Weekly Update

The subsidy game for fossil fuels

At midnight on New Year’s Day the Department of the Treasury’s Section 1603 cash grants program expired, dashing the hopes of those who have expressed legitimate concern that the end of various grants and tax credits will further devastate the embattled solar industry.

The program was a subsidy in its purest form: The government paid businesses to build renewable energy projects — a cash grant equivalent to 30 percent of the cost of each project — which lowered the ultimate cost of the produced power in the market. There were no complex tax credits, nor was there any complicated rewriting of accounting rules so that a company could be subsidized through lower corporate taxes. And there were no preferential trade laws to protect an industry. Companies needed only to build a project and the government would pick up 30 percent of the tab.

With this in mind, I took some time over the holidays to sit down with the monstrous, 351-page report from the International Energy Agency (IEA) and the Organisation for Economic Co-operation and Development (OECD) titled “Inventory of estimated budgetary support and tax expenditures for fossil fuels.” I wanted to answer the question, How is it that the political winds are beating against renewable energy when fossil fuels have been supported for almost a century — and their support is actually growing year to year — and yet nobody blinks an eye?

Some may recall that the report got some press when it was released in October, mainly because it reported that in 2010 global subsidies intended to reduce the price of fossil fuels amounted to $409 billion. That was $110 billion more than 2009, and there are projections that fossil fuel subsidies will go to $660 billion by 2020. Just to put that in perspective, $409 billion is just under 20 percent of the total tax revenue in the U.S. — roughly equivalent to the market value of Exxon-Mobil, the largest publicly traded company in the world.

Right about now is when most people start to scratch their heads, thinking about federal and state gasoline taxes in the U.S. and the fact that Europeans pay $8 to $10 a gallon for gas because of even harsher taxes. Isn’t the government taxing oil, not subsidizing it?

The answer lies in the fact that when an industry has been subsidized for almost a century, as is the case with the fossil fuel industry, the ways in which those companies are supported get numerous and complex. The OECD’s report counted at least 250 mechanisms. Unlike the 1603 Program of the Department of the Treasury, most subsidies are far more opaque.

Let’s take a look at a few. Be forewarned this can get esoteric, complicated and, yeah, boring. But since everyone loves to talk about gasoline, let’s start there, and with the U.S.

As part of the Energy Policy Act of 2005, the “Temporary Expensing of Equipment for Refining” was introduced. It is a tax provision that allows crude oil refiners to expense 50 percent of qualified property used for processing liquid fuel. Normally refiners would have to depreciate the equipment over its lifetime, often a decade or more, but now they get to expense half up front, effectively lowering their taxes. No big deal, right? Well, it cost the U.S. government $760 million in 2010 and has exceeded $2 billion overall since 2005.

How about Germany, which has been a global leader in renewable energy, with 9 percent of its energy coming from renewables? Like many countries, the cost of importing coal is lower than producing coal from hard coal mines in Germany. But RAG Deutsche Steinkohle continues to mine hard coal, making up the price difference with 1.7 billion euros in direct subsidies in 2010, down from almost 5 billion euros in 2000, as Germany has finally decided upon a slow phase out of coal subsidies by 2018.

The list of countries subsidizing fossil fuels and the methods they employ goes on and on (the OECD report looked at 24 countries), but the impact is that we never know the true cost of power and fuel, energy demand grows unchecked because the market is manipulated by subsidies, and investment in alternative energy is discouraged.

More renewable energy subsidies in the U.S. will come up for review this year, like the production tax credit (PTC), and my guess is that they will face a tough road. But before another screed about handouts for the alternative energy gets penned, authors and policy makers should stop to consider a global subsidy system for fossil fuels that has evolved over the past 100 years and how alternative energy has to compete on that uneven playing field.

Question of the week

Should all energy subsidies be phased out?