TODAY’S STUDY: THE HISTORY OF ENERGY SUBSIDIES

Governments always subsidize energy -- because energy is vital to governments.

To accuse a government of picking winners or succumbing to special interests because it supports the energy that will make the country go is as sensible as accusing a car driver of picking a winner or succumbing to a special interest for buying gas.

As detailed in the report below, the coal industry had no problem with this principle when it was the darling of the British government in the 19th century. The oil industry had no problem with it when it was the United States' golden child in the first half of the 20th century. The nuclear industry was pleased to be the chosen one from the 1960s to the 1980s.

But when the nations of the world responded to the threat of greenhouse gas emissions or nuclear waste by supporting renewables, the vested interests began throwing fits about energy subsidies.

Do renewables get an inequitable slice of the federal pie? It depends: The U.S. Energy Information Administration (EIA) calculates subsidies per year for each generation source. This makes it possible for the renewables’ subsidies to be characterized by opponents as radically disproportionate to the BTUs for which they account. However, this is not necessarily the most accurate way to assess subsidy dollars.

As the EIA itself has acknowledged, electricity generation technologies that have been supported for decades and that are now mature and self-supporting do not need or get as much support as renewables, which are less mature and have only recently become more highly valued and subsidized.

But the mature industries that emerged in the past would not be so successful today if they had not been given support when it was needed.

An example: A coal plant built in 1965 has been the beneficiary of subsidies for 45 years. A wind farm built in 2008 is collecting the bulk of its support now but will get no more federal money after 2017. Yet, by the EIA calculation, the wind farm is at present getting the bulk of the federal dollars.

With the benefit of historical perspective, it becomes clear that the subsidies now flowing to renewables mean federal lawmakers intend to prioritize renewables in the same way other electricity sources were prioritized in past decades. Similar support for renewables is now emerging even more strongly at state and local levels in the U.S. and in other governments all over the world.

More importantly, subsidies to renewables imply that governments all over the world believe them to be a more important and/or better value proposition going forward and they realize they must put a higher emphasis on developing the energy of the 21st century.

This is how governments always use energy subsidies, as the historical perspective detailed in the study below demonstrates.

The coal industry would not be what it is without the railroad system it was given a century and a half ago.

The U.S. oil industry would have strangled by its own terminal greediness had Congress not provided it with the Oil Depletion Allowance and Golden Gimmick tax breaks in the middle of the last century.

Nobody would have built nuclear plants in the 1970s if the Price-Anderson Act hadn’t indemnified the industry against its occasional catastrophes.

And renewables, in partnership with efficiency and storage technologies, will not reach scale or replace fossil fuels if not provided with reasonable subsidies.

(Versions of the preceding essay have appeared previously at NewEnergyNews and Greentech Media.)

What Would Jefferson Do? The Historical Role of Federal Subsidies in Shaping America’s Energy Future
Nancy Pfund and Ben Healy, September 2011 (DBL Investors/Double Bottom Line Venture Capital)

“Some argue that the consumer can purchase warmth or work or mobility at less cost
by means of coal or oil or nuclear energy than by means of sunshine or wind or
biomass. The argument concludes that this fact, in and of itself, relegates renewable
energy resources to a small place in the national energy budget. The argument
would be valid if energy prices were set in perfectly competitive markets. They are
not. The costs of energy production have been underwritten unevenly among
energy resources by the Federal Government.” …August 1981 report of the DOE Battelle Pacific Northwest National Laboratory

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Executive Summary

This paper frames the ongoing debate about the appropriate size and scope of federal subsidies to the energy sector within the rich historical context of U.S. energy transitions, in order to help illuminate how current energy subsidies compare to past government support for the sector. From land grants for timber and coal in the 1800s to tax expenditures for oil and gas in the early 20th century, from federal investment in hydroelectric power to research and development funding for nuclear energy and today’s incentives for alternative energy sources, America’s support for energy innovation has helped drive our country’s growth for more than 200 years.

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Using data culled from the academic literature, government documents, and NGO sources, in this paper we examine the extent of federal support (as well as support from the various states in pre-Civil War America) for emerging energy technologies in their early days. We then analyze discrete periods in history when the federal government enacted specific subsidies. While other scholars have suggested that the scope of earlier subsidies was quite large, we are—as far as we know—the first to quantify exactly how the current federal commitment to renewables compares to support for earlier energy transitions. Our findings suggest that current renewable energy subsidies do not constitute an over-subsidized outlier when compared to the historical norm for emerging sources of energy. For example:

- As a percentage of inflation-adjusted federal spending, nuclear subsidies accounted for more than 1% of the federal budget over their first 15 years, and oil and gas subsidies made up half a percent of the total budget, while renewables have constituted only about a tenth of a percent. That is to say, the federal commitment to O&G was five times greater than the federal commitment to renewables during the first 15 years of each subsidies’ life, and it was more than 10 times greater for nuclear.

- In inflation-adjusted dollars, nuclear spending averaged $3.3 billion over the first 15 years of subsidy life, and O&G subsidies averaged $1.8 billion, while renewables averaged less than $0.4 billion.

The charts below clearly demonstrate that federal incentives for early fossil fuel production and the nascent nuclear industry were much more robust than the support provided to renewables today.

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Introduction

Over the course of decades, contentious debates have raged in Washington, DC about the appropriate size and scope of federal subsidies to the energy sector, including support for both traditional fossil fuel industries and the emerging renewable energy sector. Certainly, a quick survey of existing subsidies demonstrates that critics have plenty of legitimate reasons to complain. Take the capital gains treatment of royalties on coal as an example. This subsidy allows owners of coal mining rights to reclassify income traditionally subject to the income tax as royalty payments, thereby allowing owners to pay a reduced tax rate:

This subsidy totaled well over $1.3 billion in government tax expenditures from 2000 – 2009…

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In 1950 and 1951, Congress increased a number of taxes to pay for the United States’ entry into the Korean War. With prevailing 1951 marginal income tax rates ranging up to a high of 91 percent and capital gains tax rates at 25 percent regardless of income, the reclassification was primarily adopted to insulate certain owners of coal mining rights from high marginal income tax rates … thus encouraging additional production. Since then, both income and capital gains tax rates for individuals have fallen, and the capital gains tax rate for individual owners currently stands at 15 percent. However, the credit is still available to members of the coal industry.

True, this Korean War-era tax break seems grossly out of place in the 21st century, but not all subsidies are created equal. Historically, policymakers have justified intervention in energy markets “1) to promote a new technology during the early developmental stages and 2) to pay the difference between the value of an activity to the private sector and its value to the public sector.”2 Thus, it is worth evaluating our current energy subsidies through a longer historical lens, so that we can better understand how current incentives compare to past government support for the energy sector.

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We can read the history of the United States—our country’s geographic and economic expansion—through the history of our energy production and consumption. Through war and peace, through westward expansion and our rise to economic and military superpower status, we find that energy transitions fueled it all. Wood and small hydro powered our country’s early, rural days. As cities expanded, railroads crisscrossed the nation, and the Industrial Revolution took hold, coal dominated. With the invention and improvement of the internal combustion engine, oil catapulted into our preeminent fuel. Large hydro became a reality thanks to Depression-era initiatives that have continued to drive economic development programs across the country decades later, followed by nuclear power on the heels of World War II. And today, in pursuit of greater energy security, enhanced environmental quality and economic growth on a globalized playing field, renewable energy sources are transitioning from the margins to the mainstream. As the chart below starkly illuminates, our wealth and our energy usage are intimately intertwined.

Energy innovation has driven America’s growth since before the 13 colonies came together to form the United States, and government support has driven that innovation for nearly as long. In this paper, we identify specific government interventions in the energy sector during moments of transition, and we attempt to quantify that support in order to compare it to current support for emerging renewable sources of energy. Although most of our quantitative analysis focuses on federal support, it is important to note that states have also contributed to the American energy narrative throughout our history, from the support of coal in the 19th century to incentives for renewable energy production 200 years later, and we will not ignore the role of the various states in the discussion that follows.

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Overall, what we find, in contrast to much of today’s headline-grabbing rhetoric, is that today’s government incentives for renewable energy pale in comparison to the kind of support afforded emerging fuels during previous energy transitions.

Look back to the 1700s: From Battelle National Lab – “The first recorded commercial coal transaction in the United States was a 32-ton shipment from the James River district in Virginia to New York in 1758.”

…Into the 1800s: From Stanford’s Center for International Security and Cooperation – “As a pamphleteer wrote in 1860, a year after Uncle Billy Smith struck oil at Oil Creek in Titusville, Pennsylvania, ‘Rock oil emits a dainty light, the brightest and yet the cheapest in the world; a light fit for Kings and Royalists and not unsuitable for Republicans and Democrats.’”…

From the Renewable Energy Policy Project – “The first attempt to transport natural gas on a large scale was in Rochester, New York in 1870. A 25-mile line was constructed of hollowed pine logs. It was a failure.”

…Through the 1900s: From Greenpeace – “In December, 1953, President Eisenhower inaugurated an ‘Atoms for Peace’ [nuclear energy] program that…would ultimately swallow the lion’s share of federal dollars for energy research.

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Conclusion–In Energy We Trust

In closing, we present the two images below, the first a 1962 Life magazine advertisement from Humble Oil (now Exxon Mobil) and the second a graphical representation of America’s current dependence on foreign sources of energy.

Together, these two images demonstrate the fact—more clearly than we ever could in words—that America’s energy needs and priorities have changed over time, and that they will continue to evolve going forward, driven by economics, environmental concerns, and security issues. Throughout our history, energy incentives have helped drive critical innovation, speed U.S. economic transitions, and helped shape our national character. Today, as we seek to move towards a more independent and clean energy future, the truth is that renewables—from a historical perspective—are if anything under-subsidized. This weak support is inconsistent with our nation’s own historical energy narrative, which suggests:

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Today’s market for cheap power results in part from substantial investment by the federal government in innovative technology.

It takes a substantial amount of money, invested over several years, to bring an electricity generation technology to maturity.

Although energy subsidies can and do serve many policy purposes, the most basic relate to furthering the development and commercialization of technologies deemed to be in the public interest.

We titled this paper, “What Would Jefferson Do?” We believe that the answer to that question is now clear. He would do what our country has always done—support emerging energy technologies—to drive innovation, create jobs, protect our environment, enhance our national security in a time of rapid change, and to further a distinctly American way of life in which resources once thought to be endless are replaced by ones that actually are.