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Posted on August 3, 2010

Dueling Subsidies

Having caused the largest oil spill in history, BP recently said it would take a $32 billion write-off for cleanup costs–saving $10 billion on its tax bill and incurring the wrath of many members of Congress who are now moving to amend the tax laws.

“The tax code shouldn’t protect, and certainly shouldn’t reward, companies that do extensive damage to the American economy,” said Arizona Rep. Raúl Grijalva.

The issue puts into stark relief a new report by Bloomberg New Energy Finance that global subsidies to the fossil fuel industry—many in the form of tax breaks—dwarf those offered by governments to the renewable energy sector.

Bloomberg estimates that wind, solar, biofuels and other forms of renewable energy received about $45 billion last year in tax credits and price supports, compared to the International Energy Agency’s estimate of $557 billion in subsidies for fossil fuels in 2008.

The comparison is somewhat misleading. Since the world uses vastly more fossil fuels, the subsidy per unit of energy is likely greater for many renewables. On the other hand, it’s hard to see any argument for subsidizing highly profitable, mature technologies like oil and gas extraction. (Supporting R&D on carbon capture and storage—a new technology—is another matter.)

The Group of 20 countries have pledged to phase out fossil subsidies but haven’t made much progress to that end. The IEA says simply ending those subsidies would cut global carbon emissions by 7 percent. It would also help bring deficit-plagued national budgets back into balance, a win-win.

In its comparison of government support to the fossil fuel and renewable industries, Bloomberg left out one critical fact. Subsidies to both energy sectors in effect represent a tax on the most environmentally friendly technology of all: energy efficiency. It’s time more governments put that resource at the top of their energy priorities.

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