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The Truth About Subsidies

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A tall, dark, and handsome man walked into the room He paused, shook his head gently, and greeted his guest. "Hello," he lied.

Although this line, which I love, was first introduced in a 1990s satire of Hollywood life, it could easily be transferred to a modern-day satire of the political class. Particularly during election season. Particularly during this election season. Headlines such as "Facts Take a Beating in Acceptance Speeches" drive home the point that if you're looking for substance, you should probably look elsewhere.

So today's column is about setting the record straight on energy subsidies, a hot-button political topic that prompts a lot of rhetoric but not necessarily a lot of facts.

Recently the Wall Street Journal hosted a "Vote." It was "Vote: Should Solar and Wind Power be Subsidized?" Catchy, although a little misleading. A better headline would have been: "Vote: Should Solar and Wind Power and Oil and Gas be Subsidized?" Sure, it's a bit long and unwieldy, but the point is, how can you ask one without the other? Solar, wind, oil, and gas all provide us energy and electrons. So the debate needs to be about all sources of energy, or none.

Already this may be a surprise to some. You don't often hear politicians talking about oil and gas subsidies. Perhaps this is because they're nothing new. As a country, we have subsidized the oil and gas industry for decades and decades, since its inception. Between 2002 and 2008, the fossil fuel industry received $72 billion in subsidies, while renewables received a total of $29 billion, with approximately half of it going to corn-based ethanol, not to solar or wind.

The fossil fuel industry largely receives subsidies in the form of tax breaks, including the Foreign Tax Credit and the Credit for Production of Nonconventional Fuels. This highlights the fact that we tend to import fossil fuels. Solar and wind: we produce them right here at home.

In addition to direct subsidies to the industry, investors in fossil fuels receive special treatment not available to investors in renewables. As Dan Reicher and Felix Mormonn pointed out in a recent article, master limited partnerships and real estate investment trusts are unavailable to renewable investors even as they continue to drive investment into fossil fuels.

It is true that the subsidy for oil and gas on a per-megawatt (MW), or per-unit-of-energy, is lower than that for renewables, put that's not comparing apples to apples -- since the fossil fuel industry is late in its development, and the fossil fuel costs do not reflect health care costs associated with the polluting impacts of gas and oil production.

As respected investors Nancy Pfund and Ben Healy cover in a recent research paper, the estimated amount of subsidies offered to fossil between 1918 and 2009 was approximately $447 billion compared with nearly $6 billion between 1994 and 2009 for renewables. Even when the Recovery Act spending is taken into account (close to $90 billion on renewables), it doesn't come close to making up the balance.

But that's not the crux of the issues. The real point is what happens during the critical early years of development. Pfund and Healy find that the fossil fuel industry was subsidized at a rate five times higher than that of the renewables industry during the same beginning period.

Pfund and Healy argue that the first 15 years is a truly critical period -- and, by the way, they aren't arguing in favor of continuing the subsidy indefinitely. This is another important turn of events politically: the idea is not to introduce a permanent subsidy. Quite the opposite. The idea is to help support an industry at its start -- much the same as we did for oil and gas -- that can then drive major economic growth.

We can export technology and remain competitive against countries such as China that are investing heavily in this area. We can create American jobs. And we can move to an energy source that doesn't give our kids asthma.

So, as to how or whether we should continue to subsidize solar and wind -- the question framed by the Wall Street Journal: that's an opinion every American needs to form.

But the facts about subsidies are clear:

1) Oil and gas are subsidized today and receive more total subsidies than solar and/or wind
2) Oil and gas were heavily subsidized in their development phase and, as a result, helped fuel economic expansion
3) Today we are experiencing record growth in the renewable industry; installations of solar are on track to total 2,500 MW (or roughly 2.5 percent of the total U.S. power base) this year alone and are growing at a rapid rate -- providing clean, cheaper power to millions of Americans
4) The current projections by this country's best scientists suggest that the need for subsidies for renewable energy (solar and wind) will end over the next decade.

A point worth remembering in this year's political season.

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