Energy subsidies

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Energy subsidies are measures that keep prices for consumers below market levels or for producers above market levels, or reduce costs for consumers and producers. Energy subsidies may be direct cash transfers to producers, consumers, or related bodies, as well as indirect support mechanisms, such as tax exemptions and rebates, price controls, trade restrictions, and limits on market access. They may also include energy conservation subsidies. The development of today's major modern energy industries have all relied on substantial subsidy support.

 

The elimination of energy subsidies is widely seen as one of the most effective ways of reducing global carbon emissions.

Overview

Main arguments for energy subsidies are:

• Security of supply – subsidies are used to ensure adequate domestic supply by supporting indigenous fuel production in order to reduce import dependency, or supporting overseas activities of national energy companies.
• Environmental improvement – subsidies are used to reduce pollution, including different emissions, and to fulfill international obligations (e.g. Kyoto Protocol).
• Economic benefits – subsidies in the form of reduced prices are used to stimulate particular economic sectors or segments of the population, e.g. alleviating poverty and increasing access to energy in developing countries.
• Employment and social benefits – subsidies are used to maintain employment, especially in periods of economic transition.

Main arguments against energy subsidies are:

• Some energy subsidies counter the goal of sustainable development, as they may lead to higher consumption and waste, exacerbating the harmful effects of energy use on the environment, create a heavy burden on government finances and weaken the potential for economies to grow, undermine private and public investment in the energy sector. Also, most benefits from fossil fuel subsidies in developing countries go to the richest 20% of households.
• Impede the expansion of distribution networks and the development of more environmentally benign energy technologies, and do not always help the people that need them most.
• The study conducted by the World Bank finds that subsidies to the large commercial businesses that dominate the energy sector are not justified. However, under some circumstances it is reasonable to use subsidies to promote access to energy for the poorest households in developing countries. Energy subsidies should encourage access to the modern energy sources, not to cover operating costs of companies. The study conducted by the World Resources Institute finds that energy subsidies often go to capital intensive projects at the expense of smaller or distributed alternatives.

Types of energy subsidies are:

• Direct financial transfers – grants to producers; grants to consumers; low-interest or preferential loans to producers.
• Preferential tax treatments – rebates or exemption on royalties, duties, producer levies and tariffs; tax credit; accelerated depreciation allowances on energy supply equipment.
• Trade restrictions – quota, technical restrictions and trade embargoes.
• Energy-related services provided by government at less than full cost – direct investment in energy infrastructure; public research and development.
• Regulation of the energy sector – demand guarantees and mandated deployment rates; price controls; market-access restrictions; preferential planning consent and controls over access to resources.
• Failure to impose external costs – environmental external costs; energy security risks and price volatility costs.
• Depletion Allowance – allows a deduction from gross income of up to ~27% for the depletion of exhaustible resources (oil, gas, minerals).

Overall, energy subsidies require coordination and integrated implementation, especially in light of globalization and increased interconnectedness of energy policies, thus their regulation at the World Trade Organization is often seen as necessary.

Impact of fossil fuel subsidies

The degree and impact of fossil fuel studies is extensively studied. Because fossil fuels are a leading contributor to climate change through greenhouse gases, fossil fuel subsidies increase emissions and exacerbate climate change. The OECD’s inventory in 2015 determined an overall value of $160bn-$200bn per year between 2010 and 2014 relying on the WTO's 1994 definition of fossil fuel subsidies as “financial contribution by a government” which “confers a benefit” on its recipient. This is the only internationally agreed definition of the term.

A 2016 IMF study estimated that global fossil fuel subsidies were $5.3 trillion in 2015, which represents 6.5% of global GDP. The study found that "China was the biggest subsidizer in 2013 ($1.8 trillion), followed by the United States ($0.6 trillion), and Russia, the European Union, and India (each with about $0.3 trillion)." The authors estimated that the elimination of "subsidies would have reduced global carbon emissions in 2013 by 21% and fossil fuel air pollution deaths 55%, while raising revenue of 4%, and social welfare by 2.2%, of global GDP." This study is controversial for its radical break with previous definitions of subsidies by redefining externals as a subsidy, as well as an excessively broad application of social costs as oil externals. The externals accounted for are broad enough that oil companies not paying for automobile accidents is considered a subsidy.

According to the International Energy Agency, the elimination of fossil fuel subsidies worldwide would be the one of the most effective ways of reducing greenhouse gases and battling global warming. In May 2016, the G7 nations set for the first time a deadline for ending most fossil fuel subsidies; saying government support for coal, oil and gas should end by 2025.

According to the OECD, subsidies supporting fossil fuels, particularly coal and oil, represent greater threats to the environment than subsidies to renewable energy. Subsidies to nuclear power contribute to unique environmental and safety issues, related mostly to the risk of high-level environmental damage, although nuclear power contributes positively to the environment in the areas of air pollution and climate change. According to Fatih Birol, Chief Economist at the International Energy Agency without a phasing out of fossil fuel subsidies, countries will not reach their climate targets.

A 2010 study by Global Subsidies Initiative compared global relative subsidies of different energy sources. Results show that fossil fuels receive 0.8 US cents per kWh of energy they produce (although it should be noted that the estimate of fossil fuel subsidies applies only to consumer subsidies and only within non-OECD countries), nuclear energy receives 1.7 cents / kWh, renewable energy (excluding hydroelectricity) receives 5.0 cents / kWh and bio-fuels receive 5.1 cents / kWh in subsidies.

In 2011, IEA chief economist Faith Birol said the current $409 billion equivalent of fossil fuel subsidies are encouraging a wasteful use of energy, and that the cuts in subsidies is the biggest policy item that would help renewable energies get more market share and reduce CO₂ emissions.

Impact of renewable energy subsidies

Global renewable energy subsidies reached $88 billion in 2011. According to the OECD, subsidies to renewable energy are generally considered more environmentally beneficial than fossil fuel subsidies, although the full range of environmental effects should be taken into account.

IEA position on subsidies

According to International Energy Agency (IEA) (2011) energy subsidies artificially lower the price of energy paid by consumers, raise the price received by producers or lower the cost of production. "Fossil fuels subsidies costs generally outweigh the benefits. Subsidies to renewables and low-carbon energy technologies can bring long-term economic and environmental benefits". In November 2011, an IEA report entitled Deploying Renewables 2011 said "subsidies in green energy technologies that were not yet competitive are justified in order to give an incentive to investing into technologies with clear environmental and energy security benefits". The IEA's report disagreed with claims that renewable energy technologies are only viable through costly subsidies and not able to produce energy reliably to meet demand. "A portfolio of renewable energy technologies is becoming cost-competitive in an increasingly broad range of circumstances, in some cases providing investment opportunities without the need for specific economic support," the IEA said, and added that "cost reductions in critical technologies, such as wind and solar, are set to continue."

Fossil-fuel consumption subsidies were $409 billion in 2010, oil products being half of it. Renewable-energy subsidies were $66 billion in 2010 and will reach $250 billion by 2035, according to IEA. Renewable energy is subsidized in order to compete in the market, increase their volume and develop the technology so that the subsidies become unnecessary with the development. Eliminating fossil-fuel subsidies could bring economic and environmental benefits. Phasing out fossil-fuel subsidies by 2020 would cut primary energy demand 5%. Since the start of 2010, at least 15 countries have taken steps to phase out fossil-fuel subsidies. According to IEA onshore wind may become competitive around 2020 in the European Union.

According to the IEA the phase-out of fossil fuel subsidies, over $500 billion annually, will reduce 10% greenhouse gas emissions by 2050.

Subsidies by country

The International Energy Agency estimates that governments subsidized fossil fuels by US $548 billion in 2013. Ten countries accounted for almost three-quarters of this figure. At their meeting in September 2009 the G-20 countries committed to "rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption". The 2010s have seen many countries reducing energy subsidies, for instance in July 2014 Ghana abolished all diesel and gasoline subsidies, whilst in the same month Egypt raised diesel prices 63% as part of a raft of reforms intended to remove subsidies within 5 years.

The public energy subsidies for energy in Finland in 2013 were €700 million for fossil energy and €60 million for renewable energy (mainly wood and wind).

United States

Congressional Budget Office estimated allocation of energy-related tax preferences, by type of fuel or technology, 2016

 

According to a Congressional Budget Office testimony, roughly three-fourths of the projected cost of tax preferences for energy in 2016 was for renewable energy and energy efficiency. An estimated $10.9 billion was directed toward renewable energy; $2.7 billion, went to energy efficiency or electricity transmission. Fossil fuels accounted for most of the remaining cost of energy-related tax preferences—an estimated $4.6 billion.

According to a 2015 estimate by the Obama administration, the US oil industry benefited from subsidies of about $4.6 billion per year. A 2017 study by researchers at Stockholm Environment Institute published in the journal Nature Energy estimated that nearly half of U.S. oil production would be unprofitable without subsidies.

Allocation of subsidies in the United States

On March 13, 2013, Terry M. Dinan, senior advisor at the Congressional Budget Office, testified before the Subcommittee on Energy of the Committee on Science, Space, and Technology in the U.S. House of Representatives that federal energy tax subsidies would cost $16.4 billion that fiscal year, broken down as follows:

• Renewable energy: $7.3 billion (45 percent)
• Energy efficiency: $4.8 billion (29 percent)
• Fossil fuels: $3.2 billion (20 percent)
• Nuclear energy: $1.1 billion (7 percent)

In addition, Dinan testified that the U.S. Department of Energy would spend an additional $3.4 billion on financial Support for energy technologies and energy efficiency, broken down as follows:

• Energy efficiency and renewable energy: $1.7 billion (51 percent)
• Nuclear energy: $0.7 billion (22 percent)
• Fossil energy research & development: $0.5 billion (15 percent)
• Advanced Research Projects Agency—Energy: $0.3 billion (8 percent)
• Electricity delivery and energy reliability: $0.1 billion (4 percent)

A 2011 study by the consulting firm Management Information Services, Inc. (MISI) estimated the total historical federal subsidies for various energy sources over the years 1950–2010. The study found that oil, natural gas, and coal received $369 billion, $121 billion, and $104 billion (2010 dollars), respectively, or 70% of total energy subsidies over that period. Oil, natural gas, and coal benefited most from percentage depletion allowances and other tax-based subsidies, but oil also benefited heavily from regulatory subsidies such as exemptions from price controls and higher-than-average rates of return allowed on oil pipelines. The MISI report found that non-hydro renewable energy (primarily wind and solar) benefited from $74 billion in federal subsidies, or 9% of the total, largely in the form of tax policy and direct federal expenditures on research and development (R&D). Nuclear power benefited from $73 billion in federal subsidies, 9% of the total, largely in the form of R&D, while hydro power received $90 billion in federal subsidies, 12% of the total. 

Congressional Budget Office testimony delivered March 29, 2017 showing the historic trend of energy related tax preferences

 

A 2009 study by the Environmental Law Institute assessed the size and structure of U.S. energy subsidies in 2002–08. The study estimated that subsidies to fossil fuel-based sources totaled about $72 billion over this period and subsidies to renewable fuel sources totaled $29 billion. The study did not assess subsidies supporting nuclear energy. 

The three largest fossil fuel subsidies were:

1. Foreign tax credit ($15.3 billion)
2. Credit for production of non-conventional fuels ($14.1 billion)
3. Oil and Gas exploration and development expense ($7.1 billion)

The three largest renewable fuel subsidies were:

1. Alcohol Credit for Fuel Excise Tax ($11.6 billion)
2. Renewable Electricity Production Credit ($5.2 billion)
3. Corn-Based Ethanol ($5.0 billion)

In the United States, the federal government has paid US$74 billion for energy subsidies to support R&D for nuclear power ($50 billion) and fossil fuels ($24 billion) from 1973 to 2003. During this same time frame, renewable energy technologies and energy efficiency received a total of US $26 billion. It has been suggested that a subsidy shift would help to level the playing field and support growing energy sectors, namely solar power, wind power, and bio-fuels. However, many of the "subsidies" available to the oil and gas industries are general business opportunity credits, available to all US businesses (particularly, the foreign tax credit mentioned above). The value of industry-specific (oil, gas, and coal) subsidies in 2006 was estimated by the Texas State Comptroller to be $6.25 billion - about 60% of the amount calculated by the Environmental Law Institute. The balance of federal subsidies, which the comptroller valued at $7.4 billion, came from shared credits and deductions, and oil defense (spending on the Strategic Petroleum Reserve, energy infrastructure security, etc.).

Critics allege that the most important subsidies to the nuclear industry have not involved cash payments, but rather the shifting of construction costs and operating risks from investors to taxpayers and ratepayers, burdening them with an array of risks including cost overruns, defaults to accidents, and nuclear waste management. Critics claim that this approach distorts market choices, which they believe would otherwise favor less risky energy investments.

Many energy analysts, such as Clint Wilder, Ron Pernick and Lester Brown, have suggested that energy subsidies need to be shifted away from mature and established industries and towards high growth clean energy. They also suggest that such subsidies need to be reliable, long-term and consistent, to avoid the periodic difficulties that the wind industry has had in the United States.

A 2012 study authored by researchers at the Breakthrough Institute, Brookings Institution, and World Resources Institute estimated that between 2009 and 2014 the federal government will spend $150 billion on clean energy through a combination of direct spending and tax expenditures. Renewable electricity (mainly wind, solar, geothermal, hydro, and tidal energy) will account for the largest share of this expenditure, 32.1%, while spending on liquid biofuels will account for the next largest share, 16.1%. Spending on multiple and other forms of clean energy, including energy efficiency, electric vehicles and advanced batteries, high-speed rail, grid and transportation electrification, nuclear, and advanced fossil fuel technologies, will account for the remaining share, 51.8%. Moreover, the report finds that absent federal action, spending on clean energy will decline by 75%, from $44.3 billion in 2009 to $11.0 billion in 2014.

United States government role in the development of new energy industries

From civilian nuclear power to hydro, wind, solar, and shale gas, the United States federal government has played a central role in the development of new energy industries.

America's nuclear power industry, which currently supplies about 20% of the country's electricity, has its origins in the Manhattan Project to develop atomic weapons during World War II. From 1942 to 1945, the United States invested $20 billion (2003 dollars) into a massive nuclear research and deployment initiative. But the achievement of the first nuclear weapon test in 1945 marked the beginning, not the end, of federal involvement in nuclear technologies. President Dwight D. Eisenhower's “Atoms for Peace” address in 1953 and the 1954 Atomic Energy Act committed the United States to develop peaceful uses for nuclear technology, including commercial energy generation. The new National Laboratory system, established by the Manhattan Project, was maintained and expanded, and the government poured money into nuclear energy research and development. Recognizing that research was not sufficient to spur the development of a nascent, capital-intensive industry, the federal government created financial incentives to spur the deployment of nuclear energy. For example, the 1957 Price Anderson Act limited the liability of nuclear energy firms in case of serious accident and helped firms secure capital with federal loan guarantees. In the favorable environment created by such incentives, more than 100 nuclear plants were built in the United States by 1973.

Commercial wind power, today one of the fastest growing energy sectors, was also enabled through government support. In the 1980s, the federal government pursued two different R&D efforts for wind turbine development. The first was a “big science” effort by NASA and the Department of Energy (DOE) to use U.S. expertise in high-technology research and products to develop new large-scale wind turbines for electricity generation, largely from scratch. A second, more successful R&D effort, sponsored by the DOE, focused on component innovations for smaller turbines that used the operational experience of existing turbines to inform future research agendas. Joint research projects between the government and private firms produced a number of innovations that helped increase the efficiency of wind turbines, including twisted blades and special-purpose airfoils. Publicly funded R&D was coupled with efforts to build a domestic market for new turbines. At the federal level, this included tax credits and the passage of the Public Utilities Regulatory Policy Act (PURPA), which required that utilities purchase power from some small renewable energy generators at avoided cost. Both federal and state support for wind turbine development helped drive costs down considerably, but policy incentives at both the federal and state level were discontinued at the end of the decade. However, after a nearly five-year federal policy hiatus in the late 1980s, the U.S. government enacted new policies to support the industry in the early 1990s. The National Renewable Energy Laboratory (NREL) continued its support for wind turbine R&D, and also launched the Advanced Wind Turbine Program (AWTP). The goal of the AWTP was to reduce the cost of wind power to rates that would be competitive in the U.S. market. Policymakers also introduced new mechanisms to spur the demand of new wind turbines and boost the domestic market, including a 1.5 cents per kilowatt-hour tax credit (adjusted over time for inflation) included in the 1992 Energy Policy Act. Today the wind industry's main subsidy support comes from the federal production tax credit.

The development of commercial solar power was also dependent on government support. Solar PV technology was born in the United States, when Daryl Chapin, Calvin Fuller, and Gerald Pearson at Bell Labs first demonstrated the silicon solar photovoltaic cell in 1954. The first cells recorded efficiencies of four percent, far lower than the 25 percent efficiencies typical of some silicon crystalline cells today. With the cost out of reach for most applications, developers of the new technology had to look elsewhere for an early market. As it turned out, solar PV did make economic sense in one market segment: aerospace. The United States Army and Air Force viewed the technology as an ideal power source for a top-secret project on earth-orbiting satellites. The government contracted with Hoffman Electronics to provide solar cells for its new space exploration program. The first commercial satellite, the Vanguard I, launched in 1958, was equipped with both silicon solar cells and chemical batteries. By 1965, NASA was using almost a million solar PV cells. Strong government demand and early research support for solar cells paid off in the form of dramatic declines in the cost of the technology and improvements in its performance. From 1956 to 1973, the price of PV cells declined from $300 to $20 per watt. Beginning in the 1970s, as costs were declining, manufacturers began producing solar PV cells for terrestrial applications. Solar PV found a new niche in areas distant from power lines where electricity was needed, such as oil rigs and Coast Guard lighthouses. The government continued to support the industry through the 1970s and early 1980s with new R&D efforts under Presidents Richard Nixon and Gerald Ford, both Republicans, and President Jimmy Carter, a Democrat. As a direct result of government involvement in solar PV development, 13 of the 14 top innovations in PV over the past three decades were developed with the help of federal dollars, nine of which were fully funded by the public sector.

More recently than nuclear, wind, or solar, the development of the shale gas industry and subsequent boom in shale gas development in the United States was enabled through government support. The history of shale gas fracking in the United States was punctuated by the successive developments of massive hydraulic fracturing (MHF), microseismic imaging, horizontal drilling, and other key innovations that when combined made the once unreachable energy resource technically recoverable. Along each stage of the innovation pipeline – from basic research to applied R&D to cost-sharing on demonstration projects to tax policy support for deployment – public-private partnerships and federal investments helped push hydraulic fracturing in shale into full commercial competitiveness. Through a combination of federally funded geologic research beginning in the 1970s, public-private collaboration on demonstration project and R&D priorities, and tax policy support for unconventional technologies, the federal government played a key role in the development of shale gas in the United States.

Investigations have uncovered the crucial role of the government in the development of other energy technologies and industries, including aviation and jet engines, synthetic fuels, advanced natural gas turbines, and advanced diesel internal combustion engines.

Venezuela

In Venezuela, energy subsidies were equivalent to about 8.9 percent of the country's GDP in 2012. Fuel subsidies were 7.1 percent while electricity subsidies were 1.8 percent. In order to fund this the government used about 85 percent of its tax revenue on these subsidies. It is estimated the subsidies have caused Venezuela to consume 20 percent more energy than without them. The fuel subsidies are given more heavily to the richest part of the population who are consuming the most energy. The fuel subsidies maintained a cost of about $0.01 US for a liter of gasoline at the pump since 1996 until president Nicolas Maduro reduced the national subsidy in 2016 to make it roughly $0.60 US per liter (The local currency is Bolivar and the price per liter of gas is 6 Bolivars). Fuel consumption has increased overall since the 1996 policy began even though the production of oil has fallen more than 350,000 barrels a day since 2008 under that policy. PDVSA, the Venezuelan state oil company, has been losing money on these domestic transactions since the enactment of these policies. These losses can also be attributed to the 2005 Petrocaribe agreement, under which Venezuela sells many surrounding countries petroleum at a reduced or preferable price; essentially a subsidy by Venezuela for countries that are a part of the agreement. The subsidizing of fossil fuels and consequent low cost of fuel at the pump has caused the creation of a large black market. Criminal groups smuggle fuel out of Venezuela to adjacent nations (mainly Colombia). This is due to the large profits that can be gained by this act, as fuel is much more expensive in Colombia than in Venezuela. Despite the fact that this issue is already well known in Venezuela, and insecurity in the region continues to rise, the state has not yet lowered or eliminated these fossil fuel subsidies.

Russia

Russia is one of the world’s energy powerhouses. It holds the world’s largest natural gas reserves (27% of total), the second-largest coal reserves, and the eighth-largest oil reserves. Russia is the world's third-largest energy subsidizer as of 2015. The country subsidizes electricity and natural gas as well as oil extraction. Approximately 60% of the subsidies go to natural gas, with the remainder spent on electricity (including under-pricing of gas delivered to power stations). For oil extraction the government gives tax exemptions and duty reductions amounting to about 22 billion dollars a year. Some of the tax exemptions and duty reductions also apply to natural gas extraction, though the majority is allocated for oil. In 2013 Russia offered the first subsidies to renewable power generators. The large subsidies of Russia are costly and it is recommended in order to help the economy that Russia lowers its domestic subsidies. However, the potential elimination of energy subsidies in Russia carries the risk of social unrest that makes Russian authorities reluctant to remove them.

European Union

In February 2011 and January 2012 the UK Energy Fair group, supported by other organisations and environmentalists, lodged formal complaints with the European Union's Directorate General for Competition, alleging that the Government was providing unlawful state aid in the form of subsidies for nuclear power industry, in breach of European Union competition law.

One of the largest subsidies is the cap on liabilities for nuclear accidents which the nuclear power industry has negotiated with governments. “Like car drivers, the operators of nuclear plants should be properly insured,” said Gerry Wolff, coordinator of the Energy Fair group. The group calculates that, "if nuclear operators were fully insured against the cost of nuclear disasters like those at Chernobyl and Fukushima, the price of nuclear electricity would rise by at least €0.14 per kWh and perhaps as much as €2.36, depending on assumptions made". According to the most recent statistics, subsidies for fossil fuels in Europe are exclusively allocated to coal (€10 billion) and natural gas (€6 billion). Oil products do not receive any subsidies.