by Harald Heubaum, via The Carbon Brief
US presidential contender Mitt Romney recently said that, if elected, he would not extend the production tax credits (PTCs) that have helped grow the US domestic wind energy industry since the early 1990s. But does Romney’s claim that discontinuing PTCs is necessary to “level the playing field” for energy sources stand up? A recent study taking the long view of subsidies to energy sources suggests renewables have received only a fraction of the historical support given to their fossil fuel competitors.
Romney’s position on support for renewables has vacillated over the years. In 2003, when governor of Massachusetts, Romney drew on a state fund to provide subsidies to a select group of renewable energy companies. But, nine years on, Romney’s support for free markets over government intervention has apparently hardened. He blamed the failure of Solyndra, a solar cell manufacturer that benefited from stimulus spending only to file for bankruptcy last year, on the Obama government’s decision to pick “winners and losers”.
Romney’s new stance should come as no surprise. It chimes with the current US Republican enthusiasm for unfettered free markets. And it also echoes the criticisms of predominantly right-of-centre politicians around the world, who have claimed government support has given low-carbon technologies an unfair competitive advantage over established energy players.
But are they right? Do renewable energy subsidies distort the market? To answer these questions it helps to take a closer look at government involvement in energy markets over time. The US experience is particularly illustrative.
Mapping US fossil fuel subsidies
In a 2011 study of historical US energy subsidies published by DBL Investors, Nancy Pfund and Ben Healy analyse US federal government support for various energy industries during their formative years. For the coal industry this meant cheap land grants in the 19th century. For oil and gas it was tax incentives during the first half of the 20th century, followed by costs of regulation, civillian R&D and liability risk-shifting among others for nuclear power from the late 1940s. Finally, for modern renewables it was tax incentives from the early 1990s onward.
Drawing on government, academic and NGO sources, Pfund and Healy find that when the first 15 years of subsidy life are compared, government support for the oil, gas and nuclear industries as a percentage of inflation-adjusted federal spending far outweighed the support granted to renewables.
Taking a longer-term view and again adjusting for inflation, the authors find that between 1918 and 2009, the oil and gas industry received a cumulative $446.96 billion in subsidies compared to just $5.93 billion given to renewables in the years between 1994 and 2009. Meanwhile, the nuclear industry benefitted from a cumulative $185.38 billion in federal subsidies between 1947 and 1999.
Pfund and Healy conclude:
“[C]urrent renewable energy subsidies do not constitute an over-subsidized outlier when compared to the historical norm for emerging sources of energy. Rather … federal incentives for early fossil fuel production and the nascent nuclear industry were much more robust than the support provided to renewables today.”
The study doesn’t just highlight the advantage the federal government gave oil, gas and nuclear in the form of subsidies. It also shows that the government continued the financial support as these industries matured, arguably enshrining a market distortion.
Pfund and Healy uncover evidence of direct and indirect coal subsidies reaching back as far as 1789 when the US federal government enacted a tariff on imported coal. Coal is not included in the final total of subsidy amounts, however, due to a lack of reliable data reaching back to the industry’s formative years in the early 1800s.
But it’s clear that coal continues to receive subsidies more than 200 years after the height of the Industrial Revolution. The US Energy Information Administration tallied federal government subsidies to the coal industry at $3.17 billion in 2007.
Subsidies beyond the US
It’s a common practice elsewhere, too. The German Federal Environment Agency found that German coal subsidies still stood at roughly €2.3 billion in 2006. This was down from €4.9 billion in 1999, but with the EU’s recent extension of member state coal subsidies until 2018, coal will continue to receive significant amounts of financial assistance in future.
According to a 2011 report by the Organisation for Economic Cooperation and Development (OECD), between 2005 and 2010 the 24 leading OECD economies spent up to $75 billion every year subsidising fossil fuel production and consumption.
The OECD’s report is an important first step, but it suffers from incomplete data. In the UK, for example, of the £3.63 billion of subsidies to fossil fuels the OECD calculates, £3.18 billion accounts for the lower rate of VAT applied to all energy, to help keep energy prices lower for the consumer. The most striking thing about the OECD’s report, however, is the patchy nature of the data on fossil fuel subsidies – even the UK gives very little information on this.
It’s also interesting to compare how much higher fossil fuel subsidies are when investments by non-OECD countries are taken into account. According to the International Energy Agency (IEA), governments in these countries subsidised fossil fuels to the tune of $409 billion in 2010, crowding out renewables payments, which stood at just $66 billion. If this sounds like picking winners, that’s because it probably is.
So energy market distortions began long before the advent of modern renewables and they have continued since. In response, the IEA has called for a complete phase-out of all fossil fuel subsidies while maintaining financial support for a renewable energy industry about to come into its own. According to IEA Executive Director Maria van der Hoeven:
“[Fossil fuel subsidies] often fail to meet their intended objectives: alleviating energy poverty or promoting economic development, and instead create wasteful use of energy, contribute to price volatility by blurring market signals, encourage fuel smuggling and lower competitiveness of renewables and energy efficient technologies.”
Levelling the playing field
Financial support for renewables, however, remains ” justified by the need to attach a price signal to the environmental and security benefits of renewable energy deployment,” van der Hoeven says. She adds that thanks to strong growth in the sector and resulting cost reductions, government spending on renewables can be brought down over time.
So it’s entirely legitimate to call for an end to renewable energy subsidies. To do so is a political choice. But to claim that discontinuing PTCs is a way to create a level playing field is to misunderstand the nature of today’s energy markets.
To Romney and his supporters it may seem paradoxical, but continued government involvement on behalf of renewables may create more, not less, competition and could help to create something more closely resembling a free and fair market.
Harald Heubaum is Lecturer in Global Energy and Climate Policy at SOAS, University of London. This piece was originally published at the Carbon Brief and was reprinted with permission.