Blog Posts > New Study Shows No “Free Market” in Energy Development
October 10, 2011

New Study Shows No “Free Market” in Energy Development

This past Friday we talked about the illusions that some people have about the role of government in the “free market.” Another wrinkle in the free market mythology is how the federal government supports what Alexander Hamilton called “infant industries” with direct investments, subsidies and tariffs. This is especially true when it comes to the energy market.

A new study by Nancy Pfund of DBL Investors and Ben Healey of Yale University shows us that federal subsidies have played a large role in guiding America’s energy economy over the last 200 years. In particular, Pfund and Healey quantify and compare how federal subsidies for earlier energy transitions in coal, oil, gas, and nuclear compare to our current commitment to renewables. What they find is not that surprising, especially if you’ve been keeping up current trends in the economic literature:

 Our findings suggest that current renewable energy subsidies do not constitute an over-subsidized outlier when com- pared to the historical norm for emerging sources of energy. For example:

–   As a percentage of inflation-adjusted federal spending, nuclear subsidies accounted for more than 1% of the federal budget over their first 15 years, and oil and gas subsidies made up half a percent of the total budget, while renewa- bles have constituted only about a tenth of a percent. That is to say, the federal commitment to O&G was five times greater than the federal commitment to renewables during the first 15 years of each subsidies’ life, and it was more than 10 times greater for nuclear.

–   In inflation-adjusted dollars, nuclear spending averaged $3.3 billion over the first 15 years of subsidy life, and O&G subsidies averaged $1.8 billion, while renewables averaged less than $0.4 billion.

The study also looked at how the federal government currently subsidizes the coal industry. Between 2000 and 2009, they found that the capital gains treatment of royalties on coal have totaled $1.3 billion in federal tax expenditures.

Pfund and Healey also look at the historical role of direct spending and development initiatives by the US government in the 19th century on behalf of the coal industry, including tariffs, the redistribution of land (e.g. Homestead Act of 1862) and natural resources, and the building of railroads and ports for distribution. 

At the state level, they found that states propped up the coal industry by exempting coal from taxation, granting corporate charters only to coal companies, and by sponsoring geological surveys to identify coal seams for the industry.
(As we pointed out last year, the state of West Virginia also heavily subsidizes the coal industry with preferential tax treatment and other expenditures).

The authors conclude:

Suffice it to say, domestic coal did not arrive on the scene as a mature, low-cost and competitive fuel source. Rather, government support over many years helped to turn it from a local curiosity in Schuylkill County, Pennsylvania into the domi- nant fuel source of its time. 

None of this is to say that government should not have invested and developed the coal industry over the last 200 years. The point is we need to recognize the historical and important role government has had in the development of new, infant energy industries so we can understand why it is so important that government help development new energy industries.  As Pfund and Healey conclude:

Throughout our history, energy incentives have helped drive critical innovation, speed U.S. economic 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-subsidized. This weak support is inconsistent with our nation’s own historical energy narrative, which suggests:

Today’s market for cheap power results in part from substantial investment by the federal government in innovative technology.

It takes a substantial amount of money, invested over several years, to bring an electricity generation technology to maturity.

Although energy subsidies can and do serve many policy purposes, the most basic relate to furthering the development and commercialization of technolo- gies deemed to be in the public interest.

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