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Where the Subsidies Go

May 12, 2008, 8:17 am

A week or so ago, I discussed federal energy subsidies and hypothesized, without a lot of facts, that a lot of them go to failing alternative energy projects rather than to oil company shareholders.  I asked readers if they had any more information, and the discussion is here.

But ask and ye shall receive, and the WSJ has an article today on federal energy subsidies and where they go.  The answer is:  in bulk dollars, a lot of them go nuclear, hydro, and traditional fossil fuel production.  However, it is interesting to look at them on an output basis:

For electricity generation, the EIA concludes that
solar energy is subsidized to the tune of $24.34 per megawatt hour,
wind $23.37 and "clean coal" $29.81. By contrast, normal coal receives
44 cents, natural gas a mere quarter, hydroelectric about 67 cents and
nuclear power $1.59.

The wind and solar lobbies are currently moaning that
they don't get their fair share of the subsidy pie. They also argue
that subsidies per unit of energy are always higher at an early stage
of development, before innovation makes large-scale production
possible. But wind and solar have been on the subsidy take for years,
and they still account for less than 1% of total net electricity
generation. Would it make any difference if the federal subsidy for
wind were $50 per megawatt hour, or even $100? Almost certainly not
without a technological breakthrough.

By contrast, nuclear power provides 20% of U.S. base
electricity production, yet it is subsidized about 15 times less than
wind. We prefer an energy policy that lets markets determine which
energy source dominates. But if you believe in subsidies, then nuclear
power gets a lot more power for the buck than other "alternatives."

The same study also looked at federal subsidies for
non-electrical energy production, such as for fuel. It found that
ethanol and biofuels receive $5.72 per British thermal unit of energy
produced. That compares to $2.82 for solar and $1.35 for refined coal,
but only three cents per BTU for natural gas and other petroleum
liquids.

I will repeat what I said in my earlier post, just so no one is confused about my position:

I personally don't care where [the subsidies go]. I am all for eliminating all
of this subsidy mess, equally, whether it's for oil exploration or
energy-from-donkey-poop or for CEO salary enhancement.

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Category: Government
  • http://belligerati.net OneEyedMan

    I wonder how those subsidies are calculated. You mostly just have to subsidize solar and wind at the building phase. If the subsidies are amortized that shouldn't be a problem, but if they are calculated as:
    Subsidy in a given year / Kilowatts in a given year that would overestimate the subsidy per watt over time.

  • David Moelling

    Solar/Wind get a huge (around $20/MWhr) tax credit. Without it all development stops. This is not a construction subsidy, it's an ongoing tax credit generator. Coupled with a mandate to use all the energy they generate this is quite a money sink.

    Nuclear subsidies must be considered carefully. By law, only DOE can take possession of nuclear waste. There is currently (and has been for many years) a Federal tax on nuclear electric consumption to fund waste disposal. There are much lower subsidies in the form of government research etc. Some of these are in support or piggybacked on cleanup of the nuclear weapons program.

    In all cases only the solar/wind crew get real subsidies that you could shake a fist at.

  • Yoshidad1

    You didn't say this was from the *editorial* pages of the Wall St. Journal -- a far different location from the usually accurate WSJ reporting.

    The editorial and your conclusions are wrong in several ways:

    Calculations:

    First, the calculation of the subsidy is not really that accurate, overlooks lots of externalities, and is (surprise!) just something plausible cooked up by the editorial page of the Wall St. Journal -- an example of "lies, damned lies, and statistics."

    The World Resource Institute estimated (pre-Gulf War I) that the U.S. petroleum industry receives $300 billion in annual subsidies. This total far exceeds anything alternative fuels get, no matter how much it is per kilowatt for them.

    FYI, The subsidy includes things like tax write-offs (the "depletion allowance") and military protection for overseas oilfields and pipelines (estimated then at $50 billion, but clearly *much* more now). It does not include the cost of pollution, or climate change.

    When you do the math, that WRI subsidy figure works out to roughly $2 per gallon -- or about eight times the WSJ's estimate. (Here's one source for domestic consumption: http://genomicsgtl.energy.gov/biofuels/transportation.shtml)

    The estimated subsidy for nuclear ($1.59/KWH v. $23.37 for wind) is similarly understated. Where's the calculation of the effective insurance coverage provided by the Price-Anderson act that makes the taxpayers the insurers of last resort for nuclear plants? Or the cost of waste storage for 20,000 years? Sorry, this vastly understates the subsidy, never mind the fact that the U.S. did not charge the industry for the real Manhattan Project which was the basic R&D that created the industry.

    Subsidies:

    If we look past the bogus calculations promoted by the editorial pages of the WSJ, and the externalities they ignore, there still are real subsidies going to alternative energy here. Not very much in the context of a $3 trillion federal budget, but still not nothing.

    And even if we grant the oil producers are getting orders of magnitude more in real dollars, per unit of energy produced, the alternative guys are clearly getting a substantial premium. How can one justify that?

    The question is: Do you believe the government has a role to play in the research and development phase of alternative energy exploration?

    And, for example, do you think NASA's commission to Fairchild Semiconductor to produce silicon chips paid off in the end, even though Fairchild's early research was clearly subsidized?

    Or do you think the CDC's grants for vaccine research and development are justifiable, or at least understandable?

    I'm not a big fan of just throwing money at a problem (see the alternative energy research policy of the Carter administration) but I'd say most Americans believe government-sponsored research and development is OK.

    I'll go out on a limb here and say R&D in alternative fuels / energy sources is one of the areas of public concern where such spending is actually warranted.

    On the other hand, subsidizing an industry making record profits with technology that, while sophisticated, is established, is *not* something to do.

    Just my 2¢