In Depth: Grants

Federal funds may pay all or part of some private-sector energy-related activities, reducing the share of total costs borne by the private sector.  This reduces the cost structure for the subsidized industry, making it more difficult for unsubsidized industries to compete.  Grants may be in the form of cash outlays, or the provision of subsidized or free access to other federal resources.

Grants may be used to correct for past damages, either health or environmental.  Within the US, a clear example is payments to Black Lung victims by the Social Security Administration.  While government intervention in these areas is justifiable on moral grounds, it nonetheless confers a subsidy on the original industry (in this case coal) which benefited from lower production costs historically by ignoring worker health, and is now not fully compensating the victims.

The form of subsidy at least has the advantage of being visible and is usually easy to quantify.  This allows better decisions to be made about the returns on public funds.  Grant programs are often viewed narrowly as cash grants to private parties to in response to some proposal process.  We use a broader definition as any government spending for which full compensation from beneficiaries is not expected.  This includes a great deal of government agency spending.  Spending related to government-owned enterprises, as well as research and development expenditures are discussed separately.  Other common applications of direct spending are on market planning functions; and administrative, overhead, and regulatory costs.

Market Planning Functions

Markets react to uncertainty with suspicion by demanding higher returns, limiting investment, or simply steering clear of volatile markets with risky, uncertain returns.  Government intervention can reduce the risks of these volatile supply markets and informational uncertainty.  For example, information collected by the Energy Information Administration provides market information which helps industry players evaluate markets and investments.  In the absence of such government data efforts, obtaining similar market information could be done using investment or consulting firms, though the energy industry participants themselves would need to pay the bill.

Administrative, Overhead, and Regulatory Costs 

Overseeing federal programs in the energy sector also costs money.  Overhead, in the form of general physical plant and administrative expenses, are associated with every government activity.  It is appropriate to allocate these costs to particular fuels.  The easiest way to do so is to allocate the overhead on the same basis as the spending within the agency.  For example, if 10% of the US Department of Energy's total spending is on fusion research, 10% of the agency overhead would be allocated to fusion.  This approach assumes the same overhead intensity per dollar of budget, which may not be the case; it is, however, a useful first guess.

Allocating based on share of total spending may be less accurate than using an alternative basis, such as the number of people who must be overseen. However, given the available data, we view the use of share of spending as an acceptable estimate.  While probably somewhat inaccurate, the results will surely be better than not recognizing that a broader scope of activities necessitates growth at all levels of administration. 

Some federal spending in the energy sector may be better classified as "oversight" rather than "overhead."  Oversight of regulations, or of markets in general, can take the form of valuable government services which improve the efficiency of the overall marketplace.  Public health and safety regulations are examples of traditional government services.

However, even when the government service is clearly worth the cost, it may make more economic sense to fund the service with fees from the affected industry.  The cost of nuclear safety oversight provided by the Nuclear Regulatory Commission, for instance, is a government service which should be provided.  Nonetheless, it also reflects some of the risk associated with using nuclear power, risks that do not exist with other electricity-generation technologies.  It is therefore appropriate to include the cost of federal regulation associated with the energy sector. 

Critics may point out that the direct cost to develop and oversee regulations is a small portion of the cost that these regulations force the regulated entities to incur.  In theory, this point is correct.  The critical question revolves not around the presence of regulation, but around the efficiency of that regulation.  If done efficiently, regulations often lead to efficiency improvements in the broader economy.  The costs borne by the regulated entities are lower than the costs that had previously been borne by affected parties through the regulated activities (e.g., breathing in air pollution; increased risk of traffic accidents).

Adjusting Grant Subsidies for Revenues Received

Federal agencies sometimes receive money for particular activities.  A portion of their spending is classified as "Reimbursable Program," which means that they receive payment for that effort from other government agencies or private entities.  Costs of energy-related programs should be reduced to reflect these receipts, or other revenues received through user fees.  Where revenues are earned through the sale of products, care must be taken.  Deducting the sales of products from subsidy totals is not always appropriate.  For example, the Mineral Management Service collects royalty payments from federal oil and gas leases.  Deducting these receipts from operating costs would ignore the fact that the royalties are payment for a natural resource, independent from the cost of collecting royalties.  Were a private entity managing MMS, lease prices would have to cover the cost of managing the leases, plus an adequate return on the resource sale.