U.S. Energy Subsidies in Perspective

By Roger Bezdek
Founder and President, Management Information Services, Inc.

Introduction

The issue of federal government support for the energy industries is highly contentious and has serious implications for U.S. energy policy, environmental policy, and federal budget and deficit reduction policies. There seems to be a widespread common perception that the U.S. federal government provides large subsidies and incentives to the fossil fuel industries (oil, coal, and natural gas) while providing relatively little to renewable energy. Thus, an often heard refrain is along the lines of “Fossil energy is being given huge federal financial incentives, while renewable energy is being starved.”1 This purported imbalance is frequently invoked by special interest groups arguing in favor of increased federal support for renewable energy and has been used by the Obama Administration in arguing for reduced support of fossil energy and increased funding and subsidies for renewable energy.

U.S. Energy Subsidies in Perspective

“Contrary to conventional wisdom, renewable energy has not been shortchanged, and the perception that the renewable industry has been historically underfunded with respect to incentives is not correct.”

Thus far, unfortunately, the debate has suffered from a lack of rigorous empirical data on the amounts, distributions, and forms of federal incentives and from an excess of rhetoric, claims, and counterclaims. As is often the case, the conventional wisdom here is wrong. In fact, there is a huge imbalance in federal incentives for the fossil energy industries compared to the renewable energy industries; however, the imbalance is strongly in favor of renewables and is increasing.

Here we examine this critical issue by analyzing comprehensive detailed information on federal energy incentives over the past six decades.2 We find that the federal government has historically encouraged, promoted, and supported the development of U.S. energy resources in many diverse ways. Federal energy incentives have taken the form of direct subsidies, regulation, tax incentives, market support, demonstration programs, R&D, procurement mandates, information generation and dissemination, technology transfer, directed purchases, and other types of actions.

Historical Perspective

U.S. Energy Subsidies Table 1

TABLE 1. The Total Cost for Federal Incentives of Energy Development Through 2010 (Billions of 2010 US$). Source: Management Information Services, Inc.

We identified and tracked federal energy incentives over the 60‐plus years that they have been a significant part of the modern energy marketplace. We estimate that federal incentives for energy development, 1950–2010, totaled $837 billion (2010 dollars), and we classified these incentives within six generic categories (see Table 1).3 This classification is useful because it not only shows the total federal incentives for each energy source (nuclear, hydro, coal, oil, natural gas, renewables, and geothermal), but also illustrates the distribution of these incentives among the different policy options and support mechanisms:

  • Research and development: federal R&D funding
  • Regulation: federal regulations and mandates4
  • 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
  • Market activity: direct federal involvement in the marketplace

We estimated the expenditures from 1950 to 2010 and identified the types of incentives provided and the energy sources targeted with each type of incentive.5 The amounts and recipients of each type of incentive are summarized in Table 1, which shows that:

  • The federal government has provided $837 billion (2010 dollars) for energy development since 1950.
  • The largest type of incentive has been tax concessions, amounting to about 47% of all incentives.
  • Federally funded regulation and R&D, at 19% and 18% respectively, are the second and third largest incentives.
U.S. Energy Subsidies Figure 1

FIGURE 1. Comparison of Federal Expenditures for Energy Development, 1950 – 2010 (Billions of 2010 Dollars)

The dominance of oil and gas incentives is apparent in Table 1 and Figure 1. Federal tax incentives for oil and gas are the largest of all incentives, amounting to nearly 80% 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% ($490 billion) of federal spending to support energy since 1950. Oil alone received three‐fourths ($369 billion) of this amount.
  • Coal received approximately 12% ($104 billion) of federal incentives.
  • Hydro received approximately 11% ($90 billion) of federal support.
  • Wind, solar, and geothermal received approximately 10% ($81 billion).
  • Nuclear received approximately 9% ($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 percentage of federal incentives, 23%.
  • Nuclear energy was the beneficiary of about half ($74 billion) of federal spending on energy R&D.6
U.S. Energy Subsidies Table 2

TABLE 2. Distribution of Federal Incentives, 1950 – 2010, for Each Energy Source

Each energy type benefits from a mix of federal incentives; the distribution is shown in Figure 1. The mix for each energy type is illustrated in Table 2, which illustrates that the significance of the incentives types differed significantly 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.7
  • R&D was important for nuclear, geothermal, and coal, but of little significance for oil, natural gas, or hydro.
  • 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.
  • 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 does not indicate more recent trends in federal energy incentives policies – for example, it is unclear how subsidies in the 1950s and 1960s relate to current energy policies. As noted, a common perception exists 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). As also noted, we find that this conventional wisdom is wrong – especially when the contribution to energy supply of the different energy technologies is considered.

U.S. Energy Subsidies Figure 2

FIGURE 2. U.S. Energy Supply. Source: U.S. Energy Information Administration.

For example, as shown in Figure 2, the U.S. obtains about 83% of its energy from fossil fuels (37% from oil, 25% from natural gas, and 21% from coal), 9% from nuclear power, 3% from hydro, and 3% from biofuels, wind, and solar.

U.S. Energy Subsidies Figure 3

FIGURE 3. 2010 Federal Energy Subsidies. Source: U.S. Energy Information Administration, U.S. Treasury Department, and OMB

As shown in Figure 3, 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 renewable energy technologies received about $10.5 billion – 65% of the total. Subsidies for fossil energy totaled less than $5 billion – 30%. 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 4, which compares U.S. energy supplies from each technology with federal subsidies for that technology.

U.S. Energy Subsidies Figure 4

FIGURE 4. U.S. Supply and Energy Subsidies, 2010. Source: U.S. Energy Information Administration, U.S. Treasury Department, and OMB

The imbalance in favor of renewables shown in Figure 4 is long-standing, and the federal government has supported renewable energy technologies for decades. Further, the imbalance is increasing. For example, as shown in Figure 5, in 2007–2010, renewables received about 30% more in federal subsidies than did all fossil energy combined; as noted, in 2010, renewables received more than twice as much in subsidies as oil, coal, and natural gas combined and, in 2011, renewables received nearly four times as much in federal subsidies as all fossil fuels combined.

U.S. Energy Subsidies Figure 5

FIGURE 5. U.S. Energy Subsidies, 2007-2011. Source: U.S. Energy Information Administration, U.S. Treasury Department, and OMB

Key Findings

A number of findings emerge here. One of the most interesting findings derived is that much of U.S. energy policy is literally invisible: Federal energy incentives are overwhelmingly off-budget and “hidden.” Over the past six decades, two-thirds of all federal energy subsidies were in the form of either tax expenditures 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%) 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. Despite the critical importance of R&D for the U.S. energy future, as an energy incentive it is of relatively small and declining quantitative significance. Over the past six decades, R&D accounted for only about one-sixth of all federal energy incentives, 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. Further, the quantitative significance of the energy R&D incentive continues to decline: While, historically, R&D accounted for just over 18% of energy incentives, by 2010 R&D accounted for only about 12% of total energy incentives.

Energy incentives are very much “different strokes for different folks,” and 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 coal, tax incentives and R&D are of about equal importance. For hydro, market activity incentives are determinant. For oil, tax and regulatory incentives are key.

Contrary to conventional wisdom, renewable energy has not been shortchanged, and the perception that the renewable industry has been historically underfunded with respect to incentives is not correct. Since 1950, renewable energy (solar, hydro – power, and geothermal) has received the second-largest subsidy – $171 billion (21%), compared to $121 billion (14%) for natural gas, $104 billion (12%) for coal, and $73 billion (9%) for nuclear power. In recent years, incentives for renewable energy have greatly exceeded those for fossil fuels or for nuclear energy.

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

R&D funding is skewed, and recent federal R&D expenditures bear little relevance to the contributions of various energy sources to the total energy mix. For example, renewable sources, excluding hydro, produced 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 in R&D money. Nuclear energy, which provides 10% of the nation’s energy and 20% of its electricity, was also underfunded, receiving $3.2 billion in R&D funds over the past decade.

Government intervention in energy markets affects long-term resource options, and political considerations factor into this. For some of the energy technologies, government intervention and support have literally created the industry. Relevant examples include:

  • Government development of hydroelectric projects starting in the 1930s – TVA, Grand Coulee, Hoover Dam, etc.
  • Government support of nuclear power since its inception in the 1940s.
  • Government support of renewable energy – the renewable electricity options (photovoltaics, solar, thermal, and wind) are almost entirely dependent for their existence on government subsidies and mandates.

However, the fossil energy technologies, while benefitting greatly from government support, are not critically dependent on it for their existence. For example, although oil has been the major beneficiary of federal subsidies and incentives over the past six decades, even with much less generous government support oil would still be critical to the economy. Similar comments apply to the current roles in the economy of coal and natural gas. Thus, the determinate nature of federal support differs radically among the energy technologies, and government support of some technologies may be necessary for keeping these available as long-term resource options. Indeed, if low-carbon energy alternatives are desired for future deployment, then substantial, continuing government incentives may be necessary for some technologies for many years.

Implications

The issue of the appropriate levels and types of federal incentives for energy is an extremely complex and highly controversial one about which numerous studies, papers, and books have been written – and will be written. The “optimal” level of federal support is an issue outside the scope of this article.

Nevertheless, the information presented here does provide useful insight into an important topic – one that is very timely given the current acrimonious debate in Congress over federal spending, the deficit, and tax and energy policies. These data show that, contrary to what is frequently stated and widely believed, federal incentives and support for renewables are much larger than those for fossil energy, and that this imbalance is increasing.

REFERENCES AND NOTES

1. For example, at a March 17, 2012 U.S. House Energy and Natural Resources Committee Hearing, Ranking Minority Member Edward J. Markey (D-Mass.) commented, in his opening statement, that “[t]he country is in an energy horserace between subsidized traditional fossil fuels and underfunded new technologies which have been trapped in the starting gate.”

2. The complete findings of this research are presented in Management Information Services, Inc., “60 Years of Energy Incentives: Analysis of Federal Expenditures for Energy Development,” report prepared for the Nuclear Energy Institute, Washington, D.C., October 2011. See also Roger Bezdek and Robert Wendling, “A Half Century of Federal Energy Incentives: Value, Distribution, and Policy Implications,” International Journal of Global Energy Issues, 2007, 27 (1), 42–60.

3. The information presented here was compiled from publicly available documents prepared by federal agencies with a role in energy development including the U.S. Department of Energy and its predecessors, the U.S. Nuclear Regulatory Commission, the Office of Management and Budget (OMB), the Treasury Department, and others.

4. Regulation can serve as an incentive in various ways, for example, when the government bears regulatory costs (if not covered by producer fees).

5. Current year expenditures (nominal dollars) were converted into constant 2010 dollars using price deflators derived from data published by OMB, the Congressional Budget Office, and the U.S. Department of Commerce’s Bureau of Economic Analysis.

6. About $42 billion (almost 60%) of the total spent on nuclear energy research since 1950 was spent before 1975 to explore a range of reactor concepts and potential applications for military and civilian uses.

7. For example, the oil and gas industries receive substantial financial benefits from tax incentives, such as the tax deductions for intangible drilling and development costs and for percentage depletion.

 

The content in Cornerstone does not necessarily reflect the views of the World Coal Association or its members.

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