Fiscal Cliff & Energy Subsidies

Because the Budget Control Act (BCA)’s 12-member supercommittee failed to reach a compromise last year, a package of deep spending cuts and steep tax hikes is now slated to take effect on January 1, 2013 (the Fiscal Cliff). Although energy subsidies are not specifically target by BCA cuts, negotiations to avoid the automatic cuts could include energy subsidies.  Wind, nuclear, solar, oil and natural gas subsidies are all in danger of losing subsidies.

President Obama is using his 2013 budget request as the starting point for his plan to 'control the budget.'

When companies default on loan gurantees, the government has to pay.  That is real money.  When companies get to deduct certain expenses, that is money not going to the U.S. treasury.  Of course, government support will continue to be an essential component in subsidizing energy sources because it helps in keeping energy prices at reasoaable levels, enables U.S. technology innovation, stimulates job creation and promotes economic expansion. Energy subsidies may be direct cash transfers to producers, consumers, or related bodies, as well as indirect support mechanisms, such as tax exemptions and rebates, price controls, trade restrictions, and limits on market access.

The wind energy production tax credit is already scheduled to expire at the end of the year.  Pressure to reduce the deficit and debt could kill this credit that has been helpful in stimulating wind production since 1982.

The American Association for the Advancement of Science (AAAS) estimates that federal R&D budgets would decline $12.1 billion in fiscal year 2013 if the spending cuts mandated by last year’s Budget Control Act take effect. By agency, the Department of Defense would lose $6.9 billion in R&D; National Institutes of Health, $2.4 billion; Department of Energy, $972 million; NSF, $456 million; NASA, $763 million; and Department of Agriculture, $189 million, according to the analysis.

Energy industries have enjoyed a century of federal support. From 1918 to 2009, the oil and gas industry received $446.96 billion (adjusted for inflation) in cumulative energy subsidies. Renewable energy sources received $5.93 billion (adjusted for inflation) for a much shorter period from 1994-2009.  Average annual support for the oil and gas industry has been $4.86 billion (1918-2009), compared to $3.50 billion for nuclear (1947-1999) and $0.37 billion (1994-2009) for renewable energy.

A 2009 study by the Environmental Law Institute assessed the size and structure of U.S. energy subsidies over the 2002–2008 period. The study estimated that subsidies to fossil-fuel based sources amounted to approximately $72 billion over this period and subsidies to renewable fuel sources totaled $29 billion. The study did not assess subsidies supporting nuclear energy. The three largest fossil fuel subsidies were:

1. Foreign tax credit ($15.3 billion)
2. Credit for production of non-conventional fuels ($14.1 billion)
3. Oil and Gas exploration and development expensing ($7.1 billion)

The three largest renewable fuel subsidies were:

1. Alcohol Credit for Fuel Excise Tax ($11.6 billion)
2. Renewable Electricity Production Credit ($5.2 billion)
3. Corn-Based Ethanol ($5.0 billion)

In the United States, 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. The Energy Policy Act of 2005 provided an initial $18 billion in loan guarantees for new nuclear reactors.  An additional $36 billion was added to this amount.  The U.S. government also guarantees nuclear power accident costs above $7 billion.  Will these subsidies remain in the face of the Fiscal Cliff.

The bottom line, there numerous sources for Congress to look at in the energy sector if it wants to cut deficits and debt.  However, these subsidies great benefits to America and eliminating them could lead to significant energy price increases, which can raise the prices of other goods and services. (Physics Today, 11/16/2012, Green Tech Media, 10/4/2012, Wikipedia (Energy Subsidies)