Counterintuitive Energy Subsidies

One of the most common arguments against renewable energy resources such as wind and solar is that they are not cost-competitive compared to traditional fossil fuels. Accordingly, government officials, business leaders, and taxpayers are concerned about the billions of dollars that would have to be spent in government funding and subsidies to make renewable energy more cost competitive today. However, when one examines the subsidies that fossil fuels receive annually, as well as their negative externalities, it is harder to argue that renewable energy is “too expensive”.

The majority of industries require support and legislative stability during their infancy, and this is especially true of the energy industry. It should come as no surprise that government funding and subsidies were used to help the coal and oil industries when they were first developing. However, it is unclear why fossil fuels, now a mature industry, received $72.5 billion in U.S. federal subsidies between 2002-2008. To put this in comparison, the solar industry received less than $1 billion in federal subsidies during that same time period, and all renewable energy fields together received $29 billion. If fossil fuels are so much cheaper, why should they receive more than double the amount of federal funding?

Federal subsidies include incentives, tax breaks, loan guarantees and other credits. President Barack Obama made a commitment to support clean energy, and solar subsidies have significantly increased since he took office, highlighted by a 30% Federal Tax Credit or Grant program for solar. Furthermore, Obama has proposed reducing subsidies and tax breaks for oil, natural gas and coal producers in his budget proposal each year. The G20 echoed this rhetoric, proposing in 2009 to begin phasing out fossil fuel subsidies, which was applauded by economists and environmentalists.

Yet nothing has changed. Congress successfully opposed these cuts and reductions, thanks in large part to heavy lobbying from oil, gas, and coal companies. Furthermore, none of the G20 countries have enacted a subsidy-cutting policy.

Even though 80% of Americans agree that Congress should consider reallocating federal subsidies from fossil fuels to solar, and 92% of Americans support pollution-free technology, it appears inevitable that renewable energy will lose out in subsidy fights because of the power of the entrenched fossil fuel industries. Supporters of fossil fuel subsidies point to the fact that oil prices often depend on situations in foreign countries, making the market more volatile and thus they need insulation, but this seems to be a critical disadvantage of the oil industry, not something that should be supported.

At this point, fossil fuel industries have a price advantage over alternative fuel sources because of industry maturity and federal subsidies. If a free market without subsidies existed though, fossil fuels would still be priced inaccurately due to their negative externalities.

An externality is a cost or benefit to a party that did not directly participate in the transaction. For example, fossil fuels’ most significant negative externality is pollution. Fossil fuel energy production is the primary contributor to greenhouse gas emissions that are associated with climate change. In basic economics, when a product or service has negative externalities that are not reflected in the cost, it makes sense for governments to levy a tax or charge that reflects the true cost of that action to society. However, under the status quo, levelized cost does not exist for energy sources – and the fossil fuel industry receives billions of dollars in annual subsidies to help reduce their cost.

Federal incentives for the fossil fuel industry are likely to continue, meaning renewable energies must be able to take advantage of other opportunities in order to compete. Several states have recognized a need for state-based intervention and they have helped create a better market for solar deployment through solar “carve-outs” in their Renewable Portfolio Standard (RPS). These carve-outs mandate that electricity suppliers procure a certain percentage of their electricity from solar sources. In effect, this legislation leads to a valuable market for Solar Renewable Energy Credits, or SRECS.

The ability to sell the benefits of clean solar electricity at reliable prices has prompted an increase in solar deployment in states like Pennsylvania, New Jersey, Ohio, and the District of Columbia among others, and this market-based solution does not have to rely on federal or state funding.

Looking forward, states should make good use of solar carve-outs in an attempt to level the playing field with the fossil fuel industry. State-created solar requirements and SREC values can help the solar industry get stable funding in its developing years – and eventually solar will stand on its own in the market.

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