The great big subsidy myth

You see it everywhere: in the political debate both here and overseas, particularly in the US, in the press, in “research” reports, and in comments on websites, here included: "We're paying too much for renewable subsidies!"

Really? Subsidies for energy supplies have been a constant of the industry since the first lightbulb was switched on more than a century ago. Now, a study completed in the US has, for the first time, it says, compared the level of subsidies given to the oil and gas industries, and nuclear and renewables – and guess who has been missing out?

According to the study by Nancy Pfund, a managing director of VC firm DBL Investors, and Ben Healey, a Yale graduate, the amount of government subsidies for renewables in the US pales in comparison to that of its energy rivals in their early years.

“All new energy industries – timber, coal, oil and gas, nuclear – have received substantial government support at a pivotal time in their early growth, creating millions of jobs and significant economic growth," the study says. “Subsidies for these 'traditional' energy sources were many, many times what we are spending today on renewables."

The study calculates that subsidies for nuclear energy over the first 15 years accounted for more than 1 per cent of the federal budget, subsidies for oil and gas accounted for up to half a per cent of the federal budget, while renewables accounted for about a tenth of one per cent of the federal budget.

In inflation-adjusted dollars, nuclear spending averaged $US3.3 billion over the first 15 years of subsidy life, oil and gas subsidies averaged $US1.8 billion, while renewables averaged less than $US0.4 billion.

On a historical average over the lifetime of subsidies, oil and gas has averaged $US4.86 billion (in 2010 dollars), from 1918 to the present day; nuclear averaged $US3.5 billion from 1947 to 1999, and renewables average $US370 million from 1994 to 2009. The total subsidies, adjusted for inflation, were $US446.96 billion for oil and gas, $US185 billion for nuclear, and $US6 billion for renewables.

“What we find, in contrast to much of today's headline-grabbing rhetoric, is that today's government incentives for renewable energy pale in comparison to the kind of support afforded emerging fuels during previous energy transitions,” the authors say.

The early subsidies for nuclear power dwarfed all others, and even the high water mark of renewable subsidies, the 2006 jump after tax credits were renewed, barely equalled the low-tide marks of the early oil and gas subsidies during the Depression years.

“It is worth considering why this may have been the case,” the authors write. “With oil and gas, we are analysing a period in time (the 1920s) when the rise of the automobile was driving intense demand for oil, a fuel source with no substitute for that purpose.

“Producers were scrambling to keep up with skyrocketing demand, and it is unclear how much incremental supply the subsidies really incented. Looking at renewables, on the other hand, we are analysing a set of emerging technologies competing in a commodity business (the provision of electrons) against fully depreciated coal, nuclear, and hydro facilities – all of which had also been subsidised, of course – on a grid not usually designed to support new entrants.”

To demonstrate how America's energy needs have changed over time, the report highlights two images – the first is a picture from an advertisement in Life magazine in 1962, where Humble Oil (now part of ExxonMobil) proudly displays a glacier with the words “Each day Humble supplies enough energy to melt 7 million tonnes of glacier” – kind or ironic given today's science.

The second is a graph that shows that the gap between US energy consumption and production has gone from 10 quadrillion BTUs (British thermal units) in the early 1980s, to 30 quadrillion BTUs now (about the equivalent of one million MW of new capacity).

“Together, these two images demonstrate the fact – more clearly than we ever could in words – that America's energy needs and priorities have changed over time, and that they will continue to evolve going forward, driven by economics, environmental concerns, and security issues.

“Throughout our history, energy incentives have helped drive critical innovation, speed US eco-nomic transitions, and helped shape our national character. Today, as we seek to move towards a more independent and clean energy future, the truth is that renewables – from a historical perspective – are if anything under-subsidised.”

“We titled this paper, “What Would Jefferson Do?” We believe that the answer to that question is now clear. He would do what our country has always done – support emerging energy technologies – to drive innovation, create jobs, protect our environment, enhance our national security in a time of rapid change, and to further a distinctly American way of life in which resources once thought to be endless are replaced by ones that actually are.”

Which is exactly the point that the OECD and the International Energy Agency have been making in their calls for fossil fuel subsidies to be brought to an end, so that money can be channelled into the next range generation of clean technologies - which on a global level enjoy a fraction of the support afforded to coal, oil and gas.

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