Lights Out on Subsidies: Why We Need to Turn Off the Switch on Federal Subsidies for Energy

This article is excerpted from Greenhouse Policy Without Regrets: A Free Market Approach to the Uncertain Risks of Climate Change, a new study published by CEI.  Greenhouse Policy Without Regrets was written by various members of the CEI staff (Jonathan Adler, lead author) and can be purchased by calling 202-331-1010.


While Vice President Gore and environmental activists rail against the use of carbon energy sources, the federal government continually spends tens of millions of dollars every year subsidizing the use of carbon-based fuels.  In other words, the federal government is subsidizing the expanded use of those fuel sources which some federal officials claim must be discouraged in order to combat climate change.  Many foreign nations (notably Germany and Spain, as well as much of Eastern Europe) that have endorsed the Kyoto Protocol have even larger subsidies for carbon-based fuels.


Such subsidy programs also serve to “tilt the playing field” so as to discourage the development of alternative energy sources by reducing research expenditures made by private energy companies.  This, in turn, spawns arguments for additional energy subsidy programs to “level the playing field” for other energy sources.  The end results are significant distortions in energy markets due to government interventions.  The Energy Information Administration estimates aggregate energy subsidies of between $5 billion and $10 billion per year; approximately $2 billion of which is devoted to research and development programs that benefit particular energy industries.


While direct federal subsidies to carbon-based fuels are not large, they do distort energy choices.  In Fiscal Year 1999, fossil energy research and development programs at the Department of Energy received just over $384 million; the Clinton Administration sought to reduce fossil fuel R&D to $364 million in FY 2000.  These funds cover research on the conversion of coal into petroleum, mine restoration, advanced coal power generation technologies, enhanced oil recovery, and offshore geological surveys used for private oil and gas exploration.  In FY 1997, the Clean Coal Technology Program (CCTP) received only $12 million.  However, since its inception in 1984, the CCTP has cost taxpayers approximately $1.5 billion.  The CCTP program funds research into advanced emission-control technologies for coal facilities.  These are two of the most prominent examples of subsidies to carbon-based fuels buried in the federal budget.


Federal subsidies for carbon-based fuels are typically justified as cost-effective federal support for research and development.  Yet the Congressional Budget Office and other analysts note that federal R&D money rarely produces commercially-viable technologies.  Economists Linda Cohen and Roger Noll assert, “An effective, coherent national commercial R&D program has never been put in place.”  Federal R&D expenditures tend to be less productive than private-sector investments; if the investments are worth making because of their potential to develop market-viable innovations, the private sector is fully capable of making those investments on its own. 


In addition, the allocation of government R&D funding is inevitably subject to political influence.  As a result, notes one Department of Energy official, “Government R&D dollars will tend to flow to marginal ideas.”  There may be an economic case for government support for basic scientific research, but fossil fuel R&D programs cannot be justified on those grounds. However small fossil fuel research subsidies are in terms of the overall federal budget, or even the energy sector of the US economy, there is no economic or environmental basis for continuing these programs.

Other federal subsidy programs can also serve to inflate the use of carbon-based fuels in comparison to other fuel sources.  For example, for years the Rural Electrification Administration, since renamed the Rural Utilities Service, has subsidized the electrification of rural and remote areas.  In practice, this meant ex-pending substantial resources to enable rural areas to receive electricity from central power plants.  Yet due to the remoteness of these areas, and the tremendous cost of putting up power lines for a handful of users in a given location, alternative fuel sources, such as solar, may have been more cost-effective.  These federal subsidies served to increase carbon-based fuel use and discourage the development of markets for alternative fuels that may have been viable.  Other federal programs subsidize the provision of power through the Power Marketing Administrations, artificially increasing aggregate energy use in affected areas.


Before new regulatory controls or subsidy programs are even considered, the entire federal budget should be reviewed with an eye toward eliminating those federal programs which inflate the use of energy, particularly those energy sources that are blamed for contributing to global warming.  Instead of seeking to use fiscal instruments to accelerate or slow down the development of given energy technologies, energy policy should be shifted to neutral so as not to distort the energy marketplace. 


Even subsidies for alternative fuels sources, such as wind or solar, should be up for reconsideration, if for no other reason than that federal research and development subsidies for such energy sources have tended to go toward politically attractive though economically foolhardy projects, such as the solar “tower of power”—an effort to create a solar-powered steam generator in the Mojave desert.  As even alternative-energy advocates have been forced to recognize, alternative-energy subsidies tend to fund “technical sophistication rather than practicality,” resulting in prototypes that are “neither reliable nor commercially viable.”


Some analysts may question the impact on energy markets of eliminating energy subsidies.  Several hundred million dollars in research funding is admittedly a drop in the bucket for the one-half trillion dollar energy sector of the US economy.  From this standpoint, eliminating energy subsidies may seem little more than a symbolic gesture.  Nonetheless, it is an important one.  In many nations, government interventions in energy markets are extensive and produce substantial distortions.  If for no other reason, the US should eliminate its subsidies to carbon-based fuel energy sources so as to serve as an example to the rest of the world that energy production and consumption should not be subsidized by government policy.


Subsidies to energy R&D cost taxpayers millions of dollars while producing minimal benefits. While these programs may be relatively small given the size of domestic energy markets, they serve little, if any, useful purpose while subsidizing large corporations at taxpayer expense.  The potential threat of global warming, whether it is real or not, is simply one more reason to eliminate these subsidy programs.


Jonathan H. Adler is a former CEI senior fellow in environmental policy and the lead author of Greenhouse Policy Without Regrets: A Free Market Approach to the Uncertain Risks of Climate Change.  CEI analysts Clyde Wayne Crews, Jr., Paul Georgia, Ben Lieberman, Jessica Melugin, and Mara-Lee Seivert also contributed to the study.