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Energy Subsidy Myths and Realities

Playing favorites or ‘all of the above’?

Fortnightly - June 2012

are the second- and third-largest incentives.

The dominance of oil and gas incentives is apparent in Figure 2. Federal tax concessions for oil and gas are the largest of all incentives, amounting to nearly 80 percent of all tax-related allowances for energy. Regulation of prices on oil for stripper wells or new wells comprises the second largest amount of incentives aimed at a particular energy type. In the R&D category, nuclear energy received about half of the expenditures since 1950 and coal about a quarter of the total. This figure also illustrates that oil and gas received almost 60 percent ($490 billion) of federal spending to support energy since 1950. Oil alone received three-fourths ($369 billion) of this amount. Coal received approximately 12 percent ($104 billion) of federal incentives, while hydro received approximately 11 percent ($90 billion). Wind, solar and geothermal received approximately 10 percent ($81 billion), and nuclear received approximately 9 percent ($73 billion) of federal incentives. If all of the renewable sources—hydro, geothermal, biofuels, wind, and solar—are grouped together, then renewables received the second highest percent of federal incentives, 23 percent. And nuclear energy was the beneficiary of about half ($74 billion) of federal spending on energy R&D. 7

Each energy type benefits from a mix of federal incentives, and the distribution is shown in Figure 2. For the period 1950 to 2010, the mix for each energy type is illustrated in Figures 3a and 3b.

Figures 3a and 3b illustrate that the significance of the incentives types differed substantially among the energy technologies; for example tax policy dominated the incentives for oil, natural gas, and renewables, but was of relatively little significance for hydro or nuclear. 8 R&D was very important for nuclear and geothermal, but of little importance for oil, natural gas, or hydro. Moreover, regulatory incentives were relatively important for oil and nuclear, but played negligible roles for the other energy sources. Market incentives were important for hydro and geothermal, but of little consequence for the other energy sources. And compared to the other incentives, government services and disbursements were relatively insignificant for all energy sources.

Recent Trends

Estimating historical federal energy incentives is important, but it doesn’t indicate more recent trends in federal energy incentives policies—for example, it’s unclear how subsidies in the 1950s and 1960s relate to current energy incentives and policies. In particular, there’s a common perception that recent and current federal energy policies provide large subsidies and incentives to the fossil industries (oil, coal, and natural gas) while providing relatively little to renewable energy (biofuels, wind, and solar). Thus, the refrain is often heard, “The fossil industries are being given huge federal financial incentives, while renewable energy is being starved.”

The data show that this conventional wisdom is wrong. In fact, there’s a huge imbalance in recent federal energy incentives; however, the imbalance is strongly in favor of renewable energy (RE)—especially when the contribution to energy supply of the different energy technologies is considered.

For example, the U.S. obtains about 83 percent of its energy from fossil fuels (37 percent from oil, 25