy and the railroads to support the timber and coal industries.
• In 1916 and again in 1926, Congress changed the tax code to make extraction of oil and gas less risky and more profitable.
• In 1932, Congress gave the coal industry a handout through the so-called “percentage depletion allowance” on taxes.
• In the case of nuclear, probably most significant was the Price-Anderson Act of 1957, which indemnified the nuclear industry against liability from an accident.

The Historic Look: Renewable Subsidies Pale Next to Earlier Energy Subsidies

When Pfund and Healey put all these various measures together, the results are striking: Subsidies for renewable energy have been relatively paltry.

• Government spending on nuclear energy averaged more than eight times what was spent on renewables for the first 15 years of each fuel subsidy’s life ($3.3 billion annually compared with $0.4 billion), while oil and gas ($1.8 billion) subsidies were almost five times more.
• Comparing subsidy spending as a percentage of the federal budget also places renewables in a distant third place: Nuclear received 10 times more than renewables while oil and gas garnered five times more.

Do government subsidies belong in the American economy? I suppose economists of various stripes will be arguing that one for a good long time. But from a historical point of view, some might say they’re as American as apple pie. And when it comes to the pie of energy subsidies, one thing is clear — renewables are short quite a few apples.

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End Note

* Other analyses that include subsidies excluded from the EIA analysis find that fossil fuels garner more government support than renewables.