The ongoing debate over subsidies for traditional versus renewable energy sources offers an incomplete picture. A new John Locke Foundation Spotlight report urges advocates on both sides of the debate to fill in the gaps by factoring in penalties along with subsidies.
“Energy markets are riddled with government intrusions,” said report author Dr. Roy Cordato, JLF vice president for research and resident scholar. “All energy sources are both subsidized and penalized. Too often, advocates for both traditional and renewable energy sources focus only on the subsidies.”
In technical terms, analysis tends to focus on “gross” subsidies, Cordato said. “What is economically more relevant is net subsidies, which include not only policies that subsidize the relevant industries but also the value of policies that penalize the industries.”
Representatives of the renewable energy industry tend to focus on total dollar amounts of energy subsidies, Cordato said. “They use total dollars spent to make the case that traditional energy sources get larger subsidies than renewable sources,” he said. “But these numbers make no reference to either the percentage of total energy output that the subsidies support or the amount of energy being generated per dollar of subsidy.”
“Comparing total subsidies for renewables to total subsidies for traditional energy sources, without adjusting for energy generated, is like comparing the state budget of Rhode Island to the state budget of New York without adjusting for population,” he said. “No one would suggest that such a comparison would convey any meaningful information about the relative size of the two state governments.”
Free market-oriented researchers tend to argue that subsidies ought to be weighted by the amount of energy particular sources provide to the market, Cordato said. “Weighting subsidies on a per-unit-of-energy basis changes the story dramatically,” he said. “On this basis, the amounts of subsidies going to wind and solar power are dramatically higher than those that go to traditional forms of energy.”
That shift in calculations still fails to tell the whole story, Cordato said. “The real reason for comparing subsidies is that we want to gain a better understanding of the extent to which government policy is influencing the course of one industry’s development relative to another.”
“A proper analysis would subtract the monetary value of government interventions that decrease supply or demand for particular energy sources from the monetary value of interventions that artificially increase supply or demand,” Cordato explained. “In other words, subtract penalties from subsidies.”
Energy subsidies include more than just direct government transfers and tax breaks, Cordato said.
“Most subsidy debates focus on these items, but there are other very important subsidies,” he said. “These include the value of mandates to use minimum amounts of specific energy sources and other special privileges that might be granted to utility companies to use one type of resource relative to another.”
“A good example is North Carolina’s renewable portfolio standards, implemented in 2007,” Cordato added. “The standards require that 7.5 percent of the state’s energy be generated from renewable energy sources. Mandates and special privileges may, in fact, be the most significant subsidies some of these energy resources receive. Ultimately, if the public is forced to buy your product, other subsidies like tax incentives are simply icing on the cake.”
On the other side of the debate, the subsidy calculation for traditional energy sources ought to include items such “construction work in progress” legislation, which allows utility companies to pass along the costs of building new nuclear plants and other facilities to customers before the plants are completed, Cordato said. The Price Anderson Act, a law that limits liability for nuclear power plant accidents, also should factor into subsidy calculations.
Penalties involve more than just direct taxes, Cordato said. “The penalty side of the equation should include the costs of energy-source-specific regulations,” he said. “This could mean emission control standards, restrictions on land use, ridge laws that limit wind power development, and restrictions on drilling and mining.”
The penalty calculation also should include specific programs utility companies implement to comply with so-called “energy efficiency” standards, Cordato said. “Since the purpose of these programs is to reduce demand for traditional energy sources such as coal and natural gas, they definitely act as a penalty.”
The “net” subsidies number is crucial, even if it is difficult to calculate, Cordato said. “From the perspective of economics, and liberty, the important question is: How are coercive policies distorting supply and demand relative to a free market that reflects actual scarcities, production costs, and consumer preferences?”