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It's Time to Reconsider Energy Subsidies

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Our country is in the midst of a great debate on how to reduce our national debt. This is an important discussion for all of us to have.

As part of this conversation, we should carefully examine the subsidies for different forms of energy production -- fossil fuels and renewables. All of us understand that the subsidy game can be a slippery slope, and it is important to set clear standards for when subsidies make sense and when they do not.

As a rule, there are three things we should consider before putting subsidies in place: 1) Does the subsidy provide some overarching policy or economic benefit for the country? 2) Is this a new industry that truly needs help reaching scale or is the industry mature enough that it can stand on its own without subsidies? 3) How long do the subsidies really need to be in place?

A strong case can be made for more alternative energy. It improves the environment and reduces our dependence on foreign oil. Alternative energy also creates jobs. According to The New York Times, between 1998 and 2007, U.S. green jobs grew at a rate of 9.1 percent, nearly two and a half times faster than economy-wide job growth.

30 years ago, solar had a 10-15 year payback in ideal conditions. Simply put, this industry would not have survived without government support. Since then, the cost of solar has been driven down through technological advances, while the cost of fossil fuels has risen. Due to the increased adoption of solar technology, costs are decreasing predictably at a rate of 15% to 18% a year. This is great news for consumers in countries like the U.S., which has been referred to as the "Saudi Arabia of Sunshine."

Today we are close to the point where solar is cost competitive with carbon fuels. When we reach this point, we should phase out solar incentives.

This latter point is key because taxpayers should not be subsidizing any industry for the long term. Eventually every industry has to stand on its own two feet.

Unfortunately, once offered, a subsidy is very hard to remove. Elected officials and corporate interests have too great an incentive to keep subsidies in place and the traditional democratic problem of concentrated benefits and disbursed costs takes hold. Despite the fact that oil and coal companies are among the most lucrative in the world, they continue to receive huge subsidies -- much greater than those provided to emerging green industries.

The top five American oil companies are projected to have earned $125-$144 billion in profits in 2011 alone. Governments around the world provided $557 billion in subsidies for fossil fuels but only $57 billion for renewable energy in 2009. Energy subsidies in the U.S. ran 3-to-1 in favor of fossil fuels (not including ethanol subsidies) between 2002 and 2008.

Fossil fuel subsidies are even more egregious when one considers the environmental and health effects of oil and coal. Incentivizing cleaner sources of energy through subsidies is one method of taking this damage into account without hurting consumers. We need to realign our elaborate system of subsidies to better reflect our national security, environmental, and economic policy.

As we come face to face with our need to end our dependence on foreign oil and reduce air pollution, we need to be honest about which subsidies provide real value and how quickly they can be phased out. Even alternative energy subsidies should not be long term because they entrench incumbents and stifle creativity and innovation.

Fortunately, President Obama and Energy Secretary Steven Chu are taking a balanced approach to subsidies. The proposed FY 2013 Department of Energy budget eliminates $4 billion in fossil fuel subsidies and cuts research funding for onshore wind technology because it is "an established technology."

To keep America strong we need to cut our debt and put our financial house in order. Before we consider raising taxes or cutting education, it is high time we take a long, hard look at ending subsidies that have outlived their usefulness.

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