Ensuring the Best Use of Federal Energy Subsidies

The U.S. uses a combination of direct expenditures, tax breaks, loan guarantees, and research funding to promote various energy goals. We could rely solely on the free market and avoid using federal subsidies, but we do not do that now and appear unlikely to do so in the future. Accordingly, we must decide how we will use subsidies. The complexity of the energy challenges we face makes it impossible to produce a precise blueprint for the best use of subsidies, but we can outline some general principles.

Implementing a Successful National Energy Policy

Federal subsidies should support a national energy policy that balances three key objectives: achieving greater energy independence, protecting the environment against accidents, and operating in a sustainable manner.

Fairness. We should minimize the use of federal expenditures and loan guarantees that are directed to specific companies. Such subsidies are more likely to produce an unfair windfall for a few lucky recipients and are more prone to actual or perceived conflicts of interest and cronyism. Further, notwithstanding occasional successes, the government has a poor track record of picking economic winners and losers. Solyndra provides an expensive example.

Balance. A primary challenge relating to fossil fuels is sustainability, while a primary challenge relating to renewable energy is practicality—its inability to affordably supply most of our energy needs. It is not clear whether we will have greater success at making fossil fuels more sustainable or at making renewables more practical. For this reason, we should pursue a balanced approach that supports research on renewable energy while also promoting research on carbon capture and sequestration, coal gasification, and other ways that decrease fossil fuels’ environmental impact and increase their sustainability.

Another reason to take a balanced approach is that even though renewables might become our primary source of energy someday, that is unlikely to happen anytime soon. At present, about 45% of our nation’s electricity is generated by coal and another 24% is generated by natural gas. The U.S. Energy Information Administration (EIA) projects that by the year 2035, coal will generate 39% of our electricity and natural gas will generate 27%. If both electrical and non-electrical energy uses are considered, our dependence on fossil fuels is even more pronounced. They currently provide about 83% of our total energy, and in 2035, they will supply about 77%. Thus, for at least a generation, our continuing dependence on fossil fuels will make it important to decrease our use of imported oil while working to reduce fossil fuels’ environmental impact and increase their sustainability.

At present, we aren’t taking a balanced approach in using subsidies and instead are strongly favoring renewables. The EIA reports that, during 2010, approximately 55.3% of all federal subsides relating to electrical power were directed toward renewable energy, while 21.0% were directed to nuclear power, 10.0% to coal, 8.2% to electricity transmission and distribution, and 5.5% to natural gas.

When subsidies are compared based on the relative amount of electricity generated by particular energy sources, the tilt toward renewables is even more pronounced. Subsidies directed toward coal and natural gas amounted to about $0.64 per 1,000 kWh of electricity generated by those sources. In contrast, subsidies for renewable energy were approximately $15.43 per 1,000 kWh.

Renewables also received the largest share of federal subsidies for non-electrical power. Biomass, biofuels, and other renewables received 77.7% of those subsidies in 2010, compared to 20.7% for oil and gas. And again, renewables fare even better when subsidies are compared based on the amount of power generated. Subsidies relating to oil and gas were approximately $75.83 per million Btu of power generation in 2010. In contrast, renewables’ subsidies were about $2,011. We should work toward a more balanced approach.

Strategic Action. World trade generally benefits our country, but we should decrease our dependence on oil that is imported from countries that are unstable or hostile to the U.S. Our dependence on foreign oil already has decreasedfrom 60% of our total consumption in 2005 to 49% in 2010and that percentage is still dropping. Furthermore, our largest foreign supplier is now Canada, a friendly and stable neighbor. But the EIA projects that imported oil still will account for 36% of consumption in 2035, and some of that will be from nations much less stable and friendly than Canada.

In contrast, the EIA projects that the U.S. will be a net exporter of natural gas by 2021 because of rapidly increasing domestic production. A strategic move would be to use more cars that run on natural gas, thereby decreasing our dependence on foreign oil. But there is a chicken and egg problem: Most consumers will avoid buying natural gas cars if there are few natural gas fueling stations, and entrepreneurs will avoid opening fueling stations if there are too few customers. We should give incentives for consumers to buy natural gas vehicles and for entrepreneurs to open fueling stations.

Federal energy subsidies will yield the maximum benefit if we use them to promote a national energy policy that balances the objectives of energy independence, environmental protection, and sustainability, and if we use subsidies in a way that is fair, balanced, and strategic.

Keith B. Hall (khall@stonepigman.com) is an attorney with the law firm of Stone Pigman Walther Wittmann LLC in New Orleans, La.