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Consumer Energy Report

Do energy subsidies actually work?

Governement subsidies are largely social experiments without any guarantee of success. Some pay off royally, while others are a waste of time and money.

By Russ FinleyGuest blogger / April 12, 2012

A money changer shows some one-hundred U.S. dollar bills at an exchange booth in Tokyo in this file photo. Government subsidies for energy have a checkered history, but Finley argues they are ultimately worth it as a way to experiment with new innovations.

Issei Kato/Reuters/File

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The answer largely depends on your definition of a subsidy and what you mean by payoff.

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I’d suggest that many, if not most, subsidies are a roll of the dice (crap shoot) when it comes to the purported pay off. They are social experiments without any guarantee of success, which is not to say they should not be undertaken as long as a mechanism is in place to end the subsidy in a timely manner.

There are many examples that have paid off royally, along with many that were (and are) a waste of time and money to varying degrees.

Electric Vehicle Tax Credit
 

Obama’s latest idea, to increase the maximum federal income tax credit for electric vehicles from $7,500 to $10,000, certainly fits most definitions of a subsidy. The intended payoff is to kick-start an electric car industry for various reasons (job creation, oil import reduction, reelection). And of course, not everybody is happy about it. From Daily Tech:

However, many in Washington have expressed outrage over the tax credit, stating that sales of plug-in electric vehicles have not met specified goals and that it only provides an incentive for people who are already wealthy rather than giving a break to people in lower tax brackets.

I am hopeful that battery technology adequate for use in personal transport is finally on the cusp of mass-marketability. Let’s face it, the dominant battery technology in use today (lead-acid) powered WWI submarines. If these subsidies turn out to be just what the industry needs to get over that hump, great. And if the technology succeeds regardless of the subsidy, well, that happens sometimes also.

Ethanol, Wind, Solar Hot Water Heaters

We just witnessed the anticlimactic end of the “rob Peter to pay Paul” ethanol blenders’ credit. Next up is the wind energy credit. From Politico:

“Although the credit expires at the end of the year, advocates said the long time needed to plan, permit and construct wind projects means it is essentially expiring right now.”

A significant tax incentive way back during the Carter administration put solar hot water heaters on rooftops all over the country. A few years after the subsidy ended, there were rusting hulks on rooftops all over the country because there was no solar version of the Maytag repairman, and no replacement parts either. The industry failed to kick off in the time frame allocated by the subsidy. Was that technology not commercially viable or did the subsidy end too soon? Global warming wasn’t the concern. Energy independence was the big concern — as it still is — and never mind that we don’t heat water with oil (except in places like Hawaii).

Subsidies That Worked

So, you may be wondering, “Where are these examples that paid off royally?” My first examples are projects that were so capital intensive and technologically risky that private investors were hesitant to tackle them without government assist. Here’s an excerpt of a description of one I found on the internet:

 

“The project was developed despite seemingly insurmountable engineering, administrative, financial, and political challenges. The lessons learned during the design and construction …helped ensure the success of …projects throughout the world – projects that have benefited thousands of people …”

I’ll give you another hint. These projects have paid for themselves many times over and continue to provide gargantuan amounts of affordable, low emission electricity. Give up? The Hoover and Grand Coulee dams–economic stimulus packages writ large. My Leaf is mostly powered by precipitation stored by dams like these.

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