Politics & Policy

The Left’s Case for Reforming Energy Subsidies

An original, constructive contribution

If legislators need any more evidence that American energy policy is broken, they need only look at how some of the world’s biggest corporations used “green” energy projects to snatch billions of dollars under section 1603 of the American Recovery and Reinvestment Act (also known as the federal stimulus bill). 

Between 2009 and late 2011, $9.8 billion in cash grants was disbursed under the stimulus bill, and the vast majority of that money — $7.6 billion — was received by the wind-energy sector. An analysis of the 4,256 projects that won grants from the Treasury Department under section 1603 shows that nearly half that sum — $3.25 billion — went to just eight companies, all of which are board members of the American Wind Energy Association. The biggest winners were two foreign companies, the Spanish utility Iberdrola and the German energy giant E.On.

Iberdrola, which has a market capitalization of $27 billion, collected $1 billion in grants; E.On, with a market capitalization of $44 billion, collected $542.5 million.

#ad#U.S.-based General Electric has a starring role in one of the most egregious examples of renewable-energy corporate welfare: the Shepherds Flat wind project in Oregon. The majority of the funding for the $1.9 billion, 845-megawatt project is coming from federal taxpayers. Not only is the Energy Department providing GE and its partners — which include Caithness Energy, Google, and Sumitomo — a $1.06 billion loan guarantee, but as soon as GE’s 338 turbines start turning at Shepherds Flat, the Treasury Department will send the project developers a cash grant of $490 million.

Thankfully, some environmental groups understand that the current system of subsidies desperately needs an overhaul. And that’s why a recent report from the Breakthrough Institute, Brookings Institution, and World Resources Institute is welcome. The three groups recently published a report called “Beyond Boom and Bust,” which says that it’s time to overhaul federal energy subsidies for “green” energy and focus that money on research-and-development projects that could yield long-term benefits.

To be clear, we are in favor of eliminating subsidies. Let’s let all energy sources compete, fair field, no favor. That said, it’s readily apparent that there’s a place for government in energy development — not by subsidizing uncompetitive renewable technologies, but through research into basic energy technologies that may be too speculative for private investors. It is a role the government has often played successfully in other sectors. There’s one fact in the new report that really jumps off the page: The federal government spends about $34 billion per year on R&D for health-related issues, but just $4.7 billion per year on energy-related R&D. Given that Americans spend some $1.3 trillion (about 9 percent of U.S. GDP) per year on energy, it makes sense for the federal government to make investments in developing new energy-related technologies.

Of course, this type of spending is anathema to conservatives and libertarians. And we understand why: It too often falls prey to special-interest manipulation in Congress. It also runs up against the inherent limitations of government expertise. For every success in government-sponsored innovation — and there are quite a few — there are numerous failures or middling results. For all of their clear-headedness on the need to reform the existing subsidy regime and their enthusiasm for a new strategy, the team behind “Beyond Boom and Bust” need to grapple harder with the difficulties that are inherent with any government-led research program.

#page#Further, it’s readily apparent that when it comes to existing renewable energy sources and most so-called “clean” options (electric cars, anyone?), the alternative-energy sector continues to lose out to hydrocarbons. And that’s been particularly true over the past two years or so as natural-gas prices have fallen. The reason why naturalgas is now selling for less than $2 per million BTU is that the drilling sector has out-innovated the renewable sector.

For all the buzz and hype about solar and wind energy of late, the harsh reality is that horizontal drilling and hydraulic fracturing — and the incremental gains that have been made in those technologies over the last few years — have resulted in a tidal wave of new natural-gas production that has forced the price down to the point where solar and wind cannot effectively compete. Other alternatives — whether algae biofuels, next-generation solar, or even modular nuclear reactors — now have an even steeper hill to climb to be competitive with fossil fuels in general, and natural gas in particular.

#ad#Among the key authors of the new report are the Breakthrough Institute’s Michael Shellenberger and Ted Nordhaus. The two — who are routinely vilified by the extreme Left — have long argued that the only way for alternative and renewable energy sources to compete is for those sources to be cheaper than hydrocarbons. As they pointed out back in 2009, the answer is not in carbon taxes or other measures that would make coal, oil, and natural gas more expensive, but in making “clean energy cheap.”

Now, we’re not convinced that this will happen any time soon, or even that it will happen at all. But in thinking outside the conventional boundaries of environmentalism and politics, the authors of “Beyond Boom and Bust” have staked out a new direction. Further, they’ve made an original and constructive contribution to the otherwise stale national energy debate. This is a conversation conservatives should welcome and join.

Robert Bryce is a senior fellow at the Manhattan Institute and author, most recently, of Power Hungry: The Myths of “Green” Energy and the Real Fuels of the Future. Steven Hayward is a resident scholar at the American Enterprise Institute, and the co-author, with Shellenberger, Nordhaus, and Mark Muro of the 2010 report, “Post-Partisan Power.”

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