The Subsidy Game: Page 4 of 4

Certain industries, such as pipeline operators, drillers, and mine operators, can organize themselves under a master limited partnership, which pays no corporate tax. Any tax liability passes directly to investors, who pay the lower capital gains rate (which is lower than most income tax rates). Solar and wind companies cannot do the same. 

Good Government Policy or Not?

If fossil and nuclear fuel prices reflected their true costs to human health, the environment, and economic growth, there wouldn’t be such industries—the energy they produce would be too expensive.

Government subsidies either create markets or industries, or correct market failures. It is ultimately a political question of whether society needs a missing industry or that a market needs correcting.

Getting Good Government Policy

Leveling the playing field so renewable energy can fairly compete with nonrenewable energy can be done in basically three ways. Implementing each approach comes with its own set of political challenges.

• Increase renewable energy subsidies to be commensurate with nonrenewable energy subsidies. If you can’t beat ‘em, join ‘em. Of course, in these fiscal times, getting more grants, tax credits, or tax breaks is difficult.
• Eliminate all government subsidies to all forms of energy. If oil, gas, coal, and nuclear energy were not subsidized, renewable energy sources wouldn’t need any subsidies, either. Clean and safe energy would dominate the market. However, while it’s hard to get a government subsidy, it’s even harder to get rid of one.
• Internalize externalities. If the fossil fuel industry had to pay for its pollution of the environment and its harm to human health, its product would be so expensive that renewable energy resources would have the wind at their back on the sunny side of the street. Eventually, Big Tobacco was held accountable; maybe Big Oil will be, too.

While every president since Richard Nixon has called for energy independence, the United States is still reliant on foreign oil. According to the Energy Information Administration, the United States imports about 49% of its petroleum supply. In his 2006 State of the Union address to Congress, President George W. Bush said, “America is addicted to oil.”

Yet at this writing, Iran is threatening to close the Straight of Hormuz, a navigational chokepoint through which 20% of the world’s annual oil production must pass. The United States says it will not allow any restriction of oil moving from the Persian Gulf. The downside of this conflict is the threat of war. The upside is that oil prices are rising, and higher oil prices make renewable energy options more attractive.

Positive Trends

The good news is that even if the U.S. energy playing field is not leveled, the trends for renewables are headed in the right direction, while the trends for the fossil fuels and nuclear energy industries are going in the wrong direction (for those industries, but not for those who breathe air and drink water and/or pay taxes).

In the United States, many coal power plants are shutting down because it’s too expensive to make upgrades to meet requirements of the Clean Air Act. Of course, much of this demand for energy may move to natural gas, rather than renewables. But natural gas faces a more problematic future, as public concerns increase about the environmental costs of obtaining gas trapped in shale—a practice known as hydraulic fracturing, or “fracking,” where a mixture of chemicals, sand, and water are injected into bedrock to release pockets of natural gas. This practice has been linked to chemical contamination of water supplies and low-level earthquakes. In contrast, PV modules and wind generators provide green, sustainable electricity without air, soil, or water pollution.

In general, the trend has long been—and, in all likelihood, will continue to be—that the cost of renewable energy will continue to decrease, while the cost for nonrenewables will continue to increase.

Access

Politically, Andy Kerr is a flexitarian who—depending upon the circumstances—favors markets and market-based solutions, government regulation, social group coercion, and/or individual voluntary action. He splits his time between Ashland, Oregon, and Washington, DC.

Resources:

Fossil Fuel Subsidies: A Closer Look at Tax Breaks, Special Accounting, and Societal Costs • http://tinyurl.com/homepower1

What Would Jefferson Do? The Historical Role of Federal Subsidies in Shaping America’s Energy Future • http://tinyurl.com/homepower2

Subsidy Gusher: Taxpayers Stuck With Massive Subsidies While Oil and Gas Profits Soar • http://tinyurl.com/homepower3

Green Scissors: Cutting Wasteful and Environmentally Harmful Spending • http://tinyurl.com/homepower4

Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use. Washington, DC: The National Academies Press. • http://tinyurl.com/homepower5

60 Years of Energy Incentives: Analysis of Federal Expenditures for Energy Development. Management Information Services, Washington, DC.• http://tinyurl.com/homepower6