The Truth Behind Green Energy Subsidies

By Guest Blogger Lee Rolison

Nobody wants to see their tax dollars spent covering the operating costs of failing energy companies. That’s why debates over energy subsidies tend to be fiercely polarising. They also tend to be completely misinformed.

There’s a widespread assumption that the solar power industry is not economically viable and only survives due to generous government subsidies. This is a myth that stems from slanted media headlines and misunderstandings about how energy subsidies work. In reality, the fossil fuel industry takes the overwhelming share of energy subsidies each year, at $544bn for fossil fuels compared to $101bn for renewables globally, according to a 2012 report from the International Energy Agency (IEA). In the US, that equates to a cumulative $446.96bn for the oil and gas industry between 1994 and 2009, compared to just $5.93bn for renewables.

In a competitive business environment, the companies with the best business practices will prosper, while those that perform badly will fail. The existence of gigantic fossil fuel subsidies distorts this competitive environment, so that poorly performing businesses can survive through government support. Not only that, but energy subsidies obscure the whole cost of energy production and artificially lower prices. This means that the true cost of developing and producing fossil fuels has traditionally been shouldered, in part, by the taxpayer.

This makes it very hard for alternative, cleaner energy sources to be competitive. Private investors are discouraged from putting money into alternative energy sources because that means competing with artificially low prices. Not only that, but subsidies are naturally biased in favour of large-scale productions, meaning that those who already have the most benefit disproportionately from energy subsidies. To give a crude example, someone who owns a business that requires a great deal of fuel consumption profits much more from subsidized gasoline than someone who only owns one car. Lastly, fossil fuel subsidies incentive carbon-intensive technologies and financially reward companies for taking part in the very activities that are responsible for climate change.

None of this is to say that subsidies can’t be a useful tool of government, when used correctly. But we should be moving away from a permanent subsidy model to one where subsidies primarily exist to launch new and innovative technologies. This is because young and small companies are unable to bankroll research by themselves, given that only a tiny fraction of research ever translates into a commercially viable product.

We should also remember that subsidies are useful for maintaining employment in periods of transition, just as the solar industry employs 120,000 Americans today. Lastly, and in direct opposition to how energy subsidies work today, we should be using subsidies to protect the environment and improving the air quality in our major cities. Subsidy reform makes economic sense and it makes environmental sense – it is good for the budget as it is good for the planet. As noted by Fatih Birol, Chief Economist at the IEA, without the phasing out of fossil fuel subsidies, we will not reach our climate change targets.

About the Author

Lee Rolison is a renewable energy installer who works with solar panels and other green technologies at Complete Renewables.