If they were, they would be much easier to eliminate. It is certainly acceptable to debate whether subsidies such at the manufacturer's tax credit should be eliminated.
But it is important to be informed as we discuss the issue. Anyone who discusses elimination of specific subsidies should know the answer to three questions: 1. What is the purpose of this subsidy? Is it working as intended? What is the projected impact from eliminating it? For manufacturer's tax credit, the intended purpose of course is to keep manufacturing in the U. Whether it has actually been worth the money is something that I can't say without seeing a study on the impact of the tax credit.
The ideal use of a subsidy should be when we want to stimulate action that would not have otherwise been undertaken. Regardless of how profitable a company is, they are not going to intentionally make unprofitable business decisions unless an incentive such as a regulation or a subsidy is applied. If we subsidize an action that would have been undertaken in any case -- business as usual -- then that would not ordinarily be a good usage of tax dollars.
Opponents and proponents are both apt to make unsubstantiated claims with respect to a subsidy's impact, but they need to have some basis for their opinions. Otherwise we may relearn the lesson that some actions have undesirable consequences. If we are to have a productive discussion of fossil fuel subsidies, it is important that participants understand what they are, their intended purpose, and the projected impact of removing them.
Projecting the impact requires more than a guess. Because of misleading political rhetoric, people imagine these subsidies as cash payments to oil companies. But, many of these subsidies are not what people think they are. In many cases they are benefiting people who have nothing to do with the oil industry -- yet the money spent on these programs is still tallied against the oil industry.
The result is a great deal of anger over spending that often benefits the angry people. That is why it is so hard to get rid of fossil fuel subsidies; a majority of the population likely supports at least some of them without realizing that they are in fact subsidies. Except for a note at the end, this post is concerned primarily with pre-tax subsidies. Also, although the prices often extend to electricity and industrial energy, what follows will focus on consumer prices for petroleum products.
The following table, excerpted from Appendix Table 2 in the IMF study, shows pre-tax subsidies for a representative sample of countries. Subsidizers include wealthy countries like Saudi Arabia, poor ones like Yemen, and many in between. Oil exporters are especially prominent on the list, but there are importers there as well. Some, like Indonesia and Egypt, are former exporters turned importers. At the same time, some major exporters engage in little or no subsidization, Russia and the United Arab Emirates being notable examples.
For net importers, especially former exporters, subsidies often stem from a desire to protect people from oil price shocks.
Since the long-term trend of world prices has been upward, even price controls and subsidies that originally aim only to smooth volatility easily evolve into permanent subsidies, as they have in Indonesia and Egypt. Fuel subsidies both help and hurt consumers. The trouble is that poor consumers get a disproportionately small portion of the help and a disproportionately larger share of the hurt.
The help comes because subsidies make fuels more affordable. That not only reduces direct costs for cooking and lighting, but also indirectly holds other prices down, for example, by reducing transportation costs for food. For individual families, the price reductions can be most welcome. Still, in the aggregate, poor households account for only a small part of total fuel use.
As a result, on average, consumers in the richest 20 percent of the population get six times as much total benefit from fuel subsidies as do those in the poorest 20 percent. The specific amount varies by fuel. For example, vehicle ownership is low among poor households in poor countries, so they get little direct benefit from a reduction in gasoline prices.
On the other hand, since poor households are less likely to be connected to the electric grid, they account for a larger share of kerosene consumption and get more benefit from subsidies of that fuel.
The following chart from the IMF study provides estimates of the distribution of subsidy benefits for four important fuels. The harm to the poor arises from the way that fuel subsidies drain government budgets of funds that could benefit the poor in a more targeted way. In Indonesia and Saudi Arabia, fuel subsidies amount to some 14 percent of the government budget. For Yemen, the figure is 20 percent, and for Egypt, it is an alarming 30 percent.
The same funds now squandered on fuel subsidies could be used to bolster pubic spending on education, health, or other programs more efficiently targeted at the poor. Freeing up public funds for such needs should be one of the major objectives of energy price reform.
Direct subsidies to the oil industry can be broken down into four distinct categories: There are tax expenditures , in which the federal government allows oil companies to deduct taxes during the oil-well development process. Related posts: How much does a gallon of gas actually cost? Alternative fuels vs. Gas prices are rising again—what can we do? Food vs. You might also like Toyota Embraces Hydrogen. Winston, what would you do concerning natural gas?
Will Pittsburgh be the center of a CNG revolution? Log in here. Already an ACS Member? Choose the membership that is right for you. Discount will be applied automatically at checkout. Your account has been created successfully, and a confirmation email is on the way. Their study finds a paucity of government support for renewable energy sources compared with past government investment in coal, gas, oil, or nuclear energy sources, which helped the country transition to new energy technologies and infrastructures.
The study comes as President Barack Obama continues to push for more government support for renewable, non-fossil-fuel energy sources. This push is intended to mitigate climate-change impacts of energy generation by cutting emissions of carbon dioxide from fossil fuels, as well as to create new jobs and industries. Pfund and Healey favor government investments in energy, and their research supports the view that over the years new transitional energy sources have spurred U.
In fact, they say, backing for renewable energy is trivial in size. The first 15 years, the report says, are critical to developing new technologies.
It finds that oil and gas subsidies, including tax breaks and government spending, were about five times as much as aid to renewables during their first 15 years of development; nuclear received 10 times as much support.
Coal, Pfund notes, benefits from a host of centuries-old programs that signal a rich history of aid, which is intertwined with the development of the nation. The aid runs deep and comes in many forms—state and federal tax breaks for mining and use; technological support for mining and exploration; national resource maps to encourage exploration and development; tariffs on foreign coal; and aid to steel smelters, railroads, and other industries that burn coal to encourage greater use and develop a steady market for coal.
Similarly, several measures to aid oil companies passed in the early s remain of key importance to the industry, Healey notes. These include one provision passed in to speed up depreciation of drilling costs. A second one, the oil depletion allowance, which became law in , gives oil companies a tax break for depleting an oil reservoir.
President Obama has sought to end these breaks but has been overwhelmed by the opposition from industry and its congressional allies. Nuclear power plants also benefit strongly from subsidies, Healey says, particularly from the Price-Anderson Act of , which requires the federal government to indemnify utilities in case of a nuclear disaster. The study quotes utility officials speaking in the s who warned that without federal accident indemnification the industry could not exist.
The omission weakens its conclusions, but the money was not allocated when the report was being prepared. These funds are spread throughout old and new energy forms—renewables, coal cleanup technologies, vehicles, and nuclear projects.
The biggest support for renewables comes from tax credits. But Congress has let these credits expire multiple times since their creation in the early s, the study notes. It warns that without consistent, stable support during the initial year period, a new technology will find success difficult.
Another hurdle for developers of renewable energy sources and one avoided by promoters of now-established energy technologies is strong opposition from entrenched, competitive industries, Pfund notes. When railroads shifted from burning wood to coal for fuel, no powerful timber lobby fought this change, nor was there a well-heeled influential whale-oil lobby blocking fledgling oil producers as they developed kerosene and petroleum products, Pfund adds.
Renewable energy developers face a tough battle to get a toehold in the marketplace when facing a traditional energy supplier with a fully depreciated power plant and a complete infrastructure in place to supply electricity. Without government support or a price on carbon emissions, the hurdle is even higher. A huge driver for renewable energy development in the U. When quizzed about the Solyndra failure, Pfund says it is consistent with the history of energy transitions in America.
It is a destructive cycle. If anything, she argues, the study shows renewables have been undersubsidized. Contact us to opt out anytime. Contact the reporter.
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