Emerging consensus on subsidy reform?

Written by dkoplow Posted: 01/12/2011 12:12 AM EST

The number of people calling for eliminating all subsidies to energy seems to be growing.

Jeffrey Leonard of the Global Environment Fund calls for it here in the Washington Monthly.

Amory Lovins of the Rocky Mountain Institute argues for it in the Weekly Standard

Ken Green of the American Enterprise Institute makes the pledge in Energy Biz.

And here's H. Sterling Burnett of the National Center for Policy Analysis making the same general point in the Energy Tribune

Some type of right-left political consensus that finally launches these things out the way 1986 tax reform

After 20 years working in this area, I'm not holding my breath.  Without structural changes that make all forms of government value transfer visible, political pork will continue to favor the powerful, using ever-more arcane, difficult-to-value mechanisms.  And even among these advocates, there are important differences in how they see the subsidy world.

Burnett argues subsidy elimination and a halt to carbon constraints in the same paragraph.  Yet the two are not substitutes.  Far from it.  Long-term economic efficiency requires four stages of corrections in energy prices that are largely additive.  First, eliminate fiscal subsidies in all their forms.  Second, ensure the sale of energy products is taxed at a level sufficient to fully cover any government-provided services linked to the fuel (e.g. user fees for roads, underground storage tank cleanups, oil spills).  They often do not.  Third, apply a sales tax on the actual product equal to that levied on other goods and services.  And finally, levy an additional charge to internalize fuel-related externalities.  Burnett's justification for halting carbon regulation is that carbon constraints would harm the economic recovery.  Yet why single out carbon?  Any policy that drives up costs can chill hiring and recovery, and it may be possible to structure carbon constraints in a way that make them less distortionary than many other policy constraints.  If the recession lingers due to slow labor recovery, for example, why not shift our entire reliance on labor taxes to fund social security to at least a partial reliance on carbon taxes as Germany has done?  Especially for lower skilled jobs, the elimination of FICA and medicare burdens on employers could accelerate hiring and send better signals for long-term energy investment.

Leonard flags tax subsidies as the largest source of support.  But this is likely an artifact of the particular study he relied on (see a critique here).  In fact, the most important form of support varies quite a bit depending on the fuel.  For renewables, tax breaks are king at the federal level, but purchase mandates are very important for liquid biofuels and for renewable electricity at the state-level.  For oil, leasing and oil security subsidies matter quite a bit in addition to generous tax breaks flowing to both domestic and foreign operations.  Nuclear subsidies are primarily through risk transfer -- not just accident liability risks, but also plant construction delays and long-term waste management.  He is wrong to describe existing nuclear as cheap because the costs have been "largely paid off".  They were largely written off, which is certainly not the same.  And the write-offs were at great expense to ratepayers and taxpayers alike.  True, the load factor improvements at the reactors has been a great success.  However, the current operating cost advantage he cites for nuclear versus coal and gas is not just a function of throughput; continuing operating subsidies remain quite important. 

The potential for agreement on broad-based subsidy reform is a positive sign.  But seeing these and other groups lobbying for subsidy removal even to the fuels they have traditionally supported would make me take the trend a whole lot more seriously.