Should We Eliminate All Energy Subsidies?

Writing in the Washington Post a couple weeks ago, Jeffrey Leonard argued that Congress should scrap all energy subsidies – and that clean energy would come out ahead. The op-ed was a shorter version of an essay in the current issue of the Washington Monthly. Here’s his bottom line:

“If President Obama wants to set us on a path to a sustainable energy future—and a green one, too—he should propose a very simple solution to the current mess: eliminate all energy subsidies….  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.”

I understand the political logical of this pitch: the current climate in Washington makes it easier to cut subsidies than to impose new regulations. But the odds that clean energy would win from eliminating all subsidies is roughly zero.

Here’s the heart of Leonard’s argument:

“One thing about [subsidies] is easy to summarize: they are heavily tilted toward fossil fuels. Government statistics show that about 70 percent of all federal energy subsidies goes toward oil, natural gas, and coal. Fifteen percent goes to ethanol, the only renewable source of energy that consistently gets bipartisan support in Congress (think farm lobby and Iowa). Large hydro-power companies—TVA, Bonneville Power, and others—soak up another 10 percent. That leaves the greenest renewables—wind, solar, and geothermal—to subsist on the crumbs that are left.”

There are two problems with this. First, the statistics are wrong. The Department of Energy reports that renewable energy gets far more subsidies than any other source. As of FY2007, renewables received 30% of federal subsidies. Coal, oil, and gas together received 33%.  (The rest went to end use, generic electricity, nuclear, and conservation.)

Second, fossil subsidies are spread across a much bigger base than subsidies for alternative fuels, since alternative fuels still make up a tiny fraction of U.S. primary energy. The same DOE report I just linked to showed that coal- and gas- fired electricity received average subsidies of 44 and 25 cents per megawatt hour, respectively. In contrast, wind and solar got subsidies of $23 and $24 per megawatt hour, respectively. Take those subsidies away, and you can guess which energy source wins. Even if Leonard’s statistics were correct, the much larger base for fossil fuels would still lead you to conclude that renewables wouldn’t benefit from eliminating all subsidies.

I’d love to find a quick fix for America’s energy problems just as much as the next guy. I’d also be delighted to have a reason to cut subsidies, many of which are hugely wasteful. But an effort to eliminate all energy subsidies without instituting better alternative policies should be understood for what it is: a recipe for cementing the dominance of traditional fossil fuels against their competitors.