Estimating U.S. Government Subsidies to Energy Sources

Energy Subsidies Favor Fossil Fuels Over Renewables

The current energy and climate debate would benefit from a broader understanding of the explicit and hidden government subsidies that affect energy use throughout the economy. In an effort to examine this issue, ELI conducted a review of fossil fuel and renewable energy subsidies for Fiscal Years 2002-2008. Our findings are presented in the graphic “Energy Subsidies Black, Not Green.” The accompanying paper, Estimating U.S. Government Subsidies to Energy Sources: 2002-2008, describes the approach used to identify and quantify the subsidies presented in the graphic. ELI researchers used a standardized methodology to calculate government expenditures. Where this methodology was lacking or did not apply, ELI researchers calculated subsidy values on a case-by-case basis.

Applying a conservative approach, explained in further detail in the paper, ELI found that

The vast majority of federal subsidies for fossil fuels and renewable energy supported energy sources that emit high levels of greenhouse gases when used as fuel.

The federal government provided substantially larger subsidies to fossil fuels than to renewables. Subsidies to fossil fuels—a mature, developed industry that has enjoyed government support for many years—totaled approximately $72 billion over the study period, representing a direct cost to taxpayers.

Subsidies for renewable fuels, a relatively young and developing industry, totaled $29 billion over the same period.

Subsidies to fossil fuels generally increased over the study period (though they decreased in 2008), while funding for renewables increased but saw a precipitous drop in 2006-07 (though they increased in 2008). The largest subsidies to fossil fuels were written into the U.S. Tax Code as permanent provisions. By comparison, many subsidies for renewables are time-limited initiatives implemented through energy bills, with expiration dates that limit their usefulness to the renewables industry.

The vast majority of subsidy dollars to fossil fuels can be attributed to just a handful of tax breaks, such as the Foreign Tax Credit ($15.3 billion) and the Credit for Production of Nonconventional Fuels ($14.1 billion, though this credit has since been phased out). The largest of these, the Foreign Tax Credit, applies to the overseas production of oil through an obscure provision of the Tax Code, which allows energy companies to claim a tax credit for payments that would normally receive less-beneficial tax treatment.

Almost half of the subsidies for renewables are attributable to corn-based ethanol, the use of which, while decreasing American reliance on foreign oil, raises considerable questions about effects on climate.

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