Lopsided Energy Subsidies Favor Fossil Fuels. It Is Past Time For A Change.

By Nick Lawton, Staff Attorney

Lopsided energy subsidies in the United States and around the world favor fossil fuels over renewable energy, despite the fact that environmental costs from fossil fuels continue to grow and the price of renewable energy continues to decline. Governments at all scales should take action to reverse this trend by enacting policies that support swift, smart development of renewable energy.

As I wrote about recently, energy subsidies are nothing new. In fact, governments have subsidized every form of energy generation in order to ensure plentiful, affordable electricity. Historically, most subsidies flowed to fossil fuel industries, such as coal-fired power plants. Today, though, we understand the environmental costs of burning fossil fuels to generate power, and it is increasingly clear that renewable energy offers a better solution. In short, historical fossil fuel subsidies have become obsolete, and it is high time for governments to get rid of them.

A new working paper from the International Monetary Fund (IMF), How Large Are Global Energy Subsidies, quantified the amount of global energy subsidies in 2013 at $4.9 trillion, or 6.5% of global GDP. The working paper reveals that externalities—damages to the environment and public health—constitute the vast majority of energy subsidies, roughly $4 trillion. In other words, the greatest subsidy for energy does not come in the form of direct spending or tax breaks, but instead reflects the failure to put a price on the damages that fossil fuels cause to public health and the environment.

The public pays the price of these environmental and health externalities. We pay in the form of environmental cleanup costs. For example, a coal ash spill in Virginia’s Dan River is estimated to have damaged the environment to the tune of $50 million.  However, the state is proposing that Duke Energy (which spilled the coal ash) pay only $2.5 million—leaving the people of Virginia and the United States holding the bag for the vast majority of any later cleanup costs. We also pay in the form of medical bills: Harvard’s Medical School calculates that in Appalachian communities, the annual public health burden from coal is roughly $75 billion per year. And in the most extreme cases, we pay with our lives. A study from the Clean Air Task Force revealed that in the United States, fine particle pollution from power plants led to 7,500 deaths in 2014.

Coal power provides the best example of an extremely harmful technology that continues to receive enormous, obsolete subsidies around the world. The IMF’s working paper reveals that coal remains the most heavily subsidized energy technology in the world, due mostly to the failure to price and pay for its devastating environmental and health consequences. Roughly three-quarters of coal’s externalities reflect local harms from air pollution, while the remaining quarter reflects coal’s contribution to climate change. In the United States, scientists from Harvard’s Medical School calculated in 2008 that coal imposes externalized costs of between $350 billion and $530 billion annually.

Renewable energy offers a far better way to generate affordable, plentiful, clean energy. Wind and solar power are proven technologies with decreasing costs.  According to Lazard’s Levelized Cost of Energy Analysis-Version 8.0, over the last five years the cost of wind power has declined by 58% and the cost of solar has plunged by 78%. Meanwhile, renewable energy generation is on the rise. U.S. Wind and solar energy generation has tripled since 2008, and continue to grow much more quickly than fossil fuels. However, despite plunging prices and growing energy generation, renewables accounted for only 13% of U.S. energy in 2014, while coal accounted for 39%, according to the U.S. Energy Information Administration. Moreover, coal and other fossil fuel technologies continue to receive heavy subsidies in the United States, while policies promoting renewable energy are continually under attack.

Critics of renewable energy often argue that the sector receives inappropriately large subsidies. These critics are wrong. In many ways, the federal government and state governments continue to subsidize fossil fuels more heavily than renewables. For example, federal law allows fossil fuel companies to operate as a special type of business called a “Master Limited Partnership,” (MLP) which offer very significant tax benefits for corporations and their investors. According to Oil Change International, tax avoidance through MLPs cost the United States $13 billion between 2009 and 2012.  Renewable energy companies cannot operate as MLPs. And although renewables do receive federal tax credits such as the Production Tax Credit and the Investment Tax Credit, these renewable tax credits face significant problems that MLPs do not. Congress has allowed the Production Tax Credit to lapse four times since 1999, devastating the wind energy industry each time. MLPs, in contrast, do not lapse. Meanwhile, a recent report from MIT, The Future of Solar Energy, shows that most solar developers must woo investors with huge tax appetites in order to take advantage of the Investment Tax Credit, a process that consumes “a significant fraction” of the credit’s value in transaction costs.

State-level support for fossil fuels continues as well. In Mississippi, for example, a coal-fired power plant that aims to capture some carbon emissions is currently slated to cost $6.2 billion, roughly three times what it was projected to cost. Now, Mississippi Power, the utility building the plant, is requesting a huge rate increase to cover these high costs. As a result of this new, dirty power plant, Mississippi’s ratepayers may see their energy bills rise by between 22% and 41%. In contrast, Renewable Portfolio Standards—which have been the most effective U.S. policy for promoting renewable energy—have raised rates on average less then 3%. Yet these effective and economically efficient renewable energy policies are constantly under attack.

It is well past time for governments at all levels to rescind support for fossil fuels and instead choose to support renewable energy. So long as we continue to prop up obsolete technologies, public health and the environment will continue to suffer. Renewables, in contrast, offer an inexhaustible source of clean energy. The choice is clear. What the world needs now is the political will to make the right decision.