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Costly, Subsidized Energy Not Necessary

Proposed Btu tax makes the most sense if implemented without subsidies

By Daniel Yoon and Amory B. Lovins. Daniel Yoon and Amory B. Lovins arerespectively, senior research associate and director of research at Rocky Mountain Institute in Old Snowmass, Colo. / May 4, 1993



PRESIDENT Clinton's welcome proposal for a British thermal unit (Btu) tax could reduce the deficit twice as fast if it also milked an overlooked cash cow: federal energy subsidies. Washington spends tens of billions of dollars a year on subsidies, mainly to the nuclear and fossil fuel industries. It's better to let all energy options compete on economic merit.

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Does it make sense to keep subsidizing a commodity heavily while taxing it lightly? The debate over energy taxes has miraculously missed this question.

Why not remove subsidies and price all energy forms closer to their true cost by applying an economically rational tax? This would not only at least double revenues; it would also revitalize business by encouraging more competitive levels of energy efficiency, free up enormous amounts of capital now invested uneconomically in energy supply, and reduce environmental damage from energy use. This market-oriented prescription would promote both conservative fiscal priorities and liberal social goals.

The proposed Btu tax is basically sensible, but would be even better if it cut subsidies, too. Direct subsidies include tax breaks, cheap loans and guarantees, and R&D funding, which goes mostly to "clean coal" (which isn't), nuclear fusion (which hasn't delivered any power), and nuclear fission (which now delivers less energy than wood).

The Department of Energy recently estimated total energy subsidies at $5 billion to $13 billion, but failed to include several pricey items such as many tax breaks and the Strategic Petroleum Reserve. The Alliance to Save Energy will soon release a study showing a real total more than twice as large.

These studies didn't even count major indirect subsidies. For example, peacetime readiness of American forces earmarked for Persian Gulf intervention costs taxpayers a whopping $50 billion a year. In a rational world we would spend this money on reducing dependence on foreign oil, or at least pay this cost at the pump and not from taxes.

Mr. Clinton's proposed Btu tax is estimated to bring in some $71 billion over four years - substantially less than what the government will meanwhile pay out in energy subsidies. The president has proposed to reduce (though not remove) some energy subsidies. However, most subsidies remain, and even more have been proposed for nuclear fusion, an uneconomic option.

The Btu tax could also be improved by fully reflecting such social and environmental costs of energy use as urban air pollution and nuclear-waste clean up. These costs should be internalized into the price of energy through a "polluter pays" tax, which is preventive and costs less than paying later through public health and environmental degradation. Quantifying these costs is difficult.

Researchers at the University of California at Davis have estimated total vehicle-related emissions costs at $10 billion to $200 billion. That's a big range, but at least we know that these costs are greater than zero, and it's better to be approximately right than precisely wrong.

The benefits of taking a more comprehensive approach would be great. Economic glasnost - prices that tell the truth - would encourage energy efficiency throughout the economy. Major efficiency gains are both technologically and financially feasible. Such gains do not mean making sacrifices and freezing in the dark, but doing more with less - using far less energy (and money) to get the same hot showers.

Many businesses in the United States and abroad are taking advantage of these profit opportunities.

At the same time, energy efficiency would free up the enormous amounts of capital committed each year for uneconomic investments in energy supply.

For many years annual investment in and subsidy of electricity supply have totaled about $60 billion - equal to total investment in all durable-goods manufacturing. Expensive forms of energy such as coal and nuclear would give way to cheaper and cleaner sources such as efficiency and many renewables.

It's argued that energy taxes are regressive, that they hurt the poor more than the rich. Actually, the fraction of income spent directly and indirectly on energy hardly varies with income. In any case, it is unwise social and economic policy to keep prices of basic commodities like energy artificially low for everyone, including the rich, in order to help only the poor. It makes more sense to help those in need to invest in energy efficiency to lower their bills and to make them better off overall. For homes in the Northeast, why not invest in insulation and burn less oil rather than subsidize fuel and burn more? Dollar per dollar, investing in energy efficiency creates several-fold more local jobs than investment in energy supply. For coal regions, why not invest a share of the tax revenues and create jobs that will outlive the mines?

Clinton's Btu tax is a good start, but going further, now or later, will reveal even bigger opportunities to reduce the deficit and invest in American jobs and growth.