||The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject. (September 2013)|
Energy subsidies are measures that keep prices for consumers below market levels or for producers above market levels, or reduce costs for consumers and producers. Energy subsidies may be direct cash transfers to producers, consumers, or related bodies, as well as indirect support mechanisms, such as tax exemptions and rebates, price controls, trade restrictions, and limits on market access. They may also include energy conservation subsidies. The development of today's major modern energy industries have all relied on substantial subsidy support.
Fossil fuel subsidies reached $90 billion in the OECD and over $500 billion globally in 2011. Renewable energy subsidies reached $88 billion in 2011. According to Fatih Birol, Chief Economist at the International Energy Agency without a phasing out of fossil fuel subsidies, we will not reach our climate targets.
Main arguments for energy subsidies are:
- Security of supply – subsidies are used to ensure adequate domestic supply by supporting indigenous fuel production in order to reduce import dependency, or supporting overseas activities of national energy companies.
- Environmental improvement – subsidies are used to reduce pollution, including different emissions, and to fulfill international obligations (e.g. Kyoto Protocol).
- Economic benefits – subsidies in the form of reduced prices are used to stimulate particular economic sectors or segments of the population, e.g. alleviating poverty and increasing access to energy in developing countries.
- Employment and social benefits – subsidies are used to maintain employment, especially in periods of economic transition.
Main arguments against energy subsidies are:
- Some energy subsidies counter the goal of sustainable development, as they may lead to higher consumption and waste, exacerbating the harmful effects of energy use on the environment, create a heavy burden on government finances and weaken the potential for economies to grow, undermine private and public investment in the energy sector. The majority of benefits from fossil fuel subsidies also go to the richest 20% of households.
- Impede the expansion of distribution networks and the development of more environmentally benign energy technologies, and do not always help the people that need them most.
- The study conducted by the World Bank finds that subsidies to the large commercial businesses that dominate the energy sector are not justified. However, under some circumstances it is reasonable to use subsidies to promote access to energy for the poorest households in developing countries. Energy subsidies should encourage access to the modern energy sources, not to cover operating costs of companies. The study conducted by the World Resources Institute finds that energy subsidies often go to capital intensive projects at the expense of smaller or distributed alternatives.
Types of energy subsidies are:
- Direct financial transfers – grants to producers; grants to consumers; low-interest or preferential loans to producers.
- Preferential tax treatments – rebates or exemption on royalties, duties, producer levies and tariffs; tax credit; accelerated depreciation allowances on energy supply equipment.
- Trade restrictions – quota, technical restrictions and trade embargoes.
- Energy-related services provided by government at less than full cost – direct investment in energy infrastructure; public research and development.
- Regulation of the energy sector – demand guarantees and mandated deployment rates; price controls; market-access restrictions; preferential planning consent and controls over access to resources.
- Failure to impose external costs – environmental externality costs; energy security risks and price volatility costs.
- Depletion Allowance – allows a deduction from gross income of up to ~27% for the depletion of exhaustible resources (oil, gas, minerals).
Environmental impact of energy subsidies
According to the OECD, subsidies supporting fossil fuels, particularly coal and oil, represent greater threats to the environment than subsidies to renewable energy. Subsidies to nuclear power contribute to unique environmental and safety issues, related mostly to the risk of high-level environmental damage, although nuclear power contributes positively to the environment in the areas of air pollution and climate change. Subsidies to renewable energy are generally considered more environmentally beneficial, although the full range of environmental effects should to be taken into account.
A 2010 study by Global Subsidies Initiative compared global relative subsidies of different energy sources. Results show that fossil fuels receive 0.8 US cents per kWh of energy they produce (although it should be noted that the estimate of fossil fuel subsidies applies only to consumer subsidies and only within non-OECD countries), nuclear energy receives 1.7 cents / kWh, renewable energy (excluding hydroelectricity) receives 5.0 cents / kWh and biofuels receive 5.1 cents / kWh in subsidies.
In 2011, IEA chief economist Faith Birol said the current $409 billion equivalent of fossil fuel subsidies are encouraging a wasteful use of energy, and that the cuts in subsidies is the biggest policy item that would help renewable energies get more market share and reduce CO2 emissions.
In February 2011 and January 2012 the UK Energy Fair group, supported by other organisations and environmentalists, lodged formal complaints with the European Union's Directorate General for Competition, alleging that the Government was providing unlawful State aid in the form of subsidies for nuclear power industry, in breach of European Union competition law.
One of the largest subsidies is the cap on liabilities for nuclear accidents which the nuclear power industry has negotiated with governments. “Like car drivers, the operators of nuclear plants should be properly insured,” said Gerry Wolff, coordinator of the Energy Fair group. The group calculates that, "if nuclear operators were fully insured against the cost of nuclear disasters like those at Chernobyl and Fukushima, the price of nuclear electricity would rise by at least €0.14 per kWh and perhaps as much as €2.36, depending on assumptions made".
IEA position on subsidies
According to IEA (2011) energy subsidies artificially lower the price of energy paid by consumers, raise the price received by producers or lower the cost of production. "Fossil fuels subsidies costs generally outweigh the benefits. Subsidies to renewables and low-carbon energy technologies can bring long-term economic and environmental benefits". In November 2011, an IEA report entitled Deploying Renewables 2011 said "subsidies in green energy technologies that were not yet competitive are justified in order to give an incentive to investing into technologies with clear environmental and energy security benefits". The IEA's report disagreed with claims that renewable energy technologies are only viable through costly subsidies and not able to produce energy reliably to meet demand. "A portfolio of renewable energy technologies is becoming cost-competitive in an increasingly broad range of circumstances, in some cases providing investment opportunities without the need for specific economic support," the IEA said, and added that "cost reductions in critical technologies, such as wind and solar, are set to continue."
Fossil-fuel consumption subsidies were $409 billion in 2010, oil products ca half of it. Renewable-energy subsidies were $66 billion in 2010 and will reach according to IEA $250 billion by 2035. Renewable energy is subsidized in order to compete in the market, increase their volume and develop the technology so that the subsidies become unnecessary with the development. Eliminating fossil-fuel subsidies could bring economic and environmental benefits. Phasing out fossil-fuel subsidies by 2020 would cut primary energy demand 5%. Since the start of 2010, at least 15 countries have taken steps to phase out fossil-fuel subsidies. According to IEA onshore wind may become competitive around 2020 in the European Union.
Subsidies by country
Allocation of subsidies in the United States
A 2011 study by the consulting firm Management Information Services, Inc. (MISI) estimated the total historical federal subsidies for various energy sources over the years 1950–2010. The study found that oil, natural gas, and coal received $369 billion, $121 billion, and $104 billion (2010 dollars), respectively, or 70% of total energy subsidies over that period. Oil, natural gas, and coal benefited most from percentage depletion allowances and other tax-based subsidies, but oil also benefited heavily from regulatory subsidies such as exemptions from price controls and higher-than-average rates of return allowed on oil pipelines. The MISI report found that non-hydro renewable energy (primarily wind and solar) benefited from $74 billion in federal subsidies, or 9% of the total, largely in the form of tax policy and direct federal expenditures on research and development (R&D). Nuclear power benefited from $73 billion in federal subsidies, 9% of the total, largely in the form of R&D, while hydro power received $90 billion in federal subsidies, 12% of the total.
A 2009 study by the Environmental Law Institute assessed the size and structure of U.S. energy subsidies in 2002–08. The study estimated that subsidies to fossil fuel-based sources totaled about $72 billion over this period and subsidies to renewable fuel sources totaled $29 billion. The study did not assess subsidies supporting nuclear energy.
The three largest fossil fuel subsidies were:
- Foreign tax credit ($15.3 billion)
- Credit for production of non-conventional fuels ($14.1 billion)
- Oil and Gas exploration and development expensing ($7.1 billion)
The three largest renewable fuel subsidies were:
- Alcohol Credit for Fuel Excise Tax ($11.6 billion)
- Renewable Electricity Production Credit ($5.2 billion)
- Corn-Based Ethanol ($5.0 billion)
In the United States, the federal government has paid US$74 billion for energy subsidies to support R&D for nuclear power ($50 billion) and fossil fuels ($24 billion) from 1973 to 2003. During this same timeframe, renewable energy technologies and energy efficiency received a total of US$26 billion. It has been suggested that a subsidy shift would help to level the playing field and support growing energy sectors, namely solar power, wind power, and biofuels. However, many of the "subsidies" available to the oil and gas industries are general business opportunity credits, available to all US businesses (particularly, the foreign tax credit mentioned above). The value of industry-specific subsidies in 2006 was estimated by the Texas State Comptroller to be just $3.06 billion a fraction of the amount claimed by the Environmental Law Institute. The balance of federal subsides, which the comptroller valued at $7.4 billion, came from shared credits and deductions, and oil defense (spending on the Strategic Petroleum Reserve, energy infrastructure security, etc.).
The most important subsidies to the nuclear industry have not involved cash payments. Rather, they have shifted construction costs and operating risks from investors to taxpayers and ratepayers, burdening them with an array of risks including cost overruns, defaults to accidents, and nuclear waste management. This approach has remained remarkably consistent throughout the nuclear industry’s history, and distorts market choices that would otherwise favor less risky energy investments.
Many energy analysts, such as Clint Wilder, Ron Pernick and Lester Brown, have suggested that energy subsidies need to be shifted away from mature and established industries and towards high growth clean energy. They also suggest that such subsidies need to be reliable, long-term and consistent, to avoid the periodic difficulties that the wind industry has had in the United States.
A 2012 study authored by researchers at the Breakthrough Institute, Brookings Institution, and World Resources Institute estimated that between 2009 and 2014 the federal government will spend $150 billion on clean energy through a combination of direct spending and tax expenditures. Renewable electricity (mainly wind, solar, geothermal, hydro, and tidal energy) will account for the largest share of this expenditure, 32.1%, while spending on liquid biofuels will account for the next largest share, 16.1%. Spending on multiple and other forms of clean energy, including energy efficiency, electric vehicles and advanced batteries, high-speed rail, grid and transportation electrification, nuclear, and advanced fossil fuel technologies, will account for the remaining share, 51.8%. Moreover, the report finds that absent federal action, spending on clean energy will decline by 75%, from $44.3 billion in 2009 to $11.0 billion in 2014.
United States government role in the development of new energy industries
From civilian nuclear power to hydro, wind, solar, and shale gas, the United States federal government has played a central role in the development of new energy industries.
America's nuclear power industry, which currently supplies about 20% of the country's electricity, has its origins in the Manhattan Project to develop atomic weapons during World War II. From 1942 to 1945, the United States invested $20 billion (2003 dollars) into a massive nuclear research and deployment initiative. But the achievement of the first nuclear weapon test in 1945 marked the beginning, not the end, of federal involvement in nuclear technologies. President Eisenhower's “Atoms for Peace” address in 1953 and the 1954 Atomic Energy Act committed the United States to develop peaceful uses for nuclear technology, including commercial energy generation. The new National Laboratory system, established by the Manhattan Project, was maintained and expanded, and the government poured money into nuclear energy research and development. Recognizing that research was not sufficient to spur the development of a nascent, capital-intensive industry, the federal government created financial incentives to spur the deployment of nuclear energy. For example, the 1957 Price Anderson Act limited the liability of nuclear energy firms in case of serious accident and helped firms secure capital with federal loan guarantees. In the favorable environment created by such incentives, more than 100 nuclear plants were built in the United States by 1973.
Commercial wind power, today one of the fastest growing energy sectors, was also enabled through government support. In the 1980s, the federal government pursued two different R&D efforts for wind turbine development. The first was a “big science” effort by NASA and the Department of Energy (DOE) to use U.S. expertise in high-technology research and products to develop new large-scale wind turbines for electricity generation, largely from scratch. A second, more successful R&D effort, sponsored by the DOE, focused on component innovations for smaller turbines that used the operational experience of existing turbines to inform future research agendas. Joint research projects between the government and private firms produced a number of innovations that helped increase the efficiency of wind turbines, including twisted blades and special-purpose airfoils. Publicly funded R&D was coupled with efforts to build a domestic market for new turbines. At the federal level, this included tax credits and the passage of the Public Utilities Regulatory Policy Act (PURPA), which required that utilities purchase power from some small renewable energy generators at avoided cost. Both federal and state support for wind turbine development helped drive costs down considerably, but policy incentives at both the federal and state level were discontinued at the end of the decade. However, after a nearly five-year federal policy hiatus in the late 1980s, the U.S. government enacted new policies to support the industry in the early 1990s. The National Renewable Energy Laboratory (NREL) continued its support for wind turbine R&D, and also launched the Advanced Wind Turbine Program (AWTP). The goal of the AWTP was to reduce the cost of wind power to rates that would be competitive in the U.S. market. Policymakers also introduced new mechanisms to spur the demand of new wind turbines and boost the domestic market, including a 1.5 cents per kilowatt-hour tax credit (adjusted over time for inflation) included in the 1992 Energy Policy Act. Today the wind industry's main subsidy support comes from the federal production tax credit.
The development of commercial solar power was also dependent on government support. Solar PV technology was born in the United States, when Daryl Chapin, Calvin Fuller, and Gerald Pearson at Bell Labs first demonstrated the silicon solar photovoltaic cell in 1954. The first cells recorded efficiencies of four percent, far lower than the 25 percent efficiencies typical of some silicon crystalline cells today. With the cost out of reach for most applications, developers of the new technology had to look elsewhere for an early market. As it turned out, solar PV did make economic sense in one market segment: aerospace. The United States Army and Air Force viewed the technology as an ideal power source for a top-secret project on earth-orbiting satellites. The government contracted with Hoffman Electronics to provide solar cells for its new space exploration program. The first commercial satellite, the Vanguard I, launched in 1958, was equipped with both silicon solar cells and chemical batteries. By 1965, NASA was using almost a million solar PV cells. Strong government demand and early research support for solar cells paid off in the form of dramatic declines in the cost of the technology and improvements in its performance. From 1956 to 1973, the price of PV cells declined from $300 to $20 per watt. Beginning in the 1970s, as costs were declining, manufacturers began producing solar PV cells for terrestrial applications. Solar PV found a new niche in areas distant from power lines where electricity was needed, such as oil rigs and Coast Guard lighthouses. The government continued to support the industry through the 1970s and early 80s with new R&D efforts under Presidents Richard Nixon and Gerald Ford, both Republicans, and President Jimmy Carter, a Democrat. As a direct result of government involvement in solar PV development, 13 of the 14 top innovations in PV over the past three decades were developed with the help of federal dollars, nine of which were fully funded by the public sector.
More recently than nuclear, wind, or solar, the development of the shale gas industry and subsequent boom in shale gas development in the United States was enabled through government support. The history of shale gas fracking in the United States was punctuated by the successive developments of massive hydraulic fracturing (MHF), microseismic imaging, horizontal drilling, and other key innovations that when combined made the once unreachable energy resource technically recoverable. Along each stage of the innovation pipeline – from basic research to applied R&D to cost-sharing on demonstration projects to tax policy support for deployment – public-private partnerships and federal investments helped push hydraulic fracturing in shale into full commercial competitiveness. Through a combination of federally funded geologic research beginning in the 1970s, public-private collaboration on demonstration project and R&D priorities, and tax policy support for unconventional technologies, the federal government played a key role in the development of shale gas in the United States.
Investigations have uncovered the crucial role of the government in the development of other energy technologies and industries, including aviation and jet engines, synthetic fuels, advanced natural gas turbines, and advanced diesel internal combustion engines.
- Feed-in tariff
- Renewable Energy Certificates
- Renewable energy payments
- Financial incentives for photovoltaics
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