Natural gas fracking well in Louisiana

Last week, the New York Times ran an article ("Future of Solar and Wind Power May Hinge on Federal Aid" by Kate Galbraith) discussing the reliance of solar and wind energy on federal subsidies. Bernard L. Weinstein, associate director of the Maguire Energy Institute at Cox School of Business, Southern Methodist University, wrote a letter critiquing these subsidies, advocating instead a policy to push for more oil and gas exploration, arguing they would require "no new subsidies."  The Institute was funded by Cary Maguire of the Maguire Oil Company and prepares students for jobs in the field.

The Times requested responses to the letter for their Sunday Dialogue yesterday.  Mine was not selected, but covers some points not raised in the letters that were.  It is reprinted below.

To the Editor:

Bernard Weinstein has concluded that the “renewable power industry has become addicted to federal subsidies and probably can’t stand on its own without them.”  After more than twenty years of tracking subsidies to energy both in the US and abroad, allow me to suggest that the addicts’ ward is overflowing.  The nuclear industry has been pushing for massive government subsidies for decades, and won’t build a new facility without them.  Arguments that somehow other countries know how to “do it right” are more often based on an incomplete understanding of foreign subsidies than to some miracle economic model.    

New petrol refinery?  Coal plant with carbon capture and sequestration?  Big subsidies also rule.   Liquid biofuels producers (still mostly corn ethanol) are addicts too.  They are fighting hard to keep expiring subsidies alive even though the Renewable Fuel Standard (forcing us to buy their products at above-market prices) will quickly pick up the slack.

Weinstein’s figures are also inaccurate.  He focuses only on tax breaks, though it is total subsidies through all mechanisms that distort energy markets and investment patterns.  Missing are the critical, and often enormous, subsidies that flow to various fuels through loan guarantees, royalty exemptions, liability caps, nationalized supply security or waste management obligations, purchase mandates, and subsidized government-owned energy enterprises.  Even his tax break tally is picked from problematic data from the Energy Information Administration (EIA).  EIA’s numbers have consistently been at the far low-end of subsidy reviews.  They miss many tax breaks of great benefit to the energy sector; and ignore quite large variance in the tax subsidies they do include.  Incorporating tax subsidy estimates from both of the federal sources (Joint Committee on Taxation and Treasury) rather than just Treasury, for example, would have boosted EIA’s 2007 total subsidy estimates by a third, and the share to oil and gas by nearly 125 percent.

Expand beyond just fiscal subsidies and Weinstein’s academic framing of the simplistic “drill, baby, drill” argument totally dissolves.  A recent analysis by economists Nicholas Muller, Robert Mendelsohn, and William Nordhaus estimated that petroleum-fired electric power generation caused gross external damages five times the industry’s value added.  Coal-fired power had damages more than twice its value added.  A Harvard Medical School study in February pegged the external damages from coal well above $100 billion per year.  Shortfalls in federal highway funding, which is supposed to be paid through taxes on (the mostly petroleum) motor fuels, were $70 billion in 2007 according to analysis by Pew’s Subsidyscope project.  That number alone far exceeds total energy subsidies reported by EIA; and at $700 billion over ten years would cover more than half the initial deficit reduction target for the Super Committee.

Price signals do need to play a much bigger role in energy markets, including renewables, if we are move towards a cleaner energy future in an economically-efficient way.  However, Weinstein’s selective and inaccurate vision of market reform is unlikely to take us in the right direction.


Doug Koplow
Earth Track, Inc.
Cambridge, MA 02140