Energy subsidy

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, as tax exemptions and rebates, price controls, trade restrictions, planning consent and limits on market access. They may include also energy conservation subsidies.

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 fulfil 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.
• 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 Resource 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 externality 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).

Allocation of subsidies

In the US, 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 timeframe, 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 biofuels. History shows that no energy sector was developed without subsidies.

The most important subsidies to the nuclear industry have not involved cash payments. Rather, they have shifted 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. This approach has remained remarkably consistent throughout the nuclear industry’s history, and distorts market choices that would otherwise favor less risky energy investments.

Many energy analysts 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 in the USA has had.

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. Subsidies to renewable energy are generally considered more environmentally beneficial, although the full range of environmental effects should to be taken into account.

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.

See also

• Feed-in tariff
• Renewable Energy Certificates
• Renewable energy payments
• Financial incentives for photovoltaics