Recently a friend sent a copy of an editorial from the Wall Street Journal, “Gouged By the Wind,” regarding the cost of wind industry subsidies to consumers. “With natural gas prices not far from $2 per million BTU, the competitiveness of wind power is highly suspect. If Congress allows a tax subsidy for renewables to expire this year, as it should for the sake of taxpayers, even the wind lobby in Washington admits that many turbine farms will be bankrupt,” complained the editorial.
So those statements might cause a reasonable person to wonder just how big are the subsidies to wind power and how do they compare to subsidies for other forms of energy we currently consume.
Let’s start with the wind industry, which benefits from the “production tax credit” (PTC)—the prime incentive that the federal government has used to encourage the development of renewable energy in America for the past decade and a half. The PTC originated with the Energy Policy Act of 1992, and prescribes the rate at which investors and owners receive tax credits based on production from wind turbines, solar arrays, geothermal units and the like. This rate has varied from 1.5 cents per kilowatt-hour (kwh) to its present level of 2.2 cents/kwh. However, this tax credit has also lapsed three times during the past 20 years—in 1999, 2001 and 2003, even though the PTC has clearly been highly important to the wind industry. Following the expiration of the PTC, new wind facilities decreased by 93 percent, 73 percent and 77 percent respectively in 2000, 2002 and 2004. The PTC is scheduled to expire again at the end of 2012 and its fate is deeply enmeshed in the current stalemate between Congressional ideologues.
The total value of the PTCs throughout the United States in recent years is generally estimated to be in the range of $1-$2 billion per year. As part of the 2009 stimulus program, however, two sweeteners were added that increased subsidies for renewable energy, including an “investment tax credit” (ITC) worth 30 percent of the investment in equipment and property and a grant program. For the wind industry, these two subsidies were worth along with the PTC totaled just under $5 billion for the wind industry in 2011 according to the U.S. Energy Information Administration.
So how does the $5 billion of wind industry subsidies compare with other existing energy subsidies? The answer is not easy to figure because energy subsidies exist is so many shape-shifting forms and incarnations. In addition to tax credits and cash grants, Congress has handed out tax deductions, tax incentives, and subsidized loans to a variety of energy producers. Congress has also underwritten industry energy research and development costs and used tariffs or relaxed regulations to favor particular energy sectors.
The welter of energy subsidies went into high gear during the 19th century with very large land grants to timber and coal companies, shifted to the construction of enormous hydroelectric dams during the 1930s and then took another form when the federal government assumed the insurance liability for accidents of the nuclear power industry beginning in the 1950s. So the analysis is complicated and subject to all sorts of different definitions, biases and distortions, all of which are on full display on the internet.
One of the most careful and widely quoted studies on the history of energy subsidies was published last year by a venture capital executive and a Yale graduate student—Nancy Pfund and Ben Healy, titled “What Would Thomas Jefferson Do?” They pointed out that the first energy subsidy was a 10 percent tariff on imported coal, which Congress passed in the early days of the republic in 1789 to protect the country’s fledgling domestic coal industry. The report also describes the mother of all energy subsidies enacted in 1916, the tax deduction that allows oil and gas companies to write off the lion’s share of drilling costs in a single year, rather than capitalizing and depreciating them over time, which greatly reduces the tax liability to the petroleum industry. This subsidy was followed by the oil depletion allowance in 1926, which allows oil companies to treat oil in the ground as capital equipment on which they can write off a certain percentage for each barrel that comes out.
Interestingly, the Pfund and Healy analysis excludes the value of the deduction of foreign taxes, which critics have complained are actually royalties rather than expenses, which reduces oil company tax liabilities. They also exclude consideration of the value of royalty relief from offshore drilling as a relatively recent subsidy and they further exclude a domestic manufacturing tax deduction, from which many other industries also benefit. Finally, although they mention the cost of keeping aircraft carriers in the Persian Gulf for the past three decades, whose explicit mission is securing oil shipments, they exclude these costs in order to focus on “apples to apples” comparisons of energy sector subsidies, especially during the critical early years of an energy transition period. In other words, this analysis does not appear to be biasing the results by loading the dice against the oil and gas industry.
So the summary of this analysis of the value of energy subsidies to various industries, averaged over the periods of time that the subsidies have operated concludes as follows:
Energy Sector Subsidy Period Annual Subsidy Cost
Oil and Gas 1918-1999 $4.86 billion
Nuclear 1947-1999 $3.50 billion
Biofuels (Ethanol) 1980-2009 $1.08 billion
Renewables 1994-2009 $0.37 billion
Obviously this analysis omits the recent large increase of subsidies to wind following 2009, which totaled $5 billion last year, but clearly wind producers have a ways to go to catch up with long term average subsidies for other subsidized energy sectors.
The real question to focus on is what are energy subsidies for? Historically subsidies have been justified (except in the emergencies of wartime) on the basis of encouraging the development and commercialization of new energy sources where there is a difference between the value of the activity to the private sector and its value to the public sector. If this were the yardstick we used to measure which energy subsidies to continue or discontinue, what would you decide?
Philip Conkling is president of the Island Institute based in Rockland, Maine.