Which Energy Industries Would You Subsidize?

by Jay Kimball on 25 January 2011

Subsidies and tax breaks are a tried and true way of helping a developing industry get up on its feet.

One of the strategies to accelerate a transition to cleaner greener renewable energy sources is to subsidize research development, and production of renewable energy sources, such as wind power, solar power, geothermal, etc.

Free market advocates often say that the emerging renewable energy industry should not be subsidized. What is not widely know though, is that subsidies for well established fossil fuels exceed renewables by almost six to one.

Research by the Woodrow Wilson International Center for Scholars and the Environmental Law Institute reveals that the lion’s share of energy subsidies supported energy sources that emit high levels of greenhouse gases (GHGs). The study, which reviewed fossil fuel and energy subsidies for Fiscal Years 2002-2008, showed that the federal government spent about $70 billion on the fossil fuel industry, and about $12 billion on renewables. As the report points out:

Moreover, just a handful of tax breaks make up the largest portion of subsidies for fossil fuels, with the most significant of these, the Foreign Tax Credit, supporting the overseas production of oil. More than half of the subsidies for renewables are attributable to corn-based ethanol, the use of which, while decreasing American reliance on foreign oil, has generated concern about climate effects.These figures raise the question of whether scarce government funds might be better allocated to move the United States towards a low-carbon economy.

energy subsidies fossil fuel, oil, coal, wind, solar, ethanol

Source: Internal Revenue Service, U.S. Department of Energy (Energy Information Administration), Congressional Joint Committee on Taxation, Office of Management and Budget, & U.S. Department of Agriculture

N.B. Carbon capture and storage is a developing technology that would allow coal-burning utilities to capture and store their carbon dioxide emissions. 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. The production and use of corn ethanol can generate significant greenhouse gas emissions. Recognizing that the production and use of corn-based ethanol may generate significant greenhouse gas emissions, the data depict renewable subsidies both with and without ethanol subsidies.

Fossil fuel extraction is increasingly toxic (e.g. fracking poisons public water systems) and environmentally destructive (e.g. gulf oil “spill”). And fossil fuel production seems to be hitting a Peak Oil wall. As production lags demand, we should expect oil and gas prices to rise precipitously. Subsidizing oil keeps us addicted to it.

Three of the top 5 biggest companies in the world are oil companies (Exxon, BP, Royal Dutch Shell). Rather than subsidize Big Oil profits and foreign oil nations, we should be taxing fossil fuels to reduce their use.  Tax what we want to reduce, and subsidize what we want to increase. Tax what harms us, and subsidize what helps us. Use the taxes to fund R&D and development of a world class alternative energy industry.

Obviously, that means politicians will need to resist the monied special interests of the Big Oil lobby.

What would you like to see your politicians do?

Recommended Reading

Top Business Leaders Deliver Clean Energy Plan by Jay Kimball

  • About an hour after this post, President Obama gave his State of The Union speech. A few minutes in to the speech, the President specifically mentioned a Sputnik-like initiative to develop renewable energy and cleantech solutions, using the subsidies currently lavished on the Oil industry to fund those new initiatives.

    Oil is our past, renewable energy is our future. It’s time to support that future and assume a leadership role in bring cleaner greener energy and technology solutions to the world.

  • Interesting information. Thanks for posting this.

  • Good stuff, very intelligently written and sourced. Unfortunately many in this country care nothing about those sorts of standards. I can only hope that the people will HOLD the representatives accountable that are NOT listening to them and only following the $$$$ from the big oil lobby.

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  • Anonymous

    Saw your post on NPR. Excellent information! Thanks for posting so that I could learn more!

  • You bet!

    Thanks for the good words…

  • Ryansistah74

    Jay thank you for posting this on the vine. I love it something positive for a change. I was shocked after clicking the link that I wasn’t taken to some hate-fest. This vision you write of I have been hearing about this for years past. and cannot believe that we are were we are today. but like anything else the people who make money from oil are/were the ones in Washington.

  • RacerJim

    Unfortunately neither usurper POTUS Obama/Soetoro or you proferred any plan whatsoever to gradually transform from fossil energy sources to renewable energy sources. Go ahead, eliminate current subsidies/tax breaks for fossil enerygy sources as usurper POTUS Obama/Soetoro wants to and, as he said during his campaign, “energy prices will necessarily skyrocket.” Apparently neither usurper POTUS Obama/Soetoro or you have noticed, or neither of you care, under usurper POTUS Obama/Soetoro the national average price for a gallon of regular gas has already “skyrocketed” from $1.50 +/- in January 2009 to $3.10 +/- now, and industry experts predict it will be $5.00 +/- this summer. And he and you want to make it skyrocket even more?

  • Mr. Bill

    Your analysis was going good until you failed to complete it by showing the SIZE of the industries, NUMBER of jobs in each industry, and AMERICA’s dependence on the output of each industry. And then why don’t you compare the amount of taxes paid to the US Government by the traditional fossil fuel companies relative to the taxes paid by alternative energy industries. Then you’ll see the traditional fossil fuel subsidies don’t even move the needle. IF you go back and insert those numbers THEN AND ONLY THEN will you have a good analysis of these industries mean for America. Ethanol is the greatest inefficiency of America’s resources know to mankind, the waste of land, water, energy to plant and harvest is an travesty.

  • Bkerea58

    This is just another diatribe against “Big Oil”. EVERY industry in America receives tax breaks and subsidies from the Federal government to help them offset the cost of doing business. Yes, the oil industry benefits to the tune of billions of dollars but they also spend billions of dollars to provide energy to drive the car you can’t live without, to heat your home, to provide light when you flip that switch, to provide ingredients for the medicine you take, and any number of other things in your day to day life. In addition, the constant environmental constraints placed on the industry by EPA and others results in a huge increase in the cost to do business. Almost every new air emission rule requires the oil business to do research to figure out how to meet new standards and spend billions of dollars to redesign facilities to meet the standard. Destroying the oil business so we can be in clean, green nirvana is not the solution. If people are serious about reducing the deficit and having a cleaner environment then the near-term focus needs to be on cleaner-burning natural gas. The domestic reserves of natural gas are greater than the oil-equivalents in many Middle Eastern countries. Supporting the drilling for natural gas in the U.S. and converting more or our infrastructure, vehicles, etc to natural gas would reduce our dependence on foreign oil (thus reducing the trade deficit by billions), create thousands upon thousands of jobs and reduce GHG emissions significantly, especially with the corresponding reduction in the use of coal for electrical generation. If you are an advocate of change, change to natural gas and use the billions we would save in trade to fund research for renewal energy. And while we are at it, bring the troops home and spend the billions wasted in foreign countries in the name of democracy on the needs of our country.

  • Mvineyard

    The analysis is fatally flawed. Lies, More Lies, Damned Lies, and statistics.

    First – it is necessary to understand the difference between a subsidy (giving money to a corporation to develop a wind farm …where ultimately – power might cost 30 cents per kilowatt hour) – and a tax break, where a corporation that drills wells to bring oil out of the ground is able to write off those expenses. The tax write-offs are a fairly normal AND REASONABLE way of doing business. But tax write-offs are not the same as SUBSIDIES.

    Then – consider the cost of coal or oil generated electricity… (maybe 8 – 10 cents per kilowatt hour) – and recognize that if tax breaks are eliminated, the costs to the consumer might go up 1 or 2 pennies – but that power is still a better deal than the wind power that is sucking up so much government money (tax other people and give the money to GE to build inefficient wind farms!!)

  • Edale4

    It’s a shame President Obama didn’t have an easel and your chart to underscore his statement about eliminating oil subsidies. Thank you for your remarks and your research. It should be in the hands of every American. I’ll start by forwarding this to those on my e-mail list.

  • easy

    I belive that if we spend a little money on geothermal, we could come up with a amazeing amount of enegry that would last for many centurys. No pollution. No toxic wastes.

  • Market survivor

    I have worked in the oil and gas business for 32 years, so you will know my bias. It would be my thought that no industry should get subsidies, let the market ( individuals) dictate the course, not government entities. The carbon industry has had severe ups and downs since it’s inception, but has adjusted to true market forces. All industries should held to the merits of their ingenuity and profitability.

  • Tiger

    I don’t want the government to subsidize anything, just stay out of the way and let people do what works. American citizens, both natural and corporate will do their best when the government gets out of the way.

  • NatGas Man

    Actually, we should tax the writers who use statistical lies and apples-to-oranges analyses to support a phony agenda. Then we could all retire with our savings intact. In one sentence you refer to oil subsidies and then you use the term fossil fuels and include coal. You have done this repeatedly and combined the two in your chart. Apparently you do not even understand the difference between coal and oil, so how can you write a factual article to support a reasonable position? And how many jobs are created and supported by renewable energy as compared to oil companies?

    But then again, if you told the truth and the whole truth, you would not have much to write about.

  • DrSuess

    Why even both with corn ethanol it requires more energy to synthesize than it produces joule for joule. On the other hand if we imported ethanol from Brazil made from pure sugar cane it would make more sense.

  • TooBad41

    The Federal and State governments take in about $66 Billion a year from taxation on just gasoline alone. It is reported that the Federal tax break is around $70 Billion per year. So it is basically a wash. If you eliminate the $70 Billion subsidized to the oil industry someone will have to make up that difference…..that would be you and me. The price just for a gallon of gasoline will go up at least another $.50 per gallon. And that is not counting fuel oil, diesel and the tax paid on a barrel of oil before it becomes fuel for your car or truck. Go ahead and subsidize alternative fuels. You won’t like it and I won’t like it. No one will benefit from those other industries for decades to come.

  • Rick

    Anyone know what the primary “tax break” that is granted by the IRS towards the petroleum industries?

    Answer: The Foreign Tax Credit

    The reason this “credit” exists is to prevent double taxation. A basic principle is applied to ALL taxpayers on the basis that people and companies should not be taxed on taxes paid overseas.

    This is the same credit many individuals receive for payment of foreign taxes on foreign stock dividends. If foreign income is made by any one of us, we receive the same “subsidy” on foreign taxes paid as a tax credit. In other words it IS NOT a subsidy, but it sure makes for nice sound bites and headlines.

    Corn based ethanol receievs direct tax-payer funded SUBSIDIES (I think currently it runs about $0.50 /gallon) for a process that is as old as moonshine and has little if any truly sustainable, long term benefit to people and planet. It is simply a huge taxpayer funded gift to Archer Daniels Midland and POET. Let the free market reign and sugar cane based ethanol would flood into the USA from Brazil and elsewhere – becuase it is a more cost effiecient source of sugar for ethanaol production.

  • O’

    By how much do we indirectly subsidize the fossil fuel industries through health care expenses?

  • Flat tax

    Don’t you mean undermine, not underscore?

  • Anonymous

    You are a fool. “renewable” energy is like handcuffing industry and the sure road to third world living.

  • Anonymous

    You are a fool. “renewable” energy is like handcuffing industry and the sure road to third world living.

  • Not so.

    Go to most third world nations and you will see that they are more toxic and exploited, by the first world, for their resources, to fuel rapid first world growth. Fossil fuel toxicity is rotting the planet, and will do it to the first world nations as well – e.g. think Gulf oil “spill” and fracking (see http://8020vision.com/2010/07/06/shale-gas-exploration-the-coming-storm/) for natural gas extraction. Time to leave that old decaying technology behind and transition responsibly and as rapidly as economically possible to cleaner forms of energy.

    Both oil/gas and renewable/cleantech industries create jobs. But cleantech/renewable way out performs at creating jobs. See charts 2 and 3 here:

    http://8020vision.com/2010/10/25/californias-prop-23-morphing-into-prop-26/

    Cleantech is the fastest growing job sector in California, and provides about 3 times more jobs per dollar invested, than oil/gas.

    In addition, oil/gas extraction are becoming increasingly toxic. For an example, see:

    http://8020vision.com/2010/07/06/shale-gas-exploration-the-coming-storm/

    We have a have a fantastic opportunity to transition to cleaner energy, reduce dependence on foreign oil (60% of the oil we use), and drive the next wave of technology innovation. Just as we did with silicon chip and telecom/internet technology.

  • Agreed. If we only look at the cost per BTU of energy generated, we are not understanding the true cost of things. It’s like smoking. There is the cost of the cigarette, but then, there is the cost of healthcare to combat the lung cancer, etc. Hence the tax on Cigarettes, to discourage use, and pay for impact on public health costs.

  • We want the price of gas to go up. Subsidies have kept it artificially low, so we stay addicted. Most of the world pays more for gas now, and we should to. the addiction is hurting us. Time to transition to healthier forms of energy, that don’t line the pockets of foreign oil dictators.

    I will like subsidizing and tax breaks for renewable energy. It will speed the transition. Oil had their shot, and don’t need the subsidies and tax breaks. Let the price of gas rise to it’s natural market price. Consumers will then seek new ways to transport, heat, cool, etc.

    As with the transition form horse and buggy to car, things change, and the early days of a new technology appear odd and immature. But evolution prevails and the new technology gets iteratively better and better. So it will be with renewables. It is already quite good, and has grown to be about 2% of worldwide energy production.

    Perhaps you saw in the news yesterday that China just passed the US in windpower installed base. They grew their windpower by over 60% in 2010. As Republican congressman Bob Ingliss warned his fellow Republican free marketers, “China will eat our lunch” if the US doesn’t start leading the way on cleantech and renewable energy. For more on that, See:

    http://8020vision.com/2010/11/18/gop-rep-bob-inglis-on-climate-change/

  • I totally agree. Ethanol is a boondoggle. With an Energy Returned on Energy Invest (ERoEI) of about 1.6:1 it is an absolute waste of time. And it removes farmland from food production, at a time when food scarcity is of increasing concern.

    For more on Ethanol boondoggle, see:
    http://8020vision.com/2010/09/02/farming-wind-versus-farming-corn-for-energy/

    For more on food scarcity, see:
    http://8020vision.com/2010/09/22/why-farmers-need-a-pay-rise/

  • I am taxed, just like the rest of us.

    Coal is a fossil fuel. Do you think it is not?

    Cleantech/renewable industry generates jobs about 3 times more than oil/gas industry, for every dollar invested. For how many jobs are created, see charts 2 and 3 here:
    http://8020vision.com/2010/10/25/californias-prop-23-morphing-into-prop-26

  • Subsidies and tax breaks work. Just look at the oil industry. Three of the top five biggest companies in the world are oil companies (Exxon, BP, Shell).

    There is nothing magic about business. They are not inherently good, when left un-regulated and unconstrained. Some business are great and ethical, and do the right thing, and some are underhanded, toxic, and without an ethical bone.

    Same with government. Some government helps, some hurts. We need to have smart, well managed government and business, that errs on the side of “First, do no harm.”

  • I generally agree. Once an industry is established, let market forces guide it. But for strategic industries, in their infancy, use tax breaks and subsidies to foster healthy growth.

    We need cleantech and renewable energy ASAP. We should do what we can to foster that, while in its infancy. Once up and running, and competing well against China, and offering solid alternatives to our oil addiction, set it free.

  • Geothermal looks viable. I believe Google has made substantial investments in geothermal, all with a number of other renewable energy initiatives.

  • Thanks for the kind words Edale4. I am often surprised at how little politicians use charts and pictures to convey the trends.

    You might be interested in the charts on income inequality I posted here:

    http://8020vision.com/2010/11/16/when-does-the-wealth-of-a-nation-hurt-its-wellbeing/

    They show 100 years of income, and tax trends, along with a chart showing the Gini Index.

  • The chart above shows both subsidies and tax breaks. Oil industry received about $16 billion in subsidies, and about $54 billion in tax breaks.

    The cost of oil is a bit lower than wind, but the cost of wind and solar is falling fast, and the cost of oil is rising. The trends are clear, and as oil demand exceeds oil production (peak oil) it will get worse. For more on that, see:

    http://8020vision.com/2010/09/03/german-military-study-warns-of-potential-energy-crisis/

    In addition, fossil fuels have extreme indirect costs – pollution, toxic water, oil spills, climate change, etc. We need to look at the total cost picture.

    Wind farms are very efficient. I meet regularly with utility teams in the Pacific Northwest, that manage the vast windpower arrays that augments the grid, and they are very happy with the performance of the systems. For more on that, and some very smart innovations they are pioneering, see:

    http://8020vision.com/2010/08/13/using-water-heaters-to-store-excess-wind-energy/

  • See comments above about jobs, free markets, strategic investment, etc.

    Bottom line:
    – Oil is a well established industry that needs no special treatment
    – Renewable energy and cleantech are of strategic importance and need to be encouraged with all due speed (see link above about Republican congressman Bob Inglis on China eating our lunch in cleantech//renewable energy
    -Cleantech/renewable sector creates jobs 3 times faster than oil/gas

  • See remarks above regarding why we want gas prices to rise…

  • Thanks! Glad to do it. I try to post to a variety of forums, especially those that don’t agree with my thoughts, so as you will see in the later comments, we do get some angry folks.

    But that’s OK. We need to stay in conversation with each other. If we don’t engage, however messy it may be, we will not progress.

    That said, I especially enjoy when someone like you, with kind words, takes the time to write and share your thoughts.

  • Tom

    It seems you’ve made your point without including the hundreds of billions the military gets and uses to safeguard vital oil interests in the middle east. That would squew it even further….
    How about a poll on how to divy up subsidies… Solar, for example, includes solar troughs and PV but the former is far cheaper in areas with direct solar radiation, and the latter works in cloudier areas.
    My ideas is to subsidize the kWh’s produced, so that the subsidy would naturally favor the most efficient solution for a given area. It could even include kWh’s eliminated, which would then bring efficiency gains into the game.

  • Well said. Thanks for mentioning the wars we fight for oil. A trillion here, a trillion there, and pretty soon we are talking real money. And what cost for the century-plus to come as we live with the cumulative effects of ramping climate change?

    I love your idea of performance-based incentives to further speed time to market.

    The early days of emerging technologies are the especially exciting days. We are just getting started – eh?

  • DAF

    Yeah, I have experience guiding companies through these tax breaks and the amount of revenue coming from the oil companies offsets the tax breaks they get in line with other industry averages. But I agree that if we don’t move on to renewable energy technology, we’re going to lose our place in the world. Every twenty years or so you have a new explosion in technology, such as computers or cars, that really drive an economy. We’ve led those revolutions in the past but with the emotional vitriol pervading the issue of renewable energy, completely unrelated to the underlying technology, I’m a little worried we won’t win this race.

  • JUD

    You’re a freak, dude, what are you talking about $1.50 in January??

  • Thanks for your comments DAF.

    Agreed. It’s a high stakes issue – 3 of the top 5 biggest businesses in the world are oil companies. They have done little to pioneer fossil fuel energy alternatives. BP tried to rebrand them selves as “Beyond Petroleum” but backed away a few years ago. Rather than see themselves as in the energy business – fossil and alternative – they have steadfastly embraced old oil.

    In addition, they fund climate change deniers, in what appears to be a self serving attempt to slow down the transition to renewables.

    Meanwhile, as the US dithers, China, Germany, and other nations embrace the need and opportunity for cleantech and renewable energy solutions, and lead the way.

    Just 2 days ago, China surpassed the US in megawatts of windpower installations. China is hungry for energy, as they build the equivalent of a New York city every two weeks. Renewables are a key focus for them. It should be for the U.S. too, if we can just get the special interests to do the right thing and stop slowing down progress. Big oil has a choice – be part of the problem, or part of the solution. If they don’t want to be part of the solution to renewable energy, they should get out of the way and let others lead and let the U.S. progress. If they will do that, the U.S. will rock the world with innovation and solutions to the pressing global energy and cleantech challenges.

    I like your observation about how every 20 years or so there is a new technology revolution. This is our moment if we choose to lead.

  • Jerry

    Regarding your survey, I would like to vote on “None of the above.” I would; however, like to see subsidized research into nuclear (no, not nuculer) fusion that holds the promise of practically unlimited low cost clean energy. Multiple strategies in fusion need to be funded and researched.

  • Agreed. Fusion power could be a good thing. We need to make sure that the Tritium is disposed of cleanly.

    Fusion research is actively funded, mostly by the Department of Energy. Would you like to see more funding?

    The US spends more on potato chips than energy research and development.

  • Vanrainey

    Instead of subsidizing and providing tax breaks, we should begin by applying excise taxes for the realized costs of the various energy sources. These should not be limited to offsetting health care costs but also should include costs of military and security that are necessary to maintain the hegemony necessary to protect trade routes needed for importing oil. From these funds we could surely pay for carbon sequestration technology development as well as other forms of renewable and alternative energy sources. It would also prompt the market to abandon rapidly out of date technologies and uses of fossil fuels into other less expensive sources of energy and more efficient technologies. Right now safer and much cheaper thorium based reactor technology is waiting to be developed that answer all of our energy needs for 100’s of thousands of years. Solar thermal technology is ready to be employed if we can get the distribution systems developed.

    All this can be done but we have to break the bargain struck by established energy interests so that we can move forward to a much brighter future.

  • Mienmeinmo

    Can you break this analysis down to a per unit cost for each of the categories listed? Either an amount of energy for unit subsidy cost – or amount of subsidy cost per unit of energy.

    The total subsidies you list is about $101.5 billion — so for quick math – I’ll call it $100B. Do renewables account for 12% of the energy produced? Corn ethanol for 16-17%? Fossil fuels for 70-71%?

    If you look into it, you will find that the renewables take in much more (percentage wise) of a subsidy than the fossil fuels do to produce the same amount of energy.

    Fossil fuels do account for approximately 71% of the US energy production. Nuclear accounts for about 19-20%. Renewables (including hydroelectric at 7%) only account for about 9-10%. [Hydroelectric = 7%, Geothermal = 0.3%, Biomass = 1.3%, Wind = 0.7%, and Solar = 0.1%]

    When almost 30% of the subsidies you are comparing goes to barely 2.5% of the energy produce (and even if hydroelectric is included, less than 10% of the energy produced), it appears, at least for the time being, that those would be the subsidies that should be cut.

  • Thanks for the great question.

    In my view, fossil fuels have had their day and no longer need to be subsidized. It is a well established energy technology. We want to actually deepen the subsidies for the emerging technologies, to incentivize R&D and speed deployment.

    The reason we want to accelerate renewables is that fossil fuel cost and toxicity is rising rapidly, while renewables are falling in cost and are much cleaner, and we don’t need to fight wars over securing the energy. We can generate it locally.

    The faster we shift from fossil fuel to renewables, the less impact we will have on the health of the world, and the more local the energy economy becomes.

  • Tripowerguy

    As someone who races cars I can tell you that ethanol can never be a viable fuel. It takes about one and one half as much ethanol to do the work of a gallon of gasoline. The real thing would be electric such as Chevy Volt which is an electric car that has a generator to charge the batteries if they are depleted. An all electric car is limited to a certain range. We need rapid rail lines, we had railroads to every little town until the end of WWII and now we tore all of the rails up. Trucks are not the efficient way to haul freight long haul. Efficiency is the only way we can win this, quit buying SUVs and Big Pickups unless you have a real need for them. Buy a car that gets the very best mileage and get electric if you can.

  • Totally agree. It takes almost as much energy to manufacture ethanol, as is produced by ethanol. It is a waste of subsidies, time and money. The only reason it is still going is as a political gimmick to get corn-belt votes.

  • Here’s an excellent editorial on taxing what hurts us, as a way to reduce the deficit and improve the quality of life. See:

    http://www.robert-h-frank.com/PDFs/EV.02.20.11.pdf

  • Bbwsmin

    Who in their right mind would vote to subsidize the fossil fuel industry? I can’t stand the hypocrisy of “what we are leaving to our children” when it isn’t taking into account the creation of a renewable energy economy.

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