EconoMonitor

Policies of Scale: Efficient Global Policy

Energy Subsidies in Perspective

In my last piece I mentioned the centrality of alternative energy in the two campaign’s energy platforms (a positive development in Obama’s plan, a point of criticism in Romney’s), but I used the column to focus on oil. In this much shorter piece I want to bring some attention to alternative energy based on an insightful comment from Paul Bledsoe of the Bipartisan Policy Center.

Late last week Bledsoe made an important point for those considering subsidies for alternative energy: “Every form of energy has enjoyed subsidies at some point, especially in its early development phase… If you look at railroads, coal, oil, transportation, that’s the history of the United States. No energy source is developed without subsidies. That said, some subsidies are better than others and it’s important that we look at that.”

This is true. The first government subsidy for US energy was a tariff put on British coal in 1789. In the case of oil, the subsidy in place today that allows oil companies to write off the costs of domestic drilling saves them an average of around $4.86 billion annually according to the American Chemical Society. Yet this subsidy is not new. In fact, it began in 1916 when oil was far from an assured national investment. While an argument can be made today that the subsidy is no longer warranted, it is hard to argue that, along with government support for energy innovation in every important energy sector, subsidies have not been crucial in the development of America’s energy sector.

Yet as Bledsoe said, some subsidies are better than others. For example, Stanford professor Richard White points out the misguided railroad subsidies: “For the country as a whole, the Pacific Railway Act of 1864 and subsequent legislation subsidizing the transcontinental railroads — the lines that crossed the continent from the 98th meridian to the Pacific Coast — were the worst laws money could buy. By encouraging dumb growth, those laws sacrificed public good for private gain, and Americans came to regret it.”

He goes on to argue that the very justification of the subsidies – that railroads were necessary in saving the Union – was unfounded given that “the Union was already saved before the first line was completed. The best Western farmlands would have been settled without the railroads; their impact on other lands was often environmentally disastrous. For three decades California commodities could move more cheaply, and virtually as quickly, by sea. The subsidies the railroads received enriched contractors and financiers, but nearly all the railroads went into receivership, some multiple times; the government rescued others.”

Today’s subsidies for energy production from renewable (a.k.a alternative) sources like wind and solar are quite controversial. Many argue that they are propping up an otherwise unprofitable industry and are therefore a poor usage of government money. I am not issuing my own verdict on this question, but here are some numbers to consider:

The average subsidy for an oil and gas between 1916 and 2009 in 2010 dollars was $4.86 billion while the average subsidy for alternative energy sources between 1994 and 2009 in 2010 dollars was $0.37 billion

  • In 2010, petroleum and natural gas combined for 62% of America’s total energy consumption while renewable alternative sources combined for 8%
  • The Energy Information Agency, taking current and established future law (e.g. oil production subsidies and yet to be implemented CAFE standards) into account, projects (page 76) an absolute decline in the percentage of oil consumption and static natural gas consumption from 2010 to 2035 while renewables grow from 7 to 11%.

Note: The 8% figure in the first bullet point includes biofuels while the 7% figure in the last bullet excludes them. Biofuels represented 23% of renewable energy in 2010.

9 Responses to “Energy Subsidies in Perspective”

Ali BustamanteSeptember 10th, 2012 at 4:18 pm

The average subsidy for an oil and gas between 1916 and 2009 in 2010 dollars was $4.86 BILLION and not million based on the Double Bottom Line Venture Capital report being cited.

Candy KwiatekSeptember 10th, 2012 at 4:58 pm

It's easy to look in hindsight and say subsidies were necessary, but were they really? Medicine. Science exploration. Technology. Education. Most developed in this country to extremely advanced levels in the private arena, without/prior to federal subsidies. Why should energy be any different? Federal subsidies tend to favor political, not market interests. Federal subsidies tend to focus on short-term benefits. By way of example – biofuel subsidies have negatively impacted the cost of food as farmers move into the more profitable government-subsidized commodities, and CAFE standards are now predicted to increase the death toll from auto accidents because the decreased-weight cars are made from lighter materials such as plastics. More specific to your topic is the overall economic impact of the expected federally mandated energy changes that will be implemented through subsidies. Does ANYone proposing subsidies EVER ask "And then what happens? and then what?" While you don't issue your own "verdict" on government subsidies, aren't there any answers out there about energy that don't rely on federal subsidies?

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T PainterSeptember 11th, 2012 at 1:16 pm

There is no need for CAFE standards. If gasoline is too expensive because world supply and demand dictate that fact, car markers will in turn face market forces for better fuel milage. In that case the price mechanism will itself "fuel" deamnd for "alternative" powered motor vehicles. Otherwise, CAFE standards are 100% political and have little to do with economic necessity. If "reducing freign imports" from the Middle East is a political necessity, on "national security" or any other grounds, then the push should not be placed indirectly on the car makers, but directly on the oil importers, until the political goal of reducing imports from the Middle East is met. Even in that scenario, the price mechanism, not artificial CAFE standards, will, if needed, induce "greater fuel efficiency" and/or "alternative fuel" motor vehicles.

Lastly, energy subsidy comparisons have only one valid economic approach, and that's based on the total energy produced, in energy unit equivalents; and in that respect, as long as there are energy subsidies (not that there ought to be), oil and gas subsidies are frugal compard to the subsidies for wind and solar.

Ed Dolan EdDolanSeptember 11th, 2012 at 4:52 pm

"There is no need for CAFE standards." Totally agree, as I wrote here, commenting on the latest 56 mpg CAFE standard: http://tiny.cc/4zchkw . Much better to use a price signal through a gasoline tax or carbon tax.

In fact, to the extent that there is a justification based on environmental and/or national security externalities for changing the energy mix, raising the price of the fuels that cause the externalities is always better than subsidizing those that are free of the externalities.

ThomasGrennesSeptember 11th, 2012 at 1:22 pm

Because many energy subsidies have been tried in the past, does that imply that all
new subsidies are equally promising? Now that we have data on the outcome of the
ethanol subsidies, the case against against the ethanol policy looks overwhelming.
Every dollar and every unit of corn has alternative uses.

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