Has there ever been a level energy playing field? Putting renewables subsidies in context
- 20 Aug 2012, 11:30
- Harald Heubaum
Joe Y Jiang under Creative Commons
US presidential contender Mitt Romney recently said that, if
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
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
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
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
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.
Heubaum is Lecturer in Global Energy and Climate Policy at
SOAS, University of London