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Posted on January 26, 2011

The Fight Over Energy Subsidies

“I don’t know if you noticed, but they’re doing just fine on their own,” President Obama said of the oil industry in last night’s State of the Union Address. “So instead of subsidizing yesterday’s energy, let’s invest in tomorrow’s.”

The Obama administration failed last year to eliminate almost $40 billion in federal tax and production subsidies to the oil, gas and coal industries. But with concerns growing over deficit spending, legislators may find it tough to duck the issue much longer.

That’s far too tame a solution for Jeffrey Leonard, president and CEO of the clean-tech Global Environment Fund. In the latest issue of Washington Monthly magazine, he proposes eliminating all energy subsidies as a “very simple solution” to the nation’s energy problems:

Yes, eliminate them all—for oil, coal, gas, nuclear, ethanol, even for wind and solar. It will be better for national security, the balance of payments, the budget deficit, and even, believe it or not, the environment. Indeed, because wind, solar, and other green energy sources get only the tiniest sliver of the overall subsidy pie, they’ll have a competitive advantage in the long term if all subsidies, including the huge ones for fossil fuels, are eliminated.

A study by Bloomberg New Energy Finance last year concluded that government subsidies to renewable energy came to about $45 billion worldwide ($18 billion from the United States), compared to more than $550 billion spent to subsidize fossil fuels around the globe. That’s a 12-fold difference.


On the other hand, defenders of fossil fuels rightly point out that many renewables enjoy subsidies that are vastly disproportionate to the amount of energy they actually deliver.

For example, wind and solar power enjoyed federal subsidies of more than $23 per megawatt-hour of electricity produced in fiscal year 2007, according to the U.S. Energy Information Administration.

By contrast, subsidies to coal-fired electricity, while bigger in total than those to either wind or solar, came to only $0.44 per megawatt-hour.

Bottom line: the fossil fuel industry is mature and doesn’t need subsidies, except perhaps for development of “clean coal” technology like carbon capture and storage. Fatih Birol, chief economist of the International Energy Administration, said last year, “I see fossil fuel subsidies as the appendicitis of the global energy system which needs to be removed for a healthy, sustainable development future.”

But, contrary to Leonard, don’t expect to level the playing field by eliminating all subsidies in one fell swoop. Most renewables are still much more expensive than coal-fired power and would be priced out of the market.

Here are a couple of ideas for addressing energy subsidies.

First, reserve subsidies for developing promising new clean technologies, not for making energy cheaper overall. Subsidizing energy discourages energy efficiency, which is among the most cost-effective  tools for a cleaner world.

Second, eliminate hidden environmental subsidies for fuels that pollute. Users of fossil fuels don’t pay for the trillions of dollars in damage that greenhouse gases will cause if we don’t get them under control. Renewable energy will begin looking a lot more competitive when there’s a fair price on carbon, and it won’t cost the Treasury a dime.

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