The Subsidy Game

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Energy subsidies have shaped how the U.S. uses—and chooses—its resources. A deeper look into the history & future of renewable energy & fossil fuels.
Energy Source: Oil
Energy Source: Oil
Energy Source: Natural Gas
Energy Source: Natural Gas
Energy Source: Coal
Energy Source: Coal
Energy Source: Hydro
Energy Source: Hydro
Energy Source: Hydro
Energy Source: Nuclear
Energy Source: Solar
Energy Source: Solar
Energy Source: Geothermal
Energy Source: Geothermal
Intro image.
Energy Source: Oil
Energy Source: Natural Gas
Energy Source: Coal
Energy Source: Hydro
Energy Source: Hydro
Energy Source: Solar
Energy Source: Geothermal

Most examinations of government energy subsidies don’t factor in what economists call “externalities,” side effects or consequences of activities that affect other parties without being reflected in the costs involved. With energy production, some of the biggest externalities are the social, health, and environmental effects of pollution.

The question is not whether fossil fuel, nuclear, and renewable energy industries are government subsidized, but how much, how equitably, and at what cost to the environment, and to taxpayers’ pocketbooks and health.

The ostensible purpose for government subsidies is to achieve social goods and services that the private sector is unwilling or unable to provide. The political purpose may or may not be the same.

Subsidies are necessary because the social good or service desired might not be profitable to a business. The federal government has subsidized industries and facilities since its inception. The dredging of ports, giving away millions of acres of land to get railroads built, and the home mortgage interest deduction are all government subsidies.

Government subsidies may take several forms, including the funding of basic research. For instance, we wouldn’t have PV modules on earth if not for NASA needing them in space. Most libraries and airports are government-run, which is a subsidy to private citizens or private industry. Subsidies can also be grants, tax breaks, or tariffs on foreign goods to protect domestic manufacturers.

Of course, when there is not general agreement on the worthiness of a subsidy, such as public libraries, one person’s wasteful government subsidy is another’s wise government investment. Whether government subsidies make sense depends upon the subsidy and on ideology. Should government be picking winners and losers? 

Energy Subsidies: How Much To Whom?

As to which energy sources are being subsidized and by how much is a matter of perspective. Below, some of the most recent critiques are surveyed. Collectively considering all of them results in  relatively good comparison of subsidies between various energy sources.

A report prepared for the nuclear industry by Management Information Services (MIS), an economic research and management consultancy, analyzed federal energy incentives (aka  subsidies) to the oil, natural gas, coal, hydroelectric, nuclear, renewables (primarily wind and solar), and geothermal industries over the past 60 years (see “Summary” table). They identify six categories of subsidies:

Tax policy includes special credits, deductions, allowances, and exemptions available only to a particular energy industry. As examples, wind and solar get tax credits, while the oil and gas industry receives special allowances—such as more rapid depreciation for tax purposes than is allowed for other industries—for resource depletion and intangible drilling costs.

Regulation includes “gains realized by energy businesses when they are exempt from federal requirements that raise cost or limit prices” and “costs of federal regulation that are borne by the general budget and not covered by fees charged to regulated industries.” The nuclear power industry couldn’t afford to pay the insurance premiums needed in the event of an accident, so the federal government relieves them of the obligation.

Research and development is also for demonstration programs. Neither the nuclear or solar industries would have gotten off the ground as they did without federally funded research. Perhaps PV modules would have come about by private firms seeking profit that would have been available had fossil fuels not been subsidized, but perhaps not—and certainly not as early as fossil fuels did.

Market activity “includes direct federal government involvement in the marketplace.” Safety airbags in automobiles became commonplace after the federal government required them for its own fleets.

Government services include “all services traditionally and historically provided by the federal government without direct charge.” For example, infrastructure investments like the deepening of ports for bigger ships to haul coal, oil, or liquefied natural gas.

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