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Energy Subsidy Myths and Realities

Playing favorites or ‘all of the above’?

Fortnightly - June 2012

R&D accounted for only about one-sixth of all federal energy incentives. That share was dwarfed by energy tax incentives, and was even smaller than regulatory incentives.

Energy R&D peaked in real terms in 1981 and has never come close to receiving that level of funding since then. Further, the quantitative significance of the energy R&D incentive continues to decline; Historically, R&D accounted for just over 18 percent of energy incentives, but by 2010 R&D accounted for only about 12 percent.

Energy incentives are very much “different strokes for different folks.” Different types of energy incentives are of radically different importance for the energy technologies. Nuclear and geothermal depend critically on R&D, and benefit little from tax incentives. Natural gas is almost wholly dependent on tax incentives, and for it the importance of all other types of incentives is trivial. For hydro, market activity incentives are determinant. For oil, tax and regulatory incentives are key.

Contrary to conventional wisdom, renewable energy hasn’t been shortchanged, and the perception that the renewable industry has been historically underfunded with respect to incentives is open to debate. Since 1950, renewable energy, including solar, hydropower, and geothermal, has received the second largest subsidy—$171 billion (21 percent of the total), compared to $121 billion (14 percent) for natural gas, $104 billion (12 percent) for coal, and $73 billion (9 percent) for nuclear power. In recent years, incentives for renewable energy have greatly exceeded those for fossil fuels or for nuclear energy.

There’s a serious cost-benefit mismatch, since considerable disparity exists between the level of incentives received by different energy sources and their current contribution to the U.S. energy mix. Although oil has received roughly its proportionate share of energy subsidies, nuclear energy, natural gas, and coal might have been under-subsidized, and renewable energy, especially solar, might have received a disproportionately large share of federal energy incentives.

Energy programs and incentives can take on a life of their own and persist well after the scientific rationale and general consensus supporting them have ended. The persistence of the Breeder Reactor program in the 1980s and the Magneto-hydrodynamics program in the 1990s are relevant examples. A more recent example is the continued heavy subsidization of corn ethanol.

R&D funding is skewed, and recent federal R&D expenditures bear little relevance to the contributions of various energy sources in the total energy mix. For example, renewable sources—excluding hydro—produce little energy or electricity, but received $6 billion in R&D funds between 2001 and 2010, whereas coal, which provides about one-third of U.S. energy requirements and generates nearly half of the nation’s electricity, received about the same amount of R&D money. Nuclear energy, which provides 10 percent of the nation’s energy and 20 percent of its electricity, was also underfunded, receiving $3.2 billion in R&D funds over the past decade.

There’s a fine line between some energy subsidies and welfare payments, since various types of energy-related programs are more properly considered social welfare or poverty alleviation programs. For example, Weatherization Assistance Grants (WAG) are offered by DOE to assist low-income households in weatherizing their homes, and