Fat Subsidies for Fossil Fuels

Nov92010

The next time that someone complains that solar energy is too expensive and will never be competitive with coal, oil or natural gas, throw a few of these numbers their way: $72 billion – that’s how much money the US government spent between 2002 and 2008 on subsidies for fossil fuels according to a report by the Environmental Law Institute. That’s over $10 billion a year. And how much of that — you wonder — was spent to subsidize renewable energy over the same period? $29 billion – and half of that, was spent on ethanol subsidies alone. Uncle Sam spent twice as much to subsidize fossil fuel production and consumption and only 15% was spent to subsidize the renewable energies that really can change the way the world generates electricity (solar, wind, biomass, etc.).

Subsidies are one of many policy instruments used by government to attain economic, social and environmental objectives. Certainly subsidies, for example, to defray low income heating oil expenses meet clear social and economic objectives. But one of the largest fossil fuel subsidizes arises from a convoluted foreign tax credit, which essentially gives oil companies favorable tax treatment for royalties they pay to foreign governments for rights to drill. That single subsidy accounts for over $15 billion dollars in lost tax revenue over the study period. Other than improving the bottom line for oil companies, it’s hard to define a clear economic, social or environmental objective that loophole meets.

Fossil fuel subsidies don’t stop at the US borders either. A 2010 Internal Energy Agency (IEA) report estimated that almost $700 billion a year is spent to subsidize the production and consumption of fossil fuels worldwide. That’s roughly the equivalent to 1% of the world’s gross domestic production. The IEA also estimates that if those subsidies were phased out by 2020, it would result in a reduction in primary energy demand at the global level of 5.8% and a fall in energy related carbon dioxide emission of 6.9%, compared with a base line with no change in subsidies. Among other things, subsidies can distort markets and cause over consumption of fossil fuels. For example in the former Soviet Union, electricity prices are much lower than their cost. As a result, per capita energy consumption is very high and energy efficiency is very low. Makes sense. You can’t value what you don’t pay for.

Of course, fossil fuel subsidies form the cornerstone of many economic development and quality of life initiatives, especially in the developing world. Unraveling a worldwide web of subsidies and direct assistance will not be accomplished quickly or easily, but let’s call a spade a spade. The oil, coal and natural gas industries are heavily, heavily subsidized worldwide. That’s what makes them so “cheap.” Given the cost of fossil subsidies, the damage these fossil fuels cause to the planet, and the danger we face as a nation relying on so much imported oil, solar energy looks cheaper all the time.

Some might argue that the stimulus bills evened the playing field, by focusing some money on clean tech energy investments. But the difference is that the fossil fuel subsidies are permanent, deeply embedded benefits. Stable policy attracts long term, lower cost investment whereas one time, temporary incentives creates risk and uncertainty, leaving investors and financiers nervous about making clean energy commitments.

When the fossil fuel industries give up their $700 billion a year, we’ll stop asking for solar subsidies. Until then, it just makes economic sense to incentivize the type of energy generation that society actually wants and needs.

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