Globe & Mail takes revealing look at energy subsidies

A Sept 17, Globe & Mail, Report on Business article (by Globe Reporter Neil Reynolds) provides an interesting look into the subsidies provided to various forms of energy in the U.S. Reporting statistics on energy subsidies from the April 2008 EIA study "Federal Financial Interventions & Subsidies in Energy Markets 2007", Reynolds questions the textbook rules for economics since, despite substantial subsidies, renewable energies still make up a minor portion of our generation capacity.

On the other hand, the EIA analysis suggests that government subsidies don't deliver the increased energy production that people expect from them. In its report, for example, the agency notes that Congress provides far more subsidies for renewable energy than for any other single category of energy - giving "renewables" one-third ($4.9-billion) of its energy "interventions" in 2007. It provides less than half as much ($2.1-billion) for oil and natural gas, less than one-quarter as much ($1.2-billion) for nuclear. Because "renewables" provide essentially negligible quantities of energy, the subsidies that sustain them show a commensurate impact (that is, almost nil) on energy production.

For comparison purposes in production of electricity, the EIA converts the contribution of the various forms of energy into megawatt-hours and calculates the relationship between the different subsidies that Congress now gives to all these forms of energy. Coal gets 44 cents per megawatt-hour. Oil and natural gas get 25 cents. Nuclear gets $1.59. Hydroelectric gets 67 cents. Wind gets $23.37. Solar gets $24.34. Yet, the EIA notes, wind and solar contribute "less than 1 per cent of total net [electricity] generation in the country" - even though production has tripled in the past three years.

The EIA conducted the same exercise with energy subsidies across the board, in this case using British thermal units. In this comparison, coal gets 4 cents in subsidies per million BTUs. Oil and natural gas get 3 cents. Refined coal - "synthetic fuel" - gets $1.35. Ethanol, however, gets $5.72. Although already widely discredited as an alternative energy, ethanol still gets four times the federal support given to advanced forms of clean coal and more than 150 times the federal support given to fossil fuels, of which the U.S. has a 1,000 years (or more) of reserves.

Reynolds and the EIA report both focus on the fact that despite energy subsidies have doubled over the past eight years ('99 - 2007), actual energy production has remained the same. The report then points to a variety of factors that have made increased production of energy unlikely to impossible.

A variety of factors unrelated to prices or subsidy programs such as State and Federal statutory limitations imposed on onshore and offshore oil and natural gas exploration in environmentally sensitive areas, uncertainty regarding future environmental policies possibly restricting future emissions of greenhouse gases, and declines in future production from previously developed domestic oil and natural gas resources may have impeded growth in energy production despite modest growth in consumption.

It would seem that in some cases, the government is working at cross purposes with itself by providing expanded subsidies on one hand and then restricting the ability of the energy industry to capitalize on the opportunities that funding provides.

Reynolds also offers this interesting bit of editorial on the nature and reach of the choice to subsidize certain energy sources.

Fossil fuel subsidies? Coal, oil and gas production will continue without them. Alternative energy subsidies? Wind, solar and ethanol could well disappear - without altering energy production in any significant way.