Have you noticed that critics of renewable energy always complain about subsidies?
After all, if an industry can’t compete in the marketplace without feeding at the government’s trough, can it ever amount to more than a niche player?
They paint a picture of the solar and wind industry spending time and money fighting to renew their subsidies. They claim that, if the industry had any chance of success, it wouldn’t need them after all these years.
Most of these critics conveniently neglect to acknowledge the heavy subsidies the fossil fuel industries enjoy. The remaining few still fail to demonstrate that renewable energy doesn’t deserve to receive so much.
Normally, these screeds come from people with clear ties to the fossil fuel industry, ideologically if not otherwise. So a recent article caught my eye. The author plans to install solar panels on his house, but still hates solar power. He’s a former bond salesman who now blogs about finance.
Some industries over the past 40 years — think of advances in telephony, software or computing power in that span — relentlessly innovate in a competitive market and produce stunning breakthroughs and extraordinary cost reductions. Solar power was not quite competitive with nonrenewables such as oil and gas in the 1970s, and it’s still not quite competitive with nonrenewables in the 2010s.
Why is that? I can’t prove this, but I have a sneaking suspicion that an industry built around government subsidies will attract a different set of talents and mindsets than an industry built around market competition.
Fair question. But where’s the market competition in the oil or coal business?
Fossil fuel subsidies
I found an eye-opening assertion from the coal industry:
The potential physical risks of alternative energy, great as they are, pale in comparison to the financial risks. Coal, after all, is well supported and subsidized, directly and via tax breaks. Wind and solar are not; they are in fact the epitome of risky investment. Sustainable, long-term government programs mean safety for all investors. Investing in coal will always be a smart move, especially with well-supported, long-term government subsidies driving down costs, and a near-complete absence of subsidies for so-called “alternative” energies. [Emphasis added.]
With that, we can take a closer look at energy subsidies.
Consumer subsidies result in a lower price. Producer subsidies result in higher profits. By definition, producer subsidies exclude whatever savings producers pass on to consumers.
Non-western nations pay more than 75% of the world’s fossil fuel subsidies. Iran and Saudi Arabia top the list, as they use cheap fuel prices to buy political stability. Venezuela spends more to keep gas cheap than it does on health care.
According to a report by the International Monetary Fund, consumer energy subsidies worldwide amount to 6.5% of the global GDP.
They have a devastating effect on the environment. In 2009, G-20 nations promised to end fossil fuel subsidies, which have only grown since then.
Although consumer energy subsidies worldwide dwarf producer subsidies, the controversy over whether renewable energy can stand without subsidies concerns only the latter.
Oil subsidies in the US
A report by Taxpayers for Common Sense looks specifically at oil and gas federal tax breaks. Coal and nuclear energy receive theirs from different legislation.
The 16th Amendment to the Constitution, which authorized Congress to collect personal and corporate income taxes, took effect in 1913. Oil industry tax breaks started in 1916. Congress has added multiple tax breaks since then, the latest in 2005. It has not repealed a one of them.
The oil industry now enjoys these subsidies, in order of enactment:
- 1916. Intangible drilling costs
- 1926. Special percentage depletion allowance
- 1939. Last-in, first out accounting
- 1980. Deductions for tertiary injectants
- 2004. Domestic production activities deduction
- 2005. Amortization period for geological and geophysical costs
These all come under the heading of production tax credits. The industry also enjoys investment tax credits. Meanwhile, Exxon made a record profit of $40.61 billion in 2007. That amounts to almost $1,300 per second! I am not among environmentalists who automatically view profits as somehow obscene, but a century of tax breaks provides a substantial chunk of that profit.
Eliminating all subsidies would save tax payers billions of dollars annually. But when has Congress ever eliminated one? In 2013 alone, the oil industry spent more than $144 million so that 756 lobbyists could fight the merest suggestion.
Renewable energy subsidies
Not long ago, critics could point to the high cost of renewable energy as a reason it could not compete with fossil fuels. Costs have shrunk dramatically.
Actually, the history of oil prices shows a similar trajectory. The first commercial oil well sold its output for $20 per barrel in 1859. That’s about $500 a barrel in today’s dollars.
According to a Lazard analysis of energy prices, the levelized cost of renewable energy has become competitive with fossil fuels. Even battery storage, a relative newcomer and still very expensive, has come down in price rapidly.
Although renewable energy has become cost-competitive at the point of sale, it must still work within a system designed for fossil fuels. That system includes the utility regulatory structure, the electric power grid, and the infrastructure for fueling vehicles.
Power companies built and maintain the current grid. They received a variety of subsidies along the way, from tax credits to cheap loans to outright federal grants. Solar and wind energy easily feed into the grid. On the other hand, electric vehicles must compete in an environment that greatly favors internal combustion engines. It will require extensive research and development to extend battery life and provide a network of charging stations.
But while fossil fuel enjoys permanent subsidies, renewable energy subsidies always come with a limited term. Whenever one expires, the fossil fuel industry industry fights to prevent extending it. The uncertainty makes it more difficult for renewable energy projects to attract investors.
Therefore, it’s absolutely true. Renewable energy can’t compete with fossil fuels without subsidies.
Renewable energy thriving despite unfavorable subsidies
Yet despite fossil fuels receiving vastly more subsidies without having to fight to renew them every few years, renewables have steadily become more and more competitive.
We can’t afford permanent subsidies for fossil fuels—or, really, for anything else. The best way to level the playing field is to let subsidies for renewable energy expire and eliminate existing subsidies for fossil fuels. I won’t hold my breath.
The next best way is to provide permanent subsidies for renewable energy companies. And then not keep piling on new ones after they become as hugely profitable as the oil companies.
If you know anyone who crabs about renewable energy subsidies as if they were some unfair advantage, please send them to this post.
How large are global energy subsidies? / David Coady et al. IMF working paper. International Monetary Fund, 2015
Oil Prices, exhaustible resources, and economic growth / James D. Hamilton, Department of Economics, University of California at San Diego, revised October 1, 2012.
Understanding oil and gas subsidies / Taxpayers for Common Sense, April 2014
Why renewable energy still needs subsidies / Kate Gordon. Wall Street Journal, September 14, 2015.
Solar power system, Kennedy Space Center. Pubic domain from Wikimedia Commons.
Kearny peaking plant. Pubic domain from Wikimedia Commons.
Wind farm. © Copyright Stephen Craven and licensed for reuse under this Creative Commons Licence