Debunking the Fossil-Fuel Subsidy Myth

Debunking the Fossil-Fuel Subsidy Myth
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Ask any economist and they'll tell you that subsidies are an inefficient use of government resources. If a government wants to incentivize innovation and new technologies, its funds can be put to much better uses, like research and development. And once a subsidy is in place, it's virtually impossible to repeal: the subsidized industry grows to rely on it, gets stronger financially, and gains political clout.

In the energy industry, there are lots of subsidies. But none are more attacked by environmental groups and the press than the government's handouts to the fossil-fuel industry.  

These attacks, however, are overblown and misinformed.

The federal government subsidizes the fossil-fuel industry to the tune of about $3 to $5 billion dollars per year (the exact amount depends on whose numbers you believe). This might sound like a lot. But the subsidies the federal government is simultaneously forcing the fossil-fuel industry to pay to its competitors, mainly biofuel producers, hugely dwarf the aid that the industry receives.

According to the apolitical U.S. Energy Information Agency, the federal government spends about $3.5 billion per year subsidizing the coal, petroleum and natural gas industries. By contrast, the Feds dole out about $15 billion every year in subsidies to the renewable energy industry (mainly to support new wind and solar projects) and $20 billion per year for agricultural subsidies and insurance.

Don't believe the EIA's subsidy calculations for the fossil-fuel industry? Last year, in an effort to eliminate all direct fossil-fuel subsidies, President Obama asked his U.S. Treasury Department to figure out how much the industry gets in subsidies from fossil-fuel specific tax code provisions. The answer, according to the Treasury: $4.7 billion.

Regardless of which number you believe, these fossil-fuel subsidies pale in comparison to the $15 to $20 billion the fossil-fuel industry has to shell out to its competitors and the agricultural sector every year because of the Environmental Protection Agency's renewable fuel standards program. 

Each year the EPA requires gasoline and diesel refiners to blend a certain amount of renewable fuel (mainly corn ethanol and soybean-based biodiesel) into our fuel supply before sending it to gas pumps. When this program was originally adopted back in 2005, the percentage of renewable fuel required to be blended into gasoline and diesel fuel was fairly low. 

But under the Clean Air Act, the percentage has ramped up every year (this year it will be about 10%), and the percentage is slated to continue to go up until at least 2022. By forcing the petroleum industry to blend so much renewable fuel every year, the EPA's program is impacting a huge transfer of wealth from petroleum companies to renewable fuel producers and the corn and soybean farmers providing those producers with the inputs necessary to make their renewable fuel. 

In other words, on the whole, the fossil-fuel industry in this country isn't being subsidized; it's being forced to subsidize others.

From an environmental perspective, you might think this is a good thing.  It's not.  

Since 2005, the science behind the climate and other environmental benefits from using biofuels has mostly eroded. As John DeCicco, a professor at the University of Michigan with a Ph.D. from Princeton, told Congress earlier this year: "from its inception, the (renewable fuel standard) has increased rather than decreased the amount of CO2 entering the atmosphere compared to petroleum fuels such as gasoline." The reason, at least in part, is that the huge transfer of wealth caused by the renewable fuel standard has caused farmers to clear cut forests and prairie (which are better carbon sinks), and replace them with corn and soybean crops.

Still, the debate about repealing fossil-fuel subsidies seems to get much more attention than ending the EPA's costly renewable fuel program. In August, Gilbert Metcalf, an economics professor at Tufts University, released a study looking at what would happen if the U.S. stopped giving tax breaks to companies for producing oil and gas. He found that removing such fossil-fuel subsidies would have a very modest impact on global oil prices (a less than one percent increase), but would dampen domestic oil and gas production by 4 to 5 percent and would increase domestic natural gas prices by 7 to 10 percent.  

Such significant domestic impacts could be avoided, however, if we scrapped the much more expensive renewable fuel standard program in addition to (or even in lieu of) repealing the nation's fossil-fuel subsidies. Doing so would improve the environment, while simultaneously boosting domestic oil and gas production and eliminating a huge, unnecessary drag on our economy.

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