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Energy Subsidy Myths and Realities

Playing favorites or ‘all of the above’?

Fortnightly - June 2012
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The issue of federal incentives for energy industries is highly contentious and has serious implications —for U.S. energy policy, environmental policy, and for budgets and deficit reduction. Thus far, unfortunately, the debate has suffered from a lack of rigorous empirical data. And that lack extends to the amounts, distributions, and forms of federal incentives. It only encourages an excess of rhetoric, claims, and counterclaims.

For example, renewable energy advocates and environmentalists contend that the federal government provides large subsidies and incentives to the fossil and nuclear industries, while offering relatively little to renewable energy. The oil and gas industries contend that their subsidies are modest and are essential for increasing production. And so forth.

To provide a clearer understanding of government spending patterns, recent research gathered comprehensive detailed information on federal energy incentives over the past six decades. 1 This research shows how the federal government has historically encouraged, promoted, and supported the development of U.S. energy resources—in many diverse ways, including direct subsidies, regulation, tax incentives. 2 The many forms of incentives make it difficult to quantify the relative costs and benefits of different policy priorities and approaches, but empirical data sheds some light on the issue, which might help future energy policy leaders make the best possible use of taxpayer dollars.

Historical Perspective

During the 60-plus years that federal incentives have played a significant role in the modern energy marketplace, government support has changed directions many times, making it extremely difficult to identify incentives and track them through year-to-year changes in legislation and budgets. According to research by Management Information Services, federal incentives for energy development from 1950 through 2010 totaled $837 billion (2010 dollars). These incentives can be classified within six generic categories (see Figure 1) .3 This classification illustrates not only the total federal incentives for each energy source—nuclear, hydro, coal, oil, natural gas, renewables, and geothermal 4—but also the distribution of these incentives among the different policy options and support mechanisms.

Research and development (R&D) ;

Regulation: Federal regulations and mandates; 5

Taxation: Special exemptions, allowances, deductions, credits, etc. related to the federal tax code;

Disbursements: Direct financial subsidies, such as grants;

Government services: Assistance provided by the federal government without direct charge; and

Market activity: Direct federal involvement in the marketplace.

The research quantified the expenditures from 1950 to 2010 and identified the types of incentives provided and the energy sources targeted with each type of incentive. 6 The amounts and recipients of each type of incentive are summarized in Figure 1, which shows three key facts. Namely, the federal government has provided $837 billion (2010 dollars) for energy developments since 1950. The largest type of incentive has been tax concessions, amounting to about 47 percent of all incentives. And federally funded regulation and R&D, at 19 and 18 percent respectively,

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