Get the Energy Sector off the Dole
Why ending all government subsidies for fuel production will lead to a cleaner energy future-and why Obama has a rare chance to make it happen.
Last September, President Obama promised that the cornerstone of his legislative program for 2011 would be to set an energy policy “that helps us grow at the same time as it deals with climate change in a serious way.”
Today, the president might seem to stand a better chance of refreezing the melting Arctic ice caps. After all, he’s up against a House Republican majority rife with members who openly deny that humans contribute to global warming, as well as members of his own party who are beholden to domestic fossil fuel industries. In November, West Virginia’s new Democratic senator, Joe Manchin, boasted to his constituents that he had secured Harry Reid’s assurance “that cap and trade is dead.”
But not all is lost. If President Obama wants to set us on a path to a sustainable energy future-and a green one, too-he should propose a very simple solution to the current mess: eliminate all energy subsidies. Yes, eliminate them all-for oil, coal, gas, nuclear, ethanol, even for wind and solar. It will be better for national security, the balance of payments, the budget deficit, and even, believe it or not, the environment. Indeed, because wind, solar, and other green energy sources get only the tiniest sliver of the overall subsidy pie, they’ll have a competitive advantage in the long term if all subsidies, including the huge ones for fossil fuels, are eliminated. And with anti-pork Tea Partiers loose in Washington and deficit cutting in the air, it’s not as politically inconceivable as you might think.
Energy subsidies are the sordid legacy of more than sixty years of politics as usual in Washington, and they cost us somewhere around $20 billion a year. To put that sum in perspective, that’s more than the State Department’s entire budget. It’s also enough to send half a million Americans to college each year with all expenses paid. Energy subsidies undermine the working of the free market, and they make rational approaches to long-term energy challenges and climate change impossible. They are not an aid to energy independence or environmental stewardship. They are an impediment.
Energy subsidies take many forms. Some of them are direct outlays of taxpayer dollars, like payments to corn producers for ethanol. Most are in the form of tax benefits, such as the deduction for “intangible drilling costs” (labor, repairs, hauling, you name it) in oil exploration-a notoriously abused provision of the tax code. The sheer number of subsidies is part of what makes them so hard to track.
But one thing about them is easy to summarize: they are heavily tilted toward fossil fuels. Government statistics show that about 70 percent of all federal energy subsidies goes toward oil, natural gas, and coal. Fifteen percent goes to ethanol, the only renewable source of energy that consistently gets bipartisan support in Congress (think farm lobby and Iowa). Large hydro-power companies-TVA, Bonneville Power, and others-soak up another 10 percent. That leaves the greenest renewables-wind, solar, and geothermal-to subsist on the crumbs that are left.
None of these estimates account for continuing support to the nuclear industry, estimated to be about $1 to $2 billion, much of it to promote research and development efforts on new nuclear technologies and waste disposal methods. There are plenty of hidden subsidies, too. We place a cap on liability for accidents (like the BP oil spill). We offer the nuclear industry large loan guarantees. And, of course, we maintain an immense military embroiled in the Middle East and elsewhere as it tries to secure access to energy resources around the globe.
What do we taxpayers get in return? Not much. Certainly there’s no evidence that subsidies do anything significant to increase our domestic energy supply. A recent study by the U.S. Energy Information Agency found that subsidies for domestic energy production doubled between 1999 and 2007, but despite all the extra money the amount of energy supplied by domestic sources stayed the same.
Oil lobbyists like to warn of dire consequences if petroleum subsidies are cut-fewer oil sector jobs, higher gasoline prices. But that’s nonsense. Petroleum is an international market; U.S. domestic supplies, which make up only 2 percent of the world’s proven petroleum reserves, have little effect on global oil prices. And it is world oil prices, not federal subsidies, that really determine how much drilling oil firms will do. Cutting oil subsidies, the Treasury Department has estimated, would reduce domestic energy production in the long run by less than one-half of 1 percent, would cut domestic oil jobs by the same amount, and would affect GDP by an amount “too small to measure.”
The single biggest energy subsidy, worth some $2.2 billion per year to the oil industry, doesn’t even support domestic production. It is a tax break, first inserted into the Internal Revenue Code in the 1950s, that allows American oil companies to subtract the royalty payments they make to foreign governments from the corporate income taxes they owe at home. This is a super-sized benefit, since a royalty is paid on the total value of oil extracted, while income taxes are paid on only the profits after all expenses. Even worse, of course, the tax break creates an incentive for oil companies to import petroleum, only increasing and perpetuating our dependence on foreign oil.
In other energy industries, federal subsidies have for decades brought little or no public benefit even as they support an infrastructure of lobbyists hired to keep the money tap flowing. The coal industry receives more than $2 billion per year through the alternative fuels production tax credit, largely to produce coal-based synthetic fuels, or refined coal. This is a pointless use of money. These fuels do nothing to reduce carbon dioxide or promote energy efficiency, and absent the subsidy, more power plants would probably just burn the basic coal rather than its synthetic form.
The U.S. government also allocates about $2 billion per year toward coal-related research and development into various “clean coal” technologies. So far, the return on this investment has been pretty much nil. But the coal lobby has done a good job of blurring that fact.
Today, a whole new round of government-promised subsidies is enabling the energy industry to make multibillion-dollar investments-in ethanol refineries, nuclear power facilities, and “clean coal” plants. The danger with these large-scale and highly capital-intensive “white elephant” projects is that the decisions made today will drive energy supply considerations for the next forty years. The very industries supporting such projects admit that they cannot survive in the market without government support. But, once built, these boondoggles create political interests demanding still more subsidies while limiting our nation’s flexibility to shift to cleaner and more cost-efficient energy sources.
As an investor in clean and green energy, I will confess that some of our companies have benefited from increased sales of equipment and services thanks to federal incentives to step up investment activity in solar and wind power in recent years. The primary jumpstart was the new tax credits that were built into the Energy Act of 2005 and renewed, haltingly, on an annual basis by Congress since then. I find myself concluding, however, that even subsidies for the truly green renewable sources can lead to perverse energy outcomes. For example, the entrance of the green renewable industry into the energy subsidy race over the past few years has in many places created the energy equivalent of suburban sprawl-a patchwork of wind and solar farms being deployed helter-skelter across the landscape. Thus, in some instances, wind projects have been launched without due attention to the additional infrastructure expenses that will be necessary to build new transmission lines, leaving new wind facilities stranded or underutilized. Texas, for example, has found that it must create at least $3 billion worth of transmission lines to get electricity from its wind projects to its cities, and concluded, ironically, that in some instances transmission line corridors must incorporate plans for new coal-fired power plants to justify the investment.
So we can waste money and distort the market by subsidizing all of these forms of energy. Or we can just call it quits on the waste. Disarm completely. Kill all the subsidies-yours and mine.
Full article at Washington Monthly
Last September, President Obama promised that the cornerstone of his legislative program for 2011 would be to set an energy policy “that helps us grow at the same time as it deals with climate change in a serious way.”
Today, the president might seem to stand a better chance of refreezing the melting Arctic ice caps. After all, he’s up against a House Republican majority rife with members who openly deny that humans contribute to global warming, as well as members of his own party who are beholden to domestic fossil fuel industries. In November, West Virginia’s new Democratic senator, Joe Manchin, boasted to his constituents that he had secured Harry Reid’s assurance “that cap and trade is dead.”
But not all is lost. If President Obama wants to set us on a path to a sustainable energy future-and a green one, too-he should propose a very simple solution to the current mess: eliminate all energy subsidies. Yes, eliminate them all-for oil, coal, gas, nuclear, ethanol, even for wind and solar. It will be better for national security, the balance of payments, the budget deficit, and even, believe it or not, the environment. Indeed, because wind, solar, and other green energy sources get only the tiniest sliver of the overall subsidy pie, they’ll have a competitive advantage in the long term if all subsidies, including the huge ones for fossil fuels, are eliminated. And with anti-pork Tea Partiers loose in Washington and deficit cutting in the air, it’s not as politically inconceivable as you might think.
Energy subsidies are the sordid legacy of more than sixty years of politics as usual in Washington, and they cost us somewhere around $20 billion a year. To put that sum in perspective, that’s more than the State Department’s entire budget. It’s also enough to send half a million Americans to college each year with all expenses paid. Energy subsidies undermine the working of the free market, and they make rational approaches to long-term energy challenges and climate change impossible. They are not an aid to energy independence or environmental stewardship. They are an impediment.
Energy subsidies take many forms. Some of them are direct outlays of taxpayer dollars, like payments to corn producers for ethanol. Most are in the form of tax benefits, such as the deduction for “intangible drilling costs” (labor, repairs, hauling, you name it) in oil exploration-a notoriously abused provision of the tax code. The sheer number of subsidies is part of what makes them so hard to track.
But one thing about them is easy to summarize: they are heavily tilted toward fossil fuels. Government statistics show that about 70 percent of all federal energy subsidies goes toward oil, natural gas, and coal. Fifteen percent goes to ethanol, the only renewable source of energy that consistently gets bipartisan support in Congress (think farm lobby and Iowa). Large hydro-power companies-TVA, Bonneville Power, and others-soak up another 10 percent. That leaves the greenest renewables-wind, solar, and geothermal-to subsist on the crumbs that are left.
None of these estimates account for continuing support to the nuclear industry, estimated to be about $1 to $2 billion, much of it to promote research and development efforts on new nuclear technologies and waste disposal methods. There are plenty of hidden subsidies, too. We place a cap on liability for accidents (like the BP oil spill). We offer the nuclear industry large loan guarantees. And, of course, we maintain an immense military embroiled in the Middle East and elsewhere as it tries to secure access to energy resources around the globe.
What do we taxpayers get in return? Not much. Certainly there’s no evidence that subsidies do anything significant to increase our domestic energy supply. A recent study by the U.S. Energy Information Agency found that subsidies for domestic energy production doubled between 1999 and 2007, but despite all the extra money the amount of energy supplied by domestic sources stayed the same.
Oil lobbyists like to warn of dire consequences if petroleum subsidies are cut-fewer oil sector jobs, higher gasoline prices. But that’s nonsense. Petroleum is an international market; U.S. domestic supplies, which make up only 2 percent of the world’s proven petroleum reserves, have little effect on global oil prices. And it is world oil prices, not federal subsidies, that really determine how much drilling oil firms will do. Cutting oil subsidies, the Treasury Department has estimated, would reduce domestic energy production in the long run by less than one-half of 1 percent, would cut domestic oil jobs by the same amount, and would affect GDP by an amount “too small to measure.”
The single biggest energy subsidy, worth some $2.2 billion per year to the oil industry, doesn’t even support domestic production. It is a tax break, first inserted into the Internal Revenue Code in the 1950s, that allows American oil companies to subtract the royalty payments they make to foreign governments from the corporate income taxes they owe at home. This is a super-sized benefit, since a royalty is paid on the total value of oil extracted, while income taxes are paid on only the profits after all expenses. Even worse, of course, the tax break creates an incentive for oil companies to import petroleum, only increasing and perpetuating our dependence on foreign oil.
In other energy industries, federal subsidies have for decades brought little or no public benefit even as they support an infrastructure of lobbyists hired to keep the money tap flowing. The coal industry receives more than $2 billion per year through the alternative fuels production tax credit, largely to produce coal-based synthetic fuels, or refined coal. This is a pointless use of money. These fuels do nothing to reduce carbon dioxide or promote energy efficiency, and absent the subsidy, more power plants would probably just burn the basic coal rather than its synthetic form.
The U.S. government also allocates about $2 billion per year toward coal-related research and development into various “clean coal” technologies. So far, the return on this investment has been pretty much nil. But the coal lobby has done a good job of blurring that fact.
Today, a whole new round of government-promised subsidies is enabling the energy industry to make multibillion-dollar investments-in ethanol refineries, nuclear power facilities, and “clean coal” plants. The danger with these large-scale and highly capital-intensive “white elephant” projects is that the decisions made today will drive energy supply considerations for the next forty years. The very industries supporting such projects admit that they cannot survive in the market without government support. But, once built, these boondoggles create political interests demanding still more subsidies while limiting our nation’s flexibility to shift to cleaner and more cost-efficient energy sources.
As an investor in clean and green energy, I will confess that some of our companies have benefited from increased sales of equipment and services thanks to federal incentives to step up investment activity in solar and wind power in recent years. The primary jumpstart was the new tax credits that were built into the Energy Act of 2005 and renewed, haltingly, on an annual basis by Congress since then. I find myself concluding, however, that even subsidies for the truly green renewable sources can lead to perverse energy outcomes. For example, the entrance of the green renewable industry into the energy subsidy race over the past few years has in many places created the energy equivalent of suburban sprawl-a patchwork of wind and solar farms being deployed helter-skelter across the landscape. Thus, in some instances, wind projects have been launched without due attention to the additional infrastructure expenses that will be necessary to build new transmission lines, leaving new wind facilities stranded or underutilized. Texas, for example, has found that it must create at least $3 billion worth of transmission lines to get electricity from its wind projects to its cities, and concluded, ironically, that in some instances transmission line corridors must incorporate plans for new coal-fired power plants to justify the investment.
So we can waste money and distort the market by subsidizing all of these forms of energy. Or we can just call it quits on the waste. Disarm completely. Kill all the subsidies-yours and mine.
Full article at Washington Monthly