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Energy Subsidy Myths and Realities

Playing favorites or ‘all of the above’?

Fortnightly - June 2012

percent from natural gas, and 21 percent from coal), 9 percent from nuclear power, 3 percent from hydro, and 3 percent from biofuels, wind, and solar (see Figure 4) .

As shown in Figure 5, federal energy subsidies are heavily weighted in favor of biofuels, wind, and solar: Of the approximately $16.1 billion in 2010 federal energy subsidies, these three RE technologies received about $10.5 billion—65 percent of the total. Subsidies for fossil energy totaled less than $5 billion—30 percent. Thus, in 2010, biofuels, wind, and solar received more than twice the federal incentives as oil, coal, and natural gas combined.

This imbalance is demonstrated in Figure 6, which compares U.S. energy supplies from each technology with federal subsidies for that technology.

The imbalance in favor of RE shown in Figure 6 is longstanding, and the federal government has supported RE technologies for decades. Further, the imbalance is increasing. For example, as shown in Figure 7, in the four years from 2007 through 2010, RE received about 30 percent more in federal subsidies than did all fossil energy combined. As noted, in 2010, RE received more than twice as much as oil, coal, and natural gas combined. And preliminary data for 2011 indicate that RE will receive nearly four times as much federal subsidies as all fossil fuels combined.

This information isn’t meant to imply that either fossil energy or renewables receive too much or too little federal support. How to define appropriate levels and types of federal incentives for energy is an extremely complex and highly controversial issue, about which numerous studies, papers, and books have been written—and it’s outside the scope of this analysis. Nevertheless, the data summarized here provide useful insight into an important topic—one that’s very timely given the current acrimonious debate in Congress over federal spending, tax, and energy policies.

Findings and Implications

Research analysis yields a number of implications for U.S. energy policy.

One of the most interesting, and perhaps troubling findings is that much of U.S. energy policy is literally invisible: Federal energy incentives are overwhelmingly off-budget and hidden from easy scrutiny. Over the past six decades, two-thirds of all federal energy subsidies were in the form of either tax incentives or regulatory incentives, and were thus never explicitly budgeted to support energy technologies. This raises obvious and important policy questions and concerns.

The conventional wisdom that the oil industry has been the major beneficiary of federal financial largess is correct. Oil accounted for nearly half ($369 billion) of all federal support between 1950 and 2010.

Tax incentives dominate, and policies that allowed energy companies to forego paying taxes dwarfed all other kinds of federal energy incentives. Tax policy accounted for $394 billion (47 percent) of total federal energy incentives between 1950 and 2010, with the oil industry receiving $194 billion and the natural gas industry $106 billion.

The share of energy R&D incentives is diminishing, and despite the critical importance of R&D for the U.S. energy future, as an energy incentive it’s of relatively small and declining quantitative significance. Over the past six decades,