The Energy “Subsidy” Debate – Some Additional Fuel for the Fire

Contributed by Robert Lyman © 2016

One of the recurring side debates that always seems to rage between those who favour large public spending to reduce greenhouse gas emissions and those who argue that such expenditures are not justified concerns whether energy markets are already “distorted” by existing subsidies to fossil fuel industries.

There are many complex elements to this debate, including the question of what actually constitutes a “subsidy”, who benefits from it (producers or consumers?), whether the costs of environmental effects caused or avoided should be included in the calculations, whether tax subsidies (i.e. deductions and credit that provide incentives for investment) should be weighed against the revenue received by governments when the investments occur, and so on. There are few simple answers.

With that preamble, I think John Petersen, a lawyer and investment analyst with special expertise in energy storage technologies, has provided some valuable additional information in his recent article on the subsidies provided by United States governments to Tesla Corporation and its counterpart SolarCity (both owned largely by Elon Musk). Tesla manufactures electric cars (EVs) and SolarCity manufactures the batteries needed by EVs and other users. The details of Petersen’s calculations can be found in his article here:

http://seekingalpha.com/article/4028003-teslas-subsidy-shuffle-big-public-costs-public-benefit

The combined U.S. federal subsidies to Tesla and SolarCity per vehicle sold in 2015 include $2,400 for the solar panels, $2,100 for energy storage technologies, $2,250 for GHG emission credits, and $7,500 for EV investment tax credits, for a total of $14,250. In addition, in states like California that offer zero emission vehicle (ZEV) tax credits, each vehicle sold qualifies for a $7,750 tax credit. The combined federal-state subsidy is thus $22,000.

If you assume that an average EV will save 600 gallons of fuel per year during a ten-year useful life, the combined subsidies work out to $3.67 per avoided U.S. gallon in ZEV states and $2.38 per avoided gallon in non-ZEV states. That is equivalent to $413 per tonne of GHGs avoided in ZEV states and $268 per tonne avoided in non-ZEV states.

Petersen also offers some comparative information on federal subsidies provided to different energy sources produced in the United States, based on data from the Energy Information Administration for 2013 (the most recent year available).

The following table shows the subsidies paid, the energy produced in 2013 from that source, and the subsidy per million British Thermal Units (BTU) to provide a common standard of comparison.

U.S. Federal Subsidies to Energy Production 2013

Energy Source                       Subsidies        Energy Production    Subsidies per

(millions)            (trillion BTU)              MMBTU

Coal                                            $1,085                     20,209                    $0.05

Oil and Natural Gas              $2,346                     43,695                    $0.05

Hydropower                                $395                      2,579                    $0.15

Nuclear                                      $1,660                      8,117                    $0.20

Biofuels                                     $2,445                      4,495                    $0.54

Geothermal                                  $345                         220                     $1.57

Wind                                           $5,936                      1,549                    $3.83

Solar                                           $5,328                         286                   $18.63

For comparison, the current spot price of natural gas in the United States is $2.96 per MMBTU.

Petersen notes that it is not entirely fair to compare subsidies in one year to the production in that year, as the subsidies are intended to increase production over time, and it takes several years in some cases before the up front investment results in production. Still, the difference in magnitude between the per-BTU subsidies to conventional fossil fuels and the renewable fuels is striking. For example, the per-BTU subsidies to wind producers are 76 times as high as the subsidies to coal, oil and natural gas.

It is unfortunate that comparable information is not available for Canada.

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