Volume 89 Issue 51 | pp. 30-31
Issue Date: December 19, 2011

Long History Of U.S. Energy Subsidies

Report shows centuries of government support for fossil fuels, much less for renewable energy
Department: Government & Policy
News Channels: Environmental SCENE
Keywords: DOE, energy subsidies, energy taxes, renewable energy, Solyndra, oil, gas, coal, nuclear
Oil and gas lead in historical average of annual subsidies.SOURCE: Nancy Pfund and Ben Healey. “What Would Jefferson Do?”
Credit: Nancy Pfund and Ben Headley
Oil and gas lead in historical average of annual subsidies.SOURCE: Nancy Pfund and Ben Healey. “What Would Jefferson Do?”
Credit: Nancy Pfund and Ben Headley

U.S. government subsidies for energy are as old as the nation, says Nancy Pfund, a managing partner at DBL Investors, a venture capital firm, and an anthropologist. In a recent study for DBL Investors, Pfund and coauthor Ben Healey, a Yale University economics graduate student and former Massachusetts legislative committee director, trace U.S. government energy incentives back to 1789, when leaders of the new nation slapped a tariff on the sale of British coal slipped into U.S. ports as ship ballast.

Using government documents, academic papers, and a mix of other data and reports, Pfund and Healey offer a historical perspective on today’s debate over energy subsidies. Their study finds a paucity of government support for renewable energy sources compared with past government investment in coal, gas, oil, or nuclear energy sources, which helped the country transition to new energy technologies and infrastructures.

The study comes as President Barack Obama continues to push for more government support for renewable, non-fossil-fuel energy sources. This push is intended to mitigate climate-change impacts of energy generation by cutting emissions of carbon dioxide from fossil fuels, as well as to create new jobs and industries. However, with the failure of solar energy manufacturer Solyndra and the loss of $535 million in taxpayer money that supported the company, Republicans and a few Democrats in the House of Representatives have attacked federal programs that support a transition to renewable energy (C&EN, Oct. 3, page 28).

Pfund and Healey favor government investments in energy, and their research supports the view that over the years new transitional energy sources have spurred U.S. economic growth and innovation. But their study, “What Would Jefferson Do? The Historical Role of Federal Subsidies in Shaping America’s Energy Future,” also finds that federal support of renewable energy falls short of the aid the federal government has given to oil, gas, coal, and nuclear energy when they were new. In fact, they say, backing for renewable energy is trivial in size.

In comparing current support for renewable energy with past aid for today’s traditional energy sources, the report focuses on two types of assistance: funding during the first 15 years of support and annualized expenditures over the life of the energy source.

The first 15 years, the report says, are critical to developing new technologies. It finds that oil and gas subsidies, including tax breaks and government spending, were about five times as much as aid to renewables during their first 15 years of development; nuclear received 10 times as much support.

Federal support during the first 15 years works out to $3.3 billion annually for nuclear energy and $1.8 billion annually for oil and gas, but an average of only $400 million a year in inflation-adjusted dollars for ­renewables.

For coal, which generates half the nation’s electricity, the authors were unable to quantify government support for the first 15 years, which includes federal and state aid. Coal, Pfund notes, benefits from a host of centuries-old programs that signal a rich history of aid, which is intertwined with the development of the nation. The aid runs deep and comes in many forms—state and federal tax breaks for mining and use; technological support for mining and exploration; national resource maps to encourage exploration and development; tariffs on foreign coal; and aid to steel smelters, railroads, and other industries that burn coal to encourage greater use and develop a steady market for coal.

“It has been a long heyday for coal,” she says, describing states and workers vying for jobs and business.

Pfund and Healey also found that some types of government support—particularly tax breaks—don’t go away because they are embedded in the tax code.

“These subsidies have been huge, and they are the gift that keeps on giving for many energy sources,” Pfund says. Temporary tax incentives intended to spur exploration or development of fossil fuels have become a permanent part of the country’s economic system, Pfund notes.

For example, coal companies can still take advantage of a measure passed in 1950 that originally allowed them to “temporarily” avoid a tax increase enacted to help fund the Korean War, the study says.

Similarly, several measures to aid oil companies passed in the early 1900s remain of key importance to the industry, Healey notes. These include one provision passed in 1916 to speed up depreciation of drilling costs. A second one, the oil depletion allowance, which became law in 1926, gives oil companies a tax break for depleting an oil reservoir. President Obama has sought to end these breaks but has been overwhelmed by the opposition from industry and its congressional allies.

Nuclear power plants also benefit strongly from subsidies, Healey says, particularly from the Price-Anderson Act of 1957, which requires the federal government to indemnify utilities in case of a nuclear disaster. The study quotes utility officials speaking in the 1950s who warned that without federal accident indemnification the industry could not exist.

The study does not include the nearly $40 billion in energy stimulus spending under the American Recovery & Reinvestment Act of 2009. The omission weakens its conclusions, but the money was not allocated when the report was being prepared. Even now, only about half of the $36 billion in stimulus money from the Department of Energy’s allocation has been spent. These funds are spread throughout old and new energy forms—renewables, coal cleanup technologies, vehicles, and nuclear projects. The largest loan guarantee in DOE’s controversial program would go to nuclear energy development, some $8 billion to back up a new nuclear power plant planned to be built in Georgia.

The biggest support for renewables comes from tax credits. Currently, investors can recover 30% of the cost of a wind or solar installation. But Congress has let these credits expire multiple times since their creation in the early 1990s, the study notes. It warns that without consistent, stable support during the initial 15-year period, a new technology will find success difficult.

Another hurdle for developers of renewable energy sources and one avoided by promoters of now-established energy technologies is strong opposition from entrenched, competitive industries, Pfund notes.

When railroads shifted from burning wood to coal for fuel, no powerful timber lobby fought this change, nor was there a well-heeled influential whale-oil lobby blocking fledgling oil producers as they developed kerosene and petroleum products, Pfund adds. Renewable energy developers face a tough battle to get a toehold in the marketplace when facing a traditional energy supplier with a fully depreciated power plant and a complete infrastructure in place to supply electricity. Without government support or a price on carbon emissions, the hurdle is even higher.

“A century’s worth of subsidies is going to put a damper on new product innovation and make it extremely costly to switch energy sources,” Pfund says. A huge driver for renewable energy development in the U.S. would be a price on carbon or the threat of one, which the coal and oil industries vehemently oppose.

When quizzed about the Solyndra failure, Pfund says it is consistent with the history of energy transitions in America.

“Today, we see a very stable and concentrated oil industry. But history tells us there used to be plenty of wildcatters and small oil and coal companies,” Pfund explains. “Many failed and went out of business or were long ago absorbed into larger companies. That is part of the innovative cycle—you make bets that don’t work and weed out the weaker participants. It is a destructive cycle. I don’t think you can make progress without accepting that there will be failures.”

Government support, Pfund adds, has resulted in cheap energy and is needed to continue meeting America’s future energy demands and continued economic growth. If anything, she argues, the study shows renewables have been undersubsidized.

“Subsidies are a proven tool. And there is money to be made out there,” Pfund says. “Subsidies are really the American way.”

Chemical & Engineering News
ISSN 0009-2347
Copyright © American Chemical Society
Chad  (December 19, 2011 3:31 AM)
This article misses the forest for just a handful of trees. By far the biggest subsidy to the fossil fuel industry, on the order of hundreds of billions of dollars per year, is its government-protected right to dump its waste products onto both public property and othe peoples' private property without compensating the owners or the public. Once require that polluters pay, a significant portion of the fossil fuel industry would disappear within just a few years.

» Reply
David  (April 2, 2012 10:37 PM)
Chad, if your suggestion were to be followed, how do you propose to replace the 83 % percent of our annual energy usage that comes from fossil fuels? There is presently no sufficient replacement from any combination of renewables. What would happen is a complete shutdown of the United States and massive poverty. People in the United States are not self-sufficient and are completely dependent on energy for their very survival.
» Reply
Andrew S  (March 23, 2013 11:22 AM)
Thorium Energy cheaper than Coal. Stop wasting subsidies on ineffective technologies and do the basic research to make Liquid Fluoride Thorium Reactors a working proposition. Otherwise the Chinese will be selling us the technology in a decade or so. Bet that's going to cost us dear.
» Reply
Jim  (January 31, 2012 2:19 PM)
"history tells us there used to be plenty of wildcatters and small oil and coal companies,” Pfund explains. “Many failed and went out of business or were long ago absorbed into larger companies."
Oops! Those early explorers had no subsidies?!
Eric  (April 5, 2013 11:19 AM)
I think they would argue some of those early explorers failed even with subsidies. More recent companies have failed despite subsidies: a certain Arbusto Energy/Bush Exploration/Spectrum 7/Harken Energy comes to mind.
Harold Rose  (November 14, 2013 8:13 PM)
Thank you for this article. I have been a believer in the potential of alternative energy sources. I hear many of the proponents for more conventional sources of energy say that, investment in alternative energy is too costly. From the information provided in this article, one sees that investment, via subsidies, is key to the development of the technology for the energy source.

I spent some time looking for information on the monies involved with subsidizing energy in the U.S.A. This article is much appreciated.
Cliff Claven  (December 2, 2013 2:49 PM)
The argument that fossil fuels have received more subsidies and support than renewables is an oft-repeated falsehood. No government subsidized the California gold rush, and likewise no government subsidized the Pennsylvania or Ohio or Oklahoma or Texas or California or Alaska or Gulf of Mexico or North Dakota oil rushes. Oil and gas, like coal, have bootstrapped themselves up on the backs of private capital and their profits have built all the nation's vast supporting oil and gas infrastructure. Tax revenues to state and federal governments from oil and gas have always far exceeded any subsidies, and the subsidies that do exist have generally been tools to steer the oil companies to do things the government wanted (i.e., environmental improvements), not to underwrite them in producing oil or gas.

The propaganda piece article above was prepared by DBL investors and would not bear up to the scrutiny of peer review for publication in a true science journal (http://i.bnet.com/blogs/dbl_energy_subsidies_paper.pdf). Unlike their selective use of data to hide the truth rather than reveal it, it is important to look at both sides of the scale in evaluating whether something is subsidized or not -- both the outgo and the income. The latest data that the US Department of Energy published in a report to Congress on federal energy subsidies was for 2010 and the most recent US IRS corporate tax data available are for 2009 (1. http://www.eia.gov/analysis/requests/subsidy/; 2. ftp://ftp.eia.doe.gov/pub/energy.overview/frs/s5112.xls ). Using these objective and comprehensive data covering all federal agencies, the total US oil and gas subsidies for 2010 worked out to a grand total of $2.8 billion, which equaled 45 cents per barrel of oil equivalent energy (BOE) delivered to the nation that year. In contrast, the revenues collected back by the federal government from oil and gas corporate and excise taxes were $9.01 per BOE. That's a 2000% return on investment, and does not include another $12 billion collected by the states in taxes and fees and permits.

This same DOE data reveals that wind and solar are subsidized at 68 times and 115 times the rate per unit of energy delivered compared to oil and gas (wind $31.39 per BOE = 1.843 cent/kWh; solar $52.30 per BOE = 3.017 cent/kWh). If someone wants subsidy parity, we would need to give the same deal to renewables and tax them at 2000% of their 2010 subsidy of $14.7 billion, which would be $294 billion.

Oil and gas can only sustain such a high burden of taxation because of their high EROI (energy return on investment). In Russia oil and gas are taxed even more extensively to enrich the government and all legitimate and illegitimate sectors of the economy, to the point where this sector comprises more than 40% of the GDP. There are at least 8 petro-states like Saudi Arabia whose entire GDPs and populations are subsidized exclusively by oil and/or gas export revenues. If oil and gas are subsidized, these government would not even exist, let alone be raking in cash from around the world.

It is impossible for a civilization to subsidize its own primary energy source by definition. If fossil fuels are net subsidized, then there must be something else providing the huge energy profit by which the industrial and post-industrial world have risen up from the energy poverty of the oxen age to the energy wealth of the rocket age. If it's not the hydrocarbons that provide the fuel for the rockets, than it must be pixie dust or moonbeams.
Lobo  (February 10, 2015 1:12 AM)
Cliff, you're way off here -- just because fossil fuels generate revenue doesn't mean they haven't needed subsidies or benefited from them. Historically, they *needed* government subsidies and protection to become the dominant energy sources. If they're so profitable now, why in the heck do they fight tooth and nail to maintain their subsidies? The article is very well researched and would withstand peer review, unlike your cherry-picked data. You don't address the costs of pollution from fossil fuels, which have been borne primarily by the public. Renewables' contribution to pollution is negligable by comparison. Moreover, as the article points out, fossil fuels did not have to face an entrenched industry, the way renewables do now. And it's elementary economic history that new technologies are typically more expensive and then become cheaper over time as they reach economies of scale; solar and wind costs have dropped dramatically in the last few years, even with inconsistent production tax credits. Do you work for the fossil fuel industry?
Erkko  (September 14, 2015 7:10 AM)
"If they're so profitable now, why in the heck do they fight tooth and nail to maintain their subsidies?"

If you were being given free money, wouldn't you?

It has nothing to do with needing those subsidies to operate.
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