Making (Non)Sense Out of Energy Subsidies

Energy subsidies are a stick that champions of their favorite energy technologies wield against competing technologies.

Supporters of fossil fuel and nuclear argue that wind, solar, and others in the renewable family are welfare bums that can't stand on their own. Advocates for renewables fire back that fossils and nuclear have been supping at Uncle Sam's table for years.

The fact is that all forms of energy are subsidized. Not one - conservation, renewables, nuclear, or fossils - stands on its own in some libertarian paradise free of tax preferences, research grants, loan guarantees, or other flavors of federal gravy.

That's not necessarily bad. Using subsidies as a rhetorical cudgel clouds a more fundamental question - what are the top energy problems that we're trying to solve and what subsidies should be employed to solve them?

The tripartisan trio of Senators Lindsey Graham, John Kerry, and Joseph Lieberman is crafting energy and climate legislation that will attempt to answer those questions. Wish them luck. Meanwhile, let's take a quick tour for consumers puzzled by the rhetorical barrages surrounding energy subsidies.

First, pinning down what is and isn't a subsidy is not straightforward. As the U.S. Energy Information Administration (EIA) stated in a 2008 report on the topic, "there is no universally accepted definition of subsidy." Which, unfortunately, gives ideologues and spin doctors more space to roam the happy hunting grounds of disingenuousness, and to sow the fertile soil of public confusion. As the EIA report stated: "Because all government programs have costs and benefits, there has been a tendency for the term 'subsidy' to lose specificity and acquire derogatory connotations."

With those caveats in mind, let's parse several recent reports that took a crack at calculating subsidy amounts and identifying beneficiaries.

In 2004, the National Commission on Energy Policy, a bipartisan group of public and private-sector energy worthies, published an estimate developed by a Cambridge, Mass. consultant, Earth Track, Inc. The consultant came up with a range of $37 billion to $64 billion per year. Earth Track included R&D grants, oil and gas royalty relief, tax incentives, insurance, cleanup of polluted sites, and even military protection of oil supply lines. Still, the consultant noted that its number was only a "rough estimate."

Three years later, Earth Track produced another estimate of federal subsidies for the Organization for Economic Cooperation and Development (OECD), a research and policy shop for the U.S. and 29 other developed countries. The estimate was a range of $49 billion to $100 billion per year, with fossils getting two-thirds, nuclear 12.4 percent, ethanol 7.6 percent, other renewables 7.5 percent, and conservation 2.1 percent. The remaining 4.2 percent was a mixed grill.

EIA, the Department of Energy's statistical branch, came up with an entirely different set of numbers in 2008. EIA was tasked by Senator Lamar Alexander (R-TN) with adding up subsidies that had "an identifiable federal budget impact," including tax preferences and grants. By that definition, the 2007 total was $16.6 billion, much lower than Earth Track's numbers. EIA parceled out the pie as follows: Renewables, including ethanol - 29 percent. Conservation 5.6 percent. Nuclear 7.6 percent. Fossils 33 percent.

EIA made clear that its report should not be viewed as the last word on subsidies. It did not include, for example, the federal liability cap on nuclear power plants or military protection of oil supply lines.

Yet another study was published in 2008 by the Environmental Law Institute and Woodrow Wilson Center for International Scholars. This study added some new twists to defining subsidies - it included price supports for growing corn and tax credits for foreign royalties paid by oil and gas companies. Between 2002 and 2008, fossils collected $72.5 billion and renewables $28.9 billion by that study's calculations. Nuclear's and conservation's shares weren't calculated.

Policy preferences can dictate how subsidies are defined and described. For example, champions of always-on coal and nuclear power point out that the per-kilowatt-hour cost of subsidies for intermittent renewables is much higher than the subsidy costs of baseload plants that run 24/7. For their part, renewables' advocates argue that tax preferences for fossils are permanent provisions in the tax code, while preferences for renewables have had an on-again, off-again history that has discouraged investment.

In other words, numbers can be manipulated and turned into weapons for ideological combat. But you knew that already.