OECD Warns of Dire Consequences of Climate Inaction

Summary.  The OECD reports that the sustainability of the Earth’s natural environment and human population is threatened over the next forty years.  In its “OECD Environmental Outlook to 2050” it summarizes threats to the planet’s climate, its biodiversity, the water resources that supply human needs and economic activities, and human health.  Growth of the world’s population and concomitant significant expansion of its economic output will put strains on these systems. 

Importantly, under its Baseline scenario, which assumes no new policies to combat emissions of greenhouse gases, OECD projects that the world will need 80% more energy in 2050 than now, 85% of which will still be supplied by fossil fuels.  The resulting increase in greenhouse gas emissions will threaten many aspects of human life, because Baseline policies are insufficient to keep the rise in global average temperature below the internationally formulated goal of 2ºC. 

OECD proposes that aggressive action should be begun right away to limit greenhouse gas emissions in order to keep within the international goal.  Barring such initiatives now, it will require more urgent, immediate and costly measures by about 2020 to recover lost ground and remain on the path toward achieving the international goal.  The Organization projects that expenditure of only 5.5% of worldwide economic product would be needed to reduce emissions by about 70% by 2050, which is deemed sufficient to meet the goal.  OECD believes this is achievable and highly worthy of the required effort. 

Environmental Outlook.   

The Organization for Economic Cooperation and Development (OECD) issued its “OECD Environmental Outlook to 2050: The Consequences of Inaction” (Outlook) on March 15, 2012.  The report covers four major aspects related to the climate and sustainability efforts worldwide, namely, global warming, biodiversity, water resources and the effects of increasing pollution on human health.  This post will focus primarily on climate change.

Population Growth and Profound Economic Expansion. 

The Outlook points out that the population of the world is expected to grow from 7 billion souls at present to more than 9 billion by 2050, an increase of 29%.  Over the same period, the economic activity in the world is expected to grow to about four times its present level.  The growing population in the world, and the continuing movement of much of the world’s people from poverty into the economic middle class, means that demand for energy and for natural resources will likewise expand greatly.  Higher living standards suggest that the people of the world will expect to consume more goods and services.  All these factors indicate that there will be significant stresses on the world’s societies.  It is expected that 70% of the population will become urban dwellers by 2050, exacerbating problems such as air pollution, congestion and waste management.

The Outlook expects that in support of this expansion, barring significant policy changes, the world’s energy demand will be 80% higher in 2050 than at present, and that fossil fuels will remain as the principal energy source, providing about 85% of that energy.  These conclusions are based on a “Baseline” scenario, which assumes no new policies directed toward mitigating greenhouse gas emissions, and incorporates extrapolated socioeconomic trends continuing from the present time.

Increased Emissions of Damaging Greenhouse Gases.


The expanded use of fossil fuels will lead to a corresponding growth in the annual rate of emitting the greenhouse gas carbon dioxide (CO₂) into the atmosphere.  Since the physical processes governing the fate of atmospheric CO₂ leave most of it in the atmosphere, its concentration will continue to increase as the emissions rate increases.  Much of this growth will come from developing countries of the world, which the Outlook exemplifies as BRIICS (Brazil, Russia, India, Indonesia, China and South Africa).  Beyond the increase in fossil fuels, use of land and water resources for agriculture to provide food for the expanding population and its changing dietary habits will impose increased stress on the planet.

The Outlook states in bold emphasis “Continued degradation and erosion of natural environmental capital is expected to 2050, with the risk of irreversible changes that could endanger two centuries of rising living standards.”

A summary of some of the dangers envisioned in the Outlook is given below.

Climate change

o       Greenhouse gas emissions and concomitant atmospheric concentrations continue to grow, especially from energy-derived CO₂.

o       There is increasing evidence for climate change and its effects.

• Pledges by the nations of the world were given at the Copenhagen (2009) and Cancun (2010) conferences to limit greenhouse gas emissions sufficiently to keep the atmospheric concentration below 450 parts per million (ppm) of CO₂-equivalents, the level thought to be the upper bound for keeping the long-term average increase in global temperature below 2ºC (3.6ºF) above the temperature that prevailed prior to the industrial revolution.  It appears these are incapable of being fulfilled.

Biodiversity continues to shrink in response to climate change and ncreased land use
pressures.

Water resources

o       More people will live in areas of growing water shortages and increased groundwater pollution.

o       More people, both urban and rural, will not have access to sanitary water sources.

Health and Environment

o       Increasing levels of SO₂ and NO_X air pollution in the urban areas of developing countries adversely impact the health and mortality of affected populations.

The Outlook also lists certain areas where efforts have led to a slowing of detrimental processes, and even to certain improvements.  No such improvements were identified for climate change, however.  Trends that reduce the emissions rate were identified based on increased efficiencies in developed countries, and a reduction in deforestation in OECD and BRIICS countries.

Consequences of Inaction in Climate Policy

Global Warming.  The Outlook expresses concern that in the absence of more ambitious policies to mitigate greenhouse gas emissions, climate change bringing more disruptive effects will be locked in.  It envisions greenhouse gas emissions growing, by region, under the Baseline scenario, as shown below.

OECD Baseline scenario projection of annual greenhouse gas emissions over 40 years from 2010 to 2050.  Emissions are in Gigatonnes of CO₂-equivalent and run from 0 to 90.  “AI” means Annex I of the Kyoto Protocol covering developed countries at the time the Protocol was negotiated.  “Rest of BRIICS” does not include Russia.  ROW indicates rest of the world.

Source: OECD Environmental Outlook to 2050: The Consequences of Inaction. Highlights.  http://www.oecd.org/dataoecd/6/1/49846090.pdf

The projection expects overall emissions to increase 50% between 2010 and 2050, arising largely from the BRIICS group and due mainly to growth by 70% in CO₂ emissions from energy production.  According to the Baseline, these emissions could result in atmospheric CO₂ concentrations of as much as 685 ppm by 2050, far in excess of the upper bound of 450 ppm recognized as the goal required to keep long-term global average temperatures from increasing more than 2ºC; this predicted high level could bring the temperature increase to the range of 3ºC to 6ºC (5.4ºF to 10.8ºF) above pre-industrial levels by 2050.

The Outlook deems that pledges by the countries of the world undertaken at the  Cancun Conference are inadequate to constrain global temperature rise to 2ºC.  As a result, it predicts that global precipitation patterns would change, glaciers and permafrost at high latitudes would melt increasingly more rapidly, severe sea level rise would result, and extreme weather events would increase in frequency and intensity. In order to restore the world’s climate trajectory to a path that would likely avoid consequences such as these, the Outlook foresees the need for more rapid and more expensive reductions in emissions to be effective by 2020, compared to the more long-term, reasoned approach that the world’s nations might have embarked on earlier.

Biodiversity, as measured by mean species diversity, is predicted to decrease by 10% by 2050, largely as a result of the effects of climate change, commercial forestry, and the expanded use of land for cultivating bioenergy crops.  Freshwater diversity will also likely suffer losses beyond the one-third already lost.  It is estimated that loss of biodiversity has a value between US$2 and 5 trillion per year.

Water resources will be further strained, in view of the increase in the global population and demands placed on water for consumption, industrial and manufacturing use, and cooling of thermal electric generation facilities.

Human health will suffer under the Baseline scenario, due primarily to higher mortality arising from airborne particulate matter and ground level ozone.

Policy Changes to Minimize Further Climate Change

The Outlook points out that the Baseline scenario emphasizes the high priority of changing the world’s policies in order to minimize the problems identified above.  It is very concerned that natural systems have “tipping points” of change, beyond which positive feedback mechanisms make further detrimental changes all the easier, becoming “irreversible”.  It recognizes that the factors contributing to climate and environmental tipping points remain poorly understood.

“Acting now makes environmental and economic sense”, according to the Outlook.  There remains a possibility of restraining greenhouse gas emissions so that the maximum annual rate could occur by 2020, and then decrease year by year after that.  Reducing the annual emissions rate in this way could succeed in keeping the world’s long-term global temperature rise within the 2ºC limit. This ambition implicitly refers to a metaphor in an earlier post according to which the atmosphere is a CO₂ bathtub whose faucet keeps adding more CO₂ but whose drain is mostly closed so that very little CO₂ is removed.  The result is that the level of CO₂ in the bathtub keeps rising.  In fact, CO₂ remains in the atmosphere for 100 years or more.  This metaphor emphasizes that even if the annual rate of global CO₂ emissions falls, each year’s new contribution still raises the level of the CO₂ atmosphere in the bathtub.  It is the cumulative, final level of CO₂ that determines what the long-term global average temperature rise will be, not the annual emissions rate.

The Outlook alludes to estimates that costs of harms and damages due to climate change by 2050 could be as high as 14% of global average per capita consumption.  Compared to this, the report suggests, for example, that pricing fossil fuel use, or greenhouse gas emissions, sufficient to achieve the 2ºC limit (the 450 Core scenario) would impact global gross domestic product by only 5.5% by 2050, while succeeding to reduce annual emissions by about 70% by then (see the graphic below).

Relative changes in GDP (dark blue) and greenhouse gas emissions (light blue), giving the effect of implementing the 450 ppm Core scenario (- - -) compared to the Baseline scenario ( ^______ ).

Source: OECD Environmental Outlook to 2050: The Consequences of Inaction. Highlights.  http://www.oecd.org/dataoecd/6/1/49846090.pdf

The Outlook proposes broad policy initiatives that can help achieve the benefits shown in the above graphic, and its sustainability objectives more generally.  These include

• Pricing pollution and harmful greenhouse gas emissions sufficiently higher than environmentally sound alternatives that the market will reward the latter.  Mechanisms to accomplish this policy include environmental taxes and emissions trading (cap-and-trade) schemes.  Cap and trade is already in place in the European Union, California , and the Regional Greenhouse Gas Initiative (RGGI) operating in the northeastern states of the U. S., as well as in certain other countries of the world.

• Removing subsidies that promote use of fossil fuels and increase emission of greenhouse gases.  The Outlook cites fossil fuel subsidies of US$45-75 billion per year in OECD countries, and over US$400 billion in 2010 in developing and emerging countries.  The most recent post here points out that in the U. S., subsidies for fossil fuels have historically been as much as 5 times greater than for renewable energy sources.

  Analysis

The report “OECD Environmental Outlook to 2050: The Consequences of Inaction” (as summarized here from its Highlights) covers four interrelated areas of the issue of the sustainability of human and other life forms on the planet.  The difficult problem of greenhouse gas-induced warming of long-term global average temperatures forms an important portion of the report.

The Outlook joins the most recent versions of the annual products on energy and the environment generated by the U. S. Department of Energy’s Energy Information Agency and the OECD’s International Energy Agency .  The latter agencies provide data and analytical information, but do not offer policy recommendations.

  

The recent annual meetings of the Congress of the (193) Parties under the U. N. Framework Convention on Climate Change (UNFCCC), at Copenhagen (2009) and Cancun  (2010) had as an important objective negotiating a follow-on agreement to take effect upon the expiration of the Kyoto Protocol at the end of 2012.  These conferences failed to reach agreement on this central aspect of their agendas (but each did agree to other provisions; see the linked posts).  Most recently at the Durban conference in 2011 the attending nations conceded that the objective of the Copenhagen and Cancun conferences with respect to a successor to the Kyoto Protocol was unattainable.  Rather, they agreed to the Durban Platform, embodying the new, extended objective of negotiating a legally binding world-wide treaty to limit greenhouse gas emissions by 2015, and to implement it by 2020.  Unfortunately, as noted, these dates are greatly delayed from the earlier timeline tied to the Kyoto Protocol.  In the interim no worldwide accord is in place that governs or constrains greenhouse gas emissions, although regional emissions limitations in the European Union, California, RGGI, and certain other countries are in place.

  

Yet the OECD Outlook stresses that major environmental harms, and damage to planetary sustainability, will ensue under the Baseline scenario that envisions no new environmental policies until 2050.  Of relevance under the present schedule of the UNFCCC, absent imminent action more urgent, drastic and costly measures are envisioned as necessary by 2020 in order to achieve the 450 ppm/2ºC objective. 

Once CO₂ and other greenhouse gases enter the atmosphere, the dynamics of their movements disperse the gases across the face of the entire planet.  The gases carry no tag identifying their source country.  Their effects on the climate likewise are felt all around the world.  Long-term warming of the global average temperature leads to harmful effects such as rising sea levels, extremes of weather, floods and droughts.  For these reasons it is incumbent on all nations of the world to come together as soon as possible to implement policies that mitigate emissions of greenhouse gases so as to seek to minimize the harms that they bring about.

© 2012 Henry Auer

Federal Subsidies for the U. S. Energy Industry

Summary.  Two reports on federal subsidies to the energy industry are examined here.  Despite very different approaches to the topic, both agree that federal subsidies have supported, and continue to support, the oil and gas industry to a far higher extent than the renewable energy sector, by factors of 2.5 to 5.  This effect is very pronounced during the first 15 years of a subsidy program (on a constant dollar basis), when the effects of subsidies will have the greatest effect in promoting development of a technology.

It is concluded that deploying renewable energy technologies in the U. S. is an important objective, and that federal subsidies supporting renewable energy should be expanded 3- to 5-fold.

Introduction.  The role of the U. S. government in supporting new energy technologies and startup companies has come under scrutiny recently.  Some have questioned whether research and development (R&D) of new energy technologies is an appropriate function for the federal government.  On the other hand there is no question that subsidies are also provided to established fossil fuel companies.

A subsidy in the energy economy has been justified first, as a way to encourage new technologies during early phases of R&D, and second, to account for the lower value of an enterprise viewed by the private sector compared to its value to the public at large (see Ref. 1).  The U. S. Energy Information Agency (EIA; Ref. 2) identifies several types of subsidies, defined as originating from the federal government, targeted for energy, and providing a financial benefit with an identifiable budget impact.  These are

Direct Expenditures generally are legislated programs for direct payments to support activities that provide a financial benefit to producers or consumers of energy.  Support for R&D in areas such as increasing energy supply, increasing energy efficiency, and transmission, is closely related, being a direct expenditure yet likely not having a direct payoff during the period of the expenditure.  Since direct expenditures are legislated, they may be subject to expiration and a need for reinstatement.

Tax Expenditures are features incorporated into the federal tax code, and so are relatively permanent.  The terminology is deceptive; in fact these are tax credits against a taxed amount due, or deductions against income prior to calculating the tax due, and are based on having engaged in a particular action in the energy economy considered to be desirable.  Tax expenditures result in lower taxes collected, so that they correspond to outlays from the government.

Loans and Loan Guarantees provide federal support for designated technologies and undertakings, typically through the Department of Energy (DOE).  The loans support “innovative clean energy technologies that are typically unable to obtain conventional private financing due to their ‘high technology risks.’ In addition, eligible technologies must avoid, reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gases."  (Office of Management and Budget, Analytical Perspectives of the Budget of the United States, Editions 2009 and 2012 (cited in Ref. 2)).

Two Reports on Energy Subsidies in the U. S.

The Environmental Law Institute (ELI) issued the report “Estimating U. S. Government Subsidies to Energy Sources: 2002-2008” in September 2009 (Ref. 3).  The report follows trends in subsides directed to fossil fuels and to renewable energy sources over the seven Fiscal Years 2002-2008.  This group defines “subsidy” as “actions by the U.S. government that provide an identifiable financial benefit associated with the use or production of a fossil or renewable fuel.” (Ref. 3).  The report includes conventional fossil fuels and most renewable energy sources; it omits nuclear energy from consideration. It garners detailed fiscal statistics and enumerates all subsidy expenditures, classified as to direct expenditures and tax expenditures (see Details, below).

The study concludes that, for the seven fiscal years considered, by far the largest subsidy amounts supported the various fossil fuels, i.e., energy sources that emit large amounts of the greenhouse gas carbon dioxide when burned, compared to subsidies supporting renewable energy sources (see the graphic below).  Specifically, federal subsidies granted to the fossil fuel industry totaled about US$72 billion in the period studied.  Most of these are essentially permanent features incorporated into the U. S. tax code.  The report notes that fossil fuels are a mature and highly profitable industry, and questions whether taxpayer funds should justifiably be spent supporting them.

On the other hand, subsidies supporting renewable energy, including corn-based ethanol production, totaled about US$29 billion (see the graphic below), of which only about US$12 billion went to “traditional” renewable energy sources such as wind, solar and hydropower.  (Recent analyses have suggested that production of corn-based ethanol, when considered over the full life cycle of the technology, is at best neutral with respect to reducing emissions of carbon dioxide.)  “Traditional” renewable sources represent young, developing technologies, and so are worthy of subsidy support.  In contrast to the case for fossil fuel subsidies, subsidies for renewable energy are legislated at frequent intervals with statutory “sunset” provisions, i.e., specific short-term expiration dates.  These features limit the ability of renewable energy businesses to plan energy projects over the long term.

Federal energy subsidies for FY 2002-2008.  In each quadrant, the outer, darker ring represents tax credits or allowances (tax expenditures), and the inner, lighter sector represents direct expenditures, all in US$ Billions.  The upper half of the diagram relates to activities that lead to reduction of greenhouse gas emission.  The lower half relates to activities that contribute to greenhouse gas emissions.  The left half relates to fossil fuels, and the right half to renewable energy sources.  The key in the far lower right indicates that subsidies for Traditional Fossil Fuels in the lower left quadrant are damaging to the climate (i.e. their use results in emission of the greenhouse gas carbon dioxide); and that subsidies for Traditional Renewables in the upper right quadrant preserve the climate (their use reduces or eliminates emissions of carbon dioxide). 

*Carbon Capture and Storage (upper left quadrant) is an experimental  technology that would allow energy plants that burn coal and other fossil fuels to capture and store their carbon dioxide emissions away from the atmosphere (preserves the climate; see this post).  Although this technology does not make coal a renewable fuel, if successful it would reduce greenhouse gas emissions compared to coal plants that do not use this technology.
**Recognizing that the production and use of Corn-based Ethanol (lower left quadrant) may generate significant greenhouse gas emissions, the graphic depicts renewable subsidies with (lower right quadrant) and without (upper right quadrant) ethanol subsidies separately.

Source: © Environmental Law Institute; http://www.eli.org/pdf/Energy_Subsidies_Black_Not_Green.pdf .

Pfund and Healey, in their report “What Would Jefferson Do?” (Ref. 1), studied the use of subsidies and related expenditures from the beginning of the U. S. republic.  Early subsidies were granted by both states and the federal government, first to coal mining, then to oil production, as these fuels were discovered domestically and their production grew.  (The report adjusts all expenditures to current constant dollars.)  They make the point generally that the trajectory of growth of the use these fossil fuels for energy correlates well with the growth of the U. S. economy over time.  They analyzed subsidy data starting as early as they were available in preparing their report (see Details, below).  Unfortunately, even though coal was and remains an important aspect of the U. S. energy economy, their inability to recover meaningful subsidy information for this fuel from its earliest use led them to exclude it from their analyses.  In particular, their emphasis was on the role that subsidies played in the early years of the various fuel technologies, when each respectively was being developed into an economically viable energy source.  They do, however, include nuclear energy, while the ELI study (above) does not.

Pfund and Healy conclude that, over the earliest 15 years of federal subsidy grants to a new technology, nuclear energy received more than 1% of the federal budget, subsidies to the oil and gas industry amounted to one-half percent of the budget, whereas renewable energy sources received subsidies amounting to only about one-tenth percent of the budget.  Thus the proportional support for oil and gas in its early years as an industry was about 5 times greater than that for renewable energy sources.  The proportional year-by-year subsidy grant for four energy sources is shown below.

Inflation-adjusted energy subsidies as a percentage of the Federal budget during the first 15 years of each subsidy’s lifetime.  The percentage scale runs from 0.00 to 0.25.  The years of the subsidy life, with four bars for each year, runs from year 1 to year 15.  In each year the bars represent gray, oil and gas; purple, nuclear; orange, biofuels; green, renewables.

Source: Pfund and Healey (Ref. 1); http://i.bnet.com/blogs/dbl_energy_subsidies_paper.pdf

Pfund and Healey characterize the early years of a technology as the period in which it is most useful to invest public funds to seed and develop the technology for the public good.  The graphic above shows that, staged year by year, the nuclear industry received the greatest proportion of subsidy support, followed by oil and gas in its early years as a fuel source.  Biofuels and renewable energy sources garner much less proportional federal subsidy support (and, as indicated above, biofuels may not contribute significantly to abating greenhouse gas emissions).

The annual subsidies granted to each energy source averaged over its respective lifetime as a recipient of support is shown in the following graphic.

Historical average of annual subsidies in 2010 US$ billions received by gray, oil and gas (US$4.86, over 1918-2009); purple, nuclear (US$3.50, over 1947-1999); orange, biofuels (US$1.08, over 1980-2009); green, renewable energy sources (US$0.37, over 1994-2009).

Source: Pfund and Healey (Ref. 1); http://i.bnet.com/blogs/dbl_energy_subsidies_paper.pdf

It is clear from the graphic above that oil and gas received the largest annual average subsidy over almost a century of subsidy programs, and continues to receive them up to the time of the report.  The annual average for biofuels is 22% of that for oil and gas, and the average for renewables is only 8% of that for oil and gas.   

Pfund and Healey conclude, after considering the purpose of subsidies to encourage new technologies and to enhance the value of an enterprise in the  eyes of the private sector, that “today’s government incentives for renewable energy pale in comparison to the kind of support afforded emerging fuels during previous energy transitions” (Ref. 1).

Details

The Environmental Law Institute report (Ref. 3) itemizes subsidies granted during the seven years studied.  The three largest for fossil fuels are:

A foreign tax credit totaling US$15.3 billion.  This credit is intended to prevent double taxation when taxes are paid to a foreign state, but for oil and gas, this credit permits royalty payments (ordinarily a cost of doing business) to be preferentially treated as a foreign tax (see Ref. 3).

A credit for production of nonconventional fuels totaling U$14.1 billion.  This credit has historically benefited coal mining, but also applies to oil from shale, tar sands, biomass, and other special fuel sources.

A provision that permits up-front accounting for Intangible Drilling Costs rather than long-term amortization, totaling US$ 7.1 billion.

For renewable energy sources, the largest subsidies include

The Volumetric Ethanol Excise Tax Credit totaling US$11.6 billion, excludes ethanol on a per gallon basis from the general fuel excise tax imposed throughout the U. S.

The Renewable Electricity Production Credit totaling US$5.2 billion applies to electricity production from wind, solar, biomass, geothermal, hydropower, and other sources.

A direct payment subsidy from the Department of Agriculture totaling US$5.0 billion for raising corn.  Although not intended by statute for ethanol production, this subsidy operates in conjunction with a Congressional mandate from 2005 that stimulates demand for ethanol.

The report by Pfund and Healey (Ref. 1) provides details on several aspects of subsidy policy.  They note that “not all subsidies are created equal.”

Although they did not analyze the early years of coal mining for lack of data, they point out that a reclassification of royalties received on coal mining as capital gains during the Korean War permitted the recipients to pay far less income tax, since the top marginal individual rate at the time was as high as 91%.  This tax provision was considered in the national interest during the Korean War, but it is still in effect even though that war is over, and the top tax rate is far lower now.  In its early days in the 19^th century, coal was promoted largely at the state level as a source of energy, although a 10% tariff on imported coal was in effect from before 1800.  Subsequently, the growth of the coal industry was closely coupled to that of the railroad industry, including its interests in real property and mineral assets.

The oil and gas industry, the authors point out, benefits from two subsidy provisions.  The first, introduced in 1916, permitted rapid recovery of intangible drilling costs and dry hole costs in the year incurred rather than being depreciated over several years.  The second, the excess of percentage over cost depletion deferral, introduced in 1926, permits deduction of a percentage of gross revenues rather than a deduction based on the value of the extracted resources.  Even in the mid-1980s, these two provisions represented the largest tax credits, and hence, the largest estimated losses in federal revenues, arising from the oil and gas industry.

The nuclear industry benefited from the Price-Anderson Act, which granted federal protection of utilities operating nuclear facilities in the event of a nuclear accident.  This provision was likely crucial in development of the nuclear industry, since no utility was likely to proceed with nuclear energy in its absence.

Subsidies for renewable energy began with the Energy Policy Act of 1992.  It grants a production tax credit of 2010 US$0.015/kWh for electricity generated from wind or biomass, now extended to other sources as well.  An investment tax credit has applied off-and-on for residential solar, and is now in place until 2016.  The production tax credit for wind has also been in force in fits and starts, being reinstated, after several expirations, for only one- or two-year terms.  The result is a great variability in installation of new wind generation capability, as shown below:

Cumulative wind generating capacity (left axis, blue line) and capacity added each year (right axis, green bars) for years from 1981 to 2006. The arrows show years in which the Production Tax Credit expired without being renewed.
Source: Pfund and Healey, Ref. 1; http://i.bnet.com/blogs/dbl_energy_subsidies_paper.pdf.


The three arrows in the graphic above show years in which the Production Tax Credit (PTC) lapsed without being reinstated.  This break in the continuity of support had a drastic effect, reducing the rate of installation of new wind generating capacity dramatically in the affected years (see the graphic above). 

The EIA report “Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2010” (Ref. 2) gives a detailed exposition of the expenditures in all the energy subsidy programs operating in FY 2010.  These data are referenced to corresponding data for FY 2007.  The reader is referred to the original for more details.

Analysis

Two separate studies of U. S. federal energy subsidies are considered here.  The first, by ELI (Ref. 3), reports on subsidies in the restricted period of the seven U. S. fiscal years 2002-2008.  It included the coal industry but did not consider nuclear energy.  The second study, by Pfund and Healey (Ref. 1), covers subsidy programs in energy throughout the history of the U. S.  Since records of early subsidies for coal energy were difficult to assemble, they omitted coal from the analysis, whereas nuclear energy is included.  Pfund and Healey place considerable emphasis on the first fifteen years of subsidies in an energy sector regardless of its chronological occurrence.

Both studies arrived at very similar conclusions in spite of the great difference in their approaches to analyzing subsidy data.  ELI finds that in the seven years examined, subsidies for fossil fuels were about US$72 billion, while subsidies for renewables were about US$29 billion (over half of which benefited corn-based ethanol).  Thus, at a time not significantly removed from the present, fossil fuels were subsidized at a rate about 2.5 times as great as were renewable energy sources.

Pfund and Healey devised a creative analysis that enabled them to compare subsidies that were in effect at different historical times.  They find that in the first fifteen years of subsidizing a particular energy sector, subsidies supporting the nuclear industry, the oil and gas industry, and renewable energy were granted in the ratio of approximately 10:5:1, based on their portion of the federal budget at the respective times they occurred.  Thus at the stage in the development of the respective sector, when it is novel and worthy of public support for further development, the oil and gas industry received about five times as much support, adjusted for inflation, as the renewable energy sector.

Both reports point out that currently the oil and gas industry (and the fossil fuel industry in general) is mature and profitable, no longer in need of subsidies to promote further growth.  Renewable energy, on the other hand, is a nascent industry, which, among other factors, has not yet reached a point where economies of scale have been fully realized. In addition to the disparity in subsidy rates for the two sectors, Pfund and Healey point out that the oil and gas industry was able to expand into an uncluttered, newly created market for its products in the early years of the 20^th century.  Currently, however, renewable energy sources have to compete against, indeed have to displace, energy provided by fossil fuel sources—a much more challenging task. Renewable energy reduces the dependence of the U. S. on fossil fuels for its energy, especially the need to import oil from sources abroad whose reliability may be questionable.  Use of renewable energy mitigates the emission of greenhouse gases into the atmosphere, thus abating the increase in the long-term average worldwide average temperature.  These factors support the expansion of subsidies to be provided to renewable energy sources.  There is no longer a need in our energy policy for continued subsidization of the fossil fuel industry, while the need for expanding support for renewable energy sources is evident.

As noted above, in the mature energy economy of the U. S., renewable energy largely supplants, rather than complements, energy from fossil fuels.  It has been argued that renewable energy would lead to loss of jobs.  But this is not the case; our growing energy economy would continue to provide new job opportunities as renewable energy expands, both during construction and operation of renewable facilities (see this previous post for an analysis of jobs created by renewable energy). 

As pointed out by Pfund and Healey, the Congressional policy (or lack thereof) with regard to the Production Tax Credit for wind energy demonstrates the critical need for consistent long-term fiscal incentives in developing a new energy technology.  This lack of consistency also stands in contrast to those tax credits for oil and gas that are permanently enshrined in the federal tax code.  Permanence ensures consistency in long-term planning by private enterprises.  A more enduring subsidy policy should be considered for renewable energy sources.

Conclusion

Subsidies have played a positive role in developing energy throughout the history of the U. S.  Unfortunately, the rate of subsidizing renewable energy has fallen far short of the levels supporting other energy sectors over the years.  Developing and deploying renewable energy facilities is critical for our national security, freeing us from dependence on foreign sources of fossil fuel.  Thriving job opportunities would also result.  Renewable energy contributes significantly to abating man-made global warming arising from burning fossil fuels.  For these reasons the level of federal subsidy support for renewable energy sources should be expanded 3- to 5-fold.

References

1. “What Would Jefferson Do? The Historical Role of Federal Subsidies in Shaping America’s Energy Future”, by Nancy Pfund and Ben Healey, DBL Investors, September 2011; http://i.bnet.com/blogs/dbl_energy_subsidies_paper.pdf.   

2. “Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2010”, EIA, July 2011; http://www.eia.gov/analysis/requests/subsidy/pdf/subsidy.pdf. 

3. “Estimating U. S. Government Subsidies to Energy Sources: 2002-2008”, Environmental Law Institute, September 2009; http://www.elistore.org/Data/products/d19_07.pdf.

© 2012 Henry Auer