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Tax breaks and subsidies for energy

Hovering in the background of several current energy and sustainability-related news stories is the question of tax breaks and subsidies for energy.

  • In the wake of the BP oil spill disaster, the Senate Finance Committee will discuss a possible rollback of oil and gas tax incentives, partly to fund clean energy incentives and job creation.
  • A cap on carbon is the fundamental element of the climate and energy legislation now before the Senate. Implementing a cap requires consideration of tax preferences and subsidies, whether indirectly through the allowances inherent in a market-based (cap & trade) mechanism or directly through a carbon tax.
  • The issue of subsidies is also regularly, albeit carelessly tossed around during the tug-of-war between incumbent fossil fuel interests and renewable energy advocates over long-term economic viability and jobs.

Some things are clear. Worldwide, subsidies that support fossil fuels dwarf those for renewables. The International Energy Agency’s study for the G-20 documents a worldwide total of $557 billion of fossil fuel subsidies. It is important to note that these are purely consumption-based subsidies – they exist to maintain a below-market price for fossil fuels. As such, they artificially drive up demand. The IEA estimates that phasing out these subsidies would reduce global energy use in 2020 by 5.8%.

Contrast those to the more broadly-based tax preferences and subsidies in the US, the world’s largest economy and the largest user of energy. The most recent comprehensive analysis, done by the US Energy Information Administration in 2007, estimated the total impact of all federal energy subsidies at 16.6 billion. That total includes categories of spending not estimated for the IEA study, which is focused on consumption-based subsidies. The US total includes:

  • Direct Expenditures (15%) – payments to producers or consumers of energy
  • Tax Expenditures (63%) – reductions in the tax liability of (and therefore the revenue to the federal government from) companies and individuals, based on actions they take involving energy production, consumption or conservation
  • Federal R&D Spending (17%)
  • Regionally-targeted electricity programs (5%) – programs like the Tennessee Valley Authority

While US subsidies for renewables increased significantly from the previous such analysis done in 1999, they were still smaller than those for fossil fuels ($4.875 billion to $5,451 billion). So even without considering the additive impact of more broadly calculated subsidies in other countries, renewables represent a tiny fraction (1%) of energy subsidies worldwide.

Other items of interest in the US report

  • Virtually all of the government subsidies for both fossil fuels and for renewables were the result of tax preferences or R&D (98% and 96%, respectively), with almost no direct payments to producers or consumers.
  • The overwhelming majority of direct government payments go to low income consumers – 86% of the total ($2.2 billion) is disbursed through the Low Income Home Energy Assistance Program (LHEAP).
  • Subsidies for nuclear power were primarily R&D focused ($922 million, or 73% of the $1,267 million to nuclear). The R&D spending for nuclear exceeded that for both fossil fuels ($613 million) and renewables ($727 million).

References:

  1. IEA Joint Report on Energy Subsidies for G20, http://www.worldenergyoutlook.org/subsidies.asp
  2. US Federal Financial Interventions and Subsidies in Energy Markets 2007, http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/
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