Mr Trump, Tear Down Those Energy Subsidies!

Originally posted at ThisIsEisenhower.com by John Brian Shannon

A hundred years ago in America, the federal government decided to help a new industry take its first baby-steps by legislating oil and gas subsidies which were paid for by increased citizen taxation.

It’s commonly done by governments everywhere and it’s not the worst thing for a nation to do.

Here’s how that works: (1) A new industry appears (2) the government sees economic potential (3) citizens are told they must pay more tax to support the new industry (4) the subsidies continue long after they’re no longer required (5) the subsidies tend to increase over time and expand into other areas of the business (6) until the subsidies reach obscene amounts and the taxpayers revolt.

In short: Subsidies are a ‘good thing’ — until they aren’t

United States - Energy subsidies from 1918-2009. Image courtesy of Nancy Pfund
United States – Energy subsidies from 1918-2009. Image courtesy of Nancy Pfund (PDF)

Energy subsidies accumulate over time

Arithmetic tells us that U.S. oil & gas subsidies total $442 billion from 1918-2009.

It’s worse if you add the additional $80 billion/yr in U.S. oil & gas subsidies paid from 2010-2017, which total $560 billion.

Here’s what U.S. oil & gas subsidies look like when totaled over the entire 1918-2017 timeframe: $1,002,260,000,000.

U.S. oil and gas subsidies since 1918 total one trillion dollars

And U.S. taxpayers paid every penny. That’s a trillion dollars of income tax and fuel tax paid by U.S. citizens to subsidize American oil & gas companies since 1918.

Subsidies are a fine thing for new industries taking their first baby-steps. Wherever the federal government sees economic potential for a new industry, subsidies are the way to grow the opportunity and help stabilize the new industry UNTIL it can stand on its own two feet.

But Mature Industries Don’t Need Subsidies

The problem with oil & gas subsidies is that by 1950 they were 100% redundant. No longer needed. At all.

When mature industries continue to receive taxpayer-funded subsidies long after the original need for them disappears, that revenue goes to support pro-industry advertising, pro-industry organizations and pro-industry politicians.

In that way, some $80 billion/yr in oil & gas subsidies became available for pro-industry causes as it was no longer required to support a new industry taking its first steps.

Note: Not all oil and gas subsidies are bad! Additional subsidies paid for research on ‘cleaner-burning’ fuels via high-tech additives, a transformation that began slowly in the 1970’s and continues — to remove lead from gasoline, and for catalytic converter research in the 1980’s, are two such examples. Billions of dollars were well spent and were very cost-effective. But once the research has been done and the clean-burning fuel goals have been achieved, no reason exists to continue to pay such subsidies.


Except for the dollar amounts, much that applies to U.S. oil and gas subsidies also applies to U.S. nuclear power subsidies.

So let’s skip directly to the nuclear power numbers, shall we?

Simple arithmetic tells us that U.S. nuclear power subsidies amounted to $182 billion from 1947-2009.

It’s worse if you add the additional $102 billion (conservative estimate) in U.S. nuclear power subsidies that were paid by taxpayers from 2009-2017.

Here’s what all (federal) U.S. nuclear power subsidies look like when totaled over the entire 1947-2017 timeframe: $284 billion.

U.S. nuclear power subsidies since 1947 total $284 billion

But if one were to include all nuclear power subsidy costs including; safe storage, disposal, or reprocessing of spent fuel, transportation of spent fuel to other countries for safe storage or reprocessing, the decommissioning of nuclear power sites such as Hanford, the cleanup and cost of replacement electricity due to U.S. nuclear power plant malfunctions, and future reactor design spending, nuclear power subsidies could total $500 billion. Perhaps as much as $1 trillion.

NOTE: That’s not including billions of dollars worth of grants awarded by the federal government for new nuclear power reactor designs to replace America’s aging reactors.
Nor does it include the tens of billions paid to store and defend so-called ‘spent fuel’ which is highly radioactive and useful to terrorists.
Nor does it include reprocessing costs for spent fuel.
Nor does it included shipping costs to ship spent fuel to other countries for storage or reprocessing.
Nor would it include any costs associated with nuclear power plant malfunctions.
Nor would it include any costs associated with nuclear powered US Navy ships.
Due to the sensitive nature of nuclear materials some information is difficult to obtain, therefore, the $102 billion nuclear power subsidies figure used for the 2009-2017 timeframe is an estimate.


Biofuels are a new-ish industry. It’s about where the U.S. oil & gas industry were, in their first 20-years. It’s an industry where subsidies can make a difference to get the thing up-and-running and add stability to the new industry.

Biofuel energy subsidy in the early years was subsidized at $1.00 per gallon, which then declined to $.66 per gallon, but since 2011 has fallen to $.45 per gallon.

Total U.S. biofuel subsidies amount to $31 billion from 1980-2009 and an additional $65 billion from 2010-2017.

For a grand total of $96 billion from 1980 to 2017.

U.S. biofuel subsidies have totaled almost $100 billion since 1980

Note: The original U.S. biofuel subsidies enacted by President Carter during the 1970’s fuel crisis were later expanded to allow U.S. biofuel producers to compete with the much larger and more heavily subsidized Brazilian biofuel producers.


Coal subsidies follow the pattern described in the introduction to this post (subsidy steps 1 to 6) and subsidy costs are in the same neighborhood as oil & gas.

But U.S. coal subsidies in all its forms — including so-called ‘Externalities’ might total half a trillion dollars annually

Here is what a landmark Harvard Medicine study said about the externality costs of U.S. coal:

“Each stage in the life cycle of coal—extraction, transport, processing, and combustion—generates a waste stream and carries multiple hazards for health and the environment.

These costs are external to the coal industry and are thus often considered “externalities.”

We estimate that the life cycle effects of coal and the waste stream generated are costing the U.S. public a third to one-half of a trillion dollars annually.

Many of these so-called externalities are… cumulative.

Accounting for the damages… doubles to triples the price of electricity from coal per kWh generated, making wind, solar, and other forms of nonfossil fuel power generation, along with investments in efficiency and electricity conservation methods, economically competitive…” — Harvard Medicine Full cost accounting for the life cycle of coal (PDF)

This study illustrates the most vexing problem with U.S. energy extraction, refining, processing, storage, end use, and decommissioning of energy sites — energy ‘externalities’. And such externalities aren’t limited to the coal industry.

Energy production externalities (also called ‘Indirect Subsidies’) may cost America $1 trillion per year due to higher healthcare and infrastructure maintenance costs.

Damage to infrastructure arrives in the acid rain falling downwind from fossil fuel power stations, causing damage to bridges, buildings, and roads constructed with concrete (so-called concrete spalling) and causes paint damage on cars and trucks, and is responsible for crop losses downwind or downstream from fossil fuel extraction sites or power stations, and harms aquatic life found in rivers and coastal areas near river outlets.


Terms to remember: Energy ‘kind’ and ‘type’

There are only two ‘kinds’ of energy: Non-renewable and Renewable energy.

There are many ‘types’ of energy: Natural gas-fired, oil-fired, coal-fired, nuclear energy, solar photovoltaic, solar thermal, wind turbine, hydro-electric, ocean thermal, ocean wave, ocean tidal, biomass, wood-burning, and pellet-burning.

United States – The graphic illustrates various kinds of energy. Planetary energy graphic image courtesy of Perez and Perez 2009.
United States – The graphic illustrates various kinds of energy. Planetary energy graphic image courtesy of Perez and Perez 2009.

The trend of large subsidies in a sector like the energy sector, is that subsidies reward less efficient energy producers and punish more efficient producers in relative terms.

“Just pump it Fred, we’re getting our subsidy money per barrel of oil, who cares if it’s #4 sour crude oil? We get paid to pump oil, not look for better quality oil.”

Although there’s a separate ‘oil exploration’ subsidy too.

And let’s not forget the more ‘sour’ the crude oil, the more processing it requires at the refinery, and because #4 sour is very tough on oil refinery maintenance budgets, it further increases costs at the gas pump.

The more oil you pump of whatever quality, the more subsidy money you get — and that isn’t the way to maximize the efficiency of money in the energy market.

The oil industry delivers an easy example, but every energy subsidy scheme changes the behavior of the principals involved towards lower quality energy, whether it’s subsidized non-renewable energy or subsidized renewable energy.


In the primary energy segment (electricity and district heating) the type of energy varies by region.

Hydro-electric, coal-fired, and nuclear power are astonishingly costly to build and couldn’t have been built without massive subsidies. And even with huge subsidies for R&D, construction, millions of acres of land grants, generous tax incentives and more, some of those energy types still require small per kW/h subsidies to compete in the marketplace. In their favor, all of these have been extremely reliable primary energy producers for decades, but are mature industries that no longer require subsidies as financing such projects in the 21st century is considered routine. But it wasn’t always so.

In secondary energy (transportation) oil and gas infrastructure is also costly to build and the necessary infrastructure couldn’t have been built without massive subsidies. Yet, with sufficient refinery capacity already available there is little need for new refinery capacity, and today’s fuel prices support easy financing for future capacity additions.

Especially for vertically integrated oil companies that own their oil concessions (oil fields) their own distribution system (pipelines, or rarely, rail) and their own refineries, these can thrive during times of low crude oil prices.

Removing oil & gas subsidies would cause oil companies to become vertically integrated with no loss in profits. But why bother, when there’s no incentive due to a high subsidy scheme?

That won’t be the only change. Every subsequent change to the business would necessarily be designed to improve the overall efficiency of the company, sans-subsidies. That’s been missing since 1918.

By leveling the playing field for all kinds and types of energy, the most efficient energy kind and type will become king, and energy investors will earn more profit. (Because profits are earned on the ‘spread’ — the difference between what energy costs to produce and what it can be sold for. Subsidies make markets significantly less efficient and muddy the waters)

In summary: Removing energy subsidies will cause every energy producer to concentrate their efforts on the most efficient kind and type of energy in their region of the country, instead of choosing their energy kind and type by how many subsidy dollars they can capture via their energy choice.


President-elect Donald Trump, please tear down these subsidies!

And let the marketplace determine the most efficient energy.

Federal energy subsidies should return to their proper place. That is; When the federal government sees a new industry with economic potential; To invest, subsidize, and promote that new industry using taxpayer dollars for only as long as it remains a new industry. And not one day longer.

Markets are perfectly efficient when left to their own devices. Massive, taxpayer-funded subsidies for mature industries only serve to warp the markets and punish the most cost-efficient U.S. energy producers.

People either believe in free markets or they don’t

We can’t say we believe in free markets AND THEN massively intervene in the market with humongous, taxpayer-funded energy subsidies for some kinds and types of energy, but not other kinds and types energy.

With the greatest respect Mr. President-elect, I urge you to allow all U.S. energy producers to compete in a free market by phasing-out energy subsidies for every kind and type of energy over the next five years.

Energy subsidies | Levelling the Subsidy Playing Field

Originally published at JBS News by John Brian Shannon John Brian Shannon

By now, we’re all aware of the threat to the well-being of life on this planet posed by our massive and continued use of fossil fuels and the various ways we might attempt to reduce the rate of CO2 increase in our atmosphere.

Divestment in the fossil fuel industry is one popular method under discussion to lower our massive carbon additions to our atmosphere

The case for divestment generally flows along these lines;
By making investment in fossil fuels seem unethical, investors will gradually move away from fossil fuels into other investments, leaving behind a smaller but hardcore cohort of fossil fuel investors.

Resulting (in theory) in a gradual decline in the total global investment in fossil fuels, thereby lowering consumption and CO2 additions to the atmosphere. So the thinking goes.

It worked well in the case of tobacco, a few decades back. Over time, fewer people wanted their names or fund associated with the tobacco industry — so much so, that the tobacco industry is now a mere shadow of its former self.

Interestingly, Solaris (a hybridized tobacco plant) is being grown and processed into biofuel to power South African Airways (SAA) jets. They expect all flights to be fully powered by tobacco biofuel within a few years, cutting their CO2 emissions in half. Read more about that here.

Another way to curtail carbon emissions is to remove the massive fossil fuel subsidies

In 2014, the total global fossil fuel subsidy amounted to $548 billion dollars according to the IISD (International Institute for Sustainable Development) although it was projected to hit $600 billion before the oil price crash began in September. The global fossil fuel subsidy amount totalled $550 billion dollars in 2013. For 2012, it totalled $525 billion dollars. (These aren’t secret numbers, they’re easily viewed at the IEA and major news sites such as Reuters and Bloomberg)

Yes, removing those subsidies would do much to lower our carbon emissions as many oil and gas wells, pipelines, refineries and port facilities would suddenly become hugely uneconomic.

We don’t recognize them for the white elephants they are, because they are obscured by mountains of cash.

And there are powerful lobby groups dedicated to keeping those massive subsidies in place.

Ergo, those subsidies likely aren’t going away, anytime soon.

Reducing our CO2 footprint via a carbon tax scheme

But for all of the talk… not much has happened.

The fossil fuel industry will spin this for decades, trying to get the world to come to contretemps on the *exact dollar amount* of fossil fuel damage to the environment.

Long before any agreement is reached we will be as lobsters in a pot due to global warming.

And know that there are powerful lobby groups dedicated to keeping a carbon tax from ever seeing the light of day.

The Third Option: Levelling the Subsidy Playing Field

  • Continue fossil fuel subsidies at the same level and not institute a carbon tax.
  • Quickly ramp-up renewable energy subsidies to match existing fossil fuel subsidies.

Both divestment in fossil fuels and reducing fossil fuel subsidies attempt to lower our total CO2 emissions by (1) reducing fossil fuel industry revenues while (2) a carbon tax attempts to lower our total CO2 use/emissions by increasing spending for the fossil fuel industry

I prefer (3) a revenue-neutral and spending-neutral solution (from the oil company’s perspective) to lower our CO2 use/emissions.

So far, there are no (known) powerful fossil fuel lobby groups dedicated to preventing renewable energy from receiving the same annual subsidy levels as the fossil fuel industry.

Imagine how hypocritical the fossil fuel industry would look if it attempted to block renewable energy subsidies set to the same level as fossil fuel subsidies.

Renewable energy received 1/4 of the total global subsidy amount enjoyed by fossil fuel (2014)

Global Energy Subsidies (2014, in billions USD). Image courtesy of IISD.
Global Energy Subsidies 2014. (billions USD). Image courtesy of IISD.

Were governments to decide that renewable energy could receive the same global, annual subsidy as the fossil fuel industry, a number of things would begin to happen;

  • Say goodbye to high unemployment.
  • Say goodbye to the dirtiest fossil projects.
  • Immediate lowering of CO2 emissions.
  • Less imported foreign oil.
  • Cleaner air in cities.
  • Sharp decline in healthcare costs.
  • Democratization of energy through all socio-economic groups.

Summary

Even discounting the global externality cost of fossil fuel (which some commentators have placed at up to $2 trillion per year) the global, annual $548 billion fossil fuel subsidy promotes an unfair marketplace advantage.

But instead of punishing the fossil fuel industry for supplying us with reliable energy for decades (by taking away ‘their’ subsidies) or by placing on them the burden of a huge carbon tax (one that reflects the true cost of the fossil fuel externality) I suggest that we simply match the renewable energy subsidy to the fossil subsidy… and let both compete on a level playing field in the international marketplace.

Assuming a level playing field; May the best competitor win!

By matching renewable energy subsidies to fossil fuel subsidies, ‘Energy Darwinism’ will reward the better energy solution

My opinion is that renewable energy will win hands down and that we will exceed our clean air goals over time — and stop global warming in its tracks.

Not only that, but we will create hundreds of thousands of clean energy jobs and accrue other benefits during the transition to renewable energy. We will also lower healthcare spending, agricultural damage, and lower damage to steel and concrete infrastructure from acid rain.

In the best-case future: ‘Oil & Gas companies’ will simply become known as ‘Energy companies’

Investors will simply migrate from fossil fuel energy stock, to renewable energy stock, within the same energy company or group of energy companies.

At the advent of scheduled airline transportation nearly a century ago, the smart railway companies bought existing airlines (or created their own airlines) and kept their traditional investors and gained new ones.

Likewise, smart oil and gas companies, should now buy existing renewable energy companies (or create their own renewable energy companies) and keep their traditional investors and gain new ones.

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