I had a great time last Friday at Berkeley’s Annual Energy Symposium put on by the Berkeley Energy & Resources Collaborative. Interesting people, interesting talks, and great to catch up with former students who are now working in all parts of the energy industry and government agencies. I particularly enjoyed the session I got to chair on subsidies/support/incentives (everyone has a different word) for renewable energy.
But a number of times during the day I heard the common wisdom that the subsidies to the fossil fuel industries are a major barrier (some said THE major barrier) to the success of renewable energy.
If only it were that simple. Unfortunately, the common wisdom isn’t correct. Subsidies to fossil fuel companies are bad public policy and should be ended, but they have no meaningful impact on the competitive position of renewables.
I did an analysis of this argument as it applies to the electricity sector in a paper on renewable electricity generation that I published earlier this year. Basically, I took the estimated energy subsidies from a study by the Environmental Law Institute and parsed out the ones that go to coal and natural gas used for electricity generation, which comes to about $21 billion over the 7 years they studied, 2002-2008 I then divided the subsidies by the total electricity generated from these sources during the same period. The result is an average subsidy of $0.0011 per kilowatt-hour, just a couple percent of the average wholesale price of electricity. The Energy Information Administration has a smaller number for coal and gas subsidies, and some studies have numbers a few times higher. But even if you take the highest plausible numbers out there, eliminating these subsidies would do almost nothing to bridge the gap between renewables and fossil fuel electricity generation.
The other argument I hear is about subsidies for oil. The ELI study puts these at nearly $50 billion over 7 years. That’s a lot of money, but for renewable fuels that compete with oil the relevant question is how much of that subsidy gets passed along to consumers. The answer is virtually none. Oil is sold in a world market. The impact of these subsidies on U.S. oil production (less than 8 million barrels/day during this period) was probably small to begin with, but its impact on price in the world oil market (about 85 million barrels/day) was almost certainly undetectable. Subsidies for oil production are really dumb policy, but they aren’t lowering the price of oil (or gasoline), so they aren’t making it harder for renewable fuels to compete.
And then there’s the argument that we’ve been subsidizing fossil fuels for the last 100 years, so it’s only “fair” to subsidize alternatives now. It’s hard to find much economic logic in this argument. Surely we shouldn’t subsidize any alternative, no matter how expensive or ineffective, just because we have subsidized fossil fuels in the past. The argument for subsidizing alternatives today has to be forward-looking — will such subsidies lead to better outcomes for society? — Not the idea that two bad policies cancel each other out.
Of course, the real subsidy to fossil fuels is that they emit local and global pollutants for which no one is required to pay. From an environmental perspective, we’d be better off focusing on that major issue, not pretending that eliminating special tax breaks for fossil fuels will make alternatives economic.
Severin Borenstein is E.T. Grether Professor of Business Administration and Public Policy at the Haas School of Business. He has published extensively on the oil and gasoline industries, electricity markets and pricing greenhouse gases. His current research projects include the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing. In 2012-13, he served on the Emissions Market Assessment Committee that advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases. Currently, he chairs the California Energy Commission's Petroleum Market Advisory Committee and is a member of the Bay Area Air Quality Management District's Advisory Council.