The easy step towards cleaner energy

As we attempt to move towards a clean energy economy, numerous roadblocks remain. From the more antiquated nature of our electricity grid, to our vast existing fossil fuel-based energy infrastructure, to some loud voices who still deny that climate change is a problem, there are a variety of obstacles standing between a clean energy-based future and our fossil fuel dependent present.

One of the major obstacles standing in the way might not be as obvious as the others—federal government subsidies. As we seek to accelerate the world’s transition to a clean energy economy, a rational approach to subsidies is critical. An obvious first step we should take is to reexamine federal subsidies.

Subsidies for fossil fuels totaled $3.2 billion in 2013, according to the Congressional Budget Office (CBO). This includes more than a billion dollars in tax benefits related to the option to expense depletion costs on the basis of gross income rather than actual costs, almost a billion dollars related to expensing of exploration and development costs for oil and natural gas and $200 million related to investments in clean coal.

In many ways, the CBO report significantly underestimated the federal government’s support for fossil fuel. Another report from Oil Change International estimates that total federal government’s support for fossil fuels equaled $18.5 billion in 2013, up from $12.7 billion in 2009.

For instance, the CBO report does not include an important hidden federal subsidy—under-market leasing of federal land to oil, gas and coal producers. These land deals benefit fossil fuel companies to the tune of more than $3 billion a year. In some areas, oil and gas companies pay only $1.50 per acre annually – less than a latte – to rent federal public lands for drilling, according to a report from the Center for Western Priorities.

Another key subsidy excluded from the CBO report is a tax benefit for overseas drilling. The dual capacity taxpayer deduction allows fossil fuel companies to deduct royalty payments to foreign governments from U.S. income taxes as if they were foreign taxes. This tax benefit totaled $530 million in 2013.

It is also interesting to note that while negative externalities such as pollution aren’t really well accounted in the price of fossil fuels, in the cases of oil spills, the externality remediation costs count as a “standard business expense.” For example, in 2010 BP claimed a $9.9 billion dollar tax credit for clean-up costs associated with their oil spill in the Gulf of Mexico.

The examples above only reflect subsidies that are taking place right now. Decades of support for fossil fuels have provided the industry with a deep-seated advantage that helps account for their seemingly inexpensive prices today. From 1918 to 2009, fossil fuels received $446.96 billion in cumulative subsidies from the United States, as opposed to just $5.93 billion for renewables, according to DBL Investors. Over the lifetime of these subsidies, this works out to an average of $4.86 billion in annual subsidies for fossil fuels, and just $370 million for renewables. These subsidies do not consider other favorable deals or policies that were enacted outside of those that were measurable.

Government support for fossil fuels is not limited to the United States – it exists worldwide. Globally, more than half a trillion dollars is channeled towards subsidies for fossil fuels, dwarfing the $120 billion invested in incentives for renewables, according to the International Energy Agency (IEA). Though these subsidies might be necessary in economies that are energy poor or that have limited energy infrastructure, they still have significant externalities with a negative impact on the environment.

The playing field between renewables and fossil fuels is not yet level, and historical government support for fossil fuels is a major reason why. There is no doubt that past and present government subsidies have been a major driver for the fossil fuel industry’s growth. Yet despite the past and present subsidies to the fossil fuel industry, many still attack subsides designed to encourage renewable energy development as market distorting abominations. These attacks continue even though the federal government’s clean energy loan portfolio is expected to generate over $5 billion in total profits. Moreover, the IEA estimates that the world needs to invest a trillion dollars a year to keep the average temperature of the world’s atmosphere from climbing by two degrees and thereby avoid the worst effects of climate change. The benefits of such an investment would not be limited to the climate – it is estimated that such an investment would result in $115 billion in fuel savings, for net benefit of $71 billion.

Since we first started using fossil fuels to power the industrial revolution, we have been using government subsidies and other support to encourage the development of what is, in the end, a dirty industry that negatively impacts our environment, climate change, and the health of all life, not to mention the negative externalities inflicted on generations after we have passed.

Moreover, subsidies include not just direct financial subsidies, but also the many policies that act like subsidies, in that they remove barriers to the proliferation of specific technologies or encourage investment in certain technologies. We see these in our daily lives from trade policy to regulatory rules. All these types of subsidies shift the direction of our economy, and what we choose not to subsidize, just as much as what we do subsidize, is predictive of what future will emerge for our world.

I would like to say that we can easily drive change without subsidies. However, as I look at many of the innovations of the past, from the military funding of GPS, to incentives that helped lead to the decrease in costs of more than 80 percent on solar photovoltaics, there seems to be little doubt that subsidization targeted properly drives step changes in technology and growth in addition to what may or may not emerge unsubsidized.

Looking back today, it is easy to see why it seemed to make sense to subsidize fossil fuels in the past. However, moving forward we need to think about the future and relook at what we do subsidize and what we do not subsidize. We are at a pivotal point, and our choice will have the ability to change the world. Therefore, it is more critical than ever for us to focus our economy on developing clean energy solutions for the future, not on supporting obsolete and/or dirty technologies of the past.

This article is published in collaboration with The Energy Collective. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Jonathan is the CEO of Soligent, which, as the largest solar distributor in the Americas, supports over 5,000 solar installers

Image: An offshore wind farm stands in the water near the Danish island of Samso May 19, 2008. REUTERS/Bob Strong.