Arguments
Trump’s plan to bail out failing fossil fuels with taxpayer subsidies is perverse
Posted on 9 October 2017 by dana1981
The conservative philosophy of allowing an unregulated free market to operate unfettered often seems to fall by the wayside when the Republican Party’s industry allies are failing to compete in the marketplace. Trump’s Energy Secretary Rick Perry recently provided a stark example of this philosophical flexibility when he proposed to effectively pull the failing coal industry out of the marketplace and instead prop it up with taxpayer-funded subsidies.
Trump’s proposed coal bailout
The Trump administration has made no secret of its love for the coal industry. However, that industry has been losing badly in the free market, due largely to its inability to compete with cheaper natural gas and renewables. That was in fact the finding of Perry’s own Energy Department’s report, published just 3 months ago. The report also concluded:
Most of the common metrics for grid reliability suggest that the grid is in good shape despite the retirement of many baseload power plants … The power system is more reliable today due to better planning, market discipline, and better operating rules and standards
Perry’s new proposed rules directly contradict his department’s report, claiming “the resiliency of the electric grid is threatened by the premature retirements of these fuel-secure traditional baseload resources.” Perry tried to shift the goalposts from reliability to “resiliency” of the electric grid, essentially arguing that we need power plants that can store 90 days’ worth of fuel (i.e. huge piles of coal) to ensure that the grid remains “resilient.”
However, Perry also made the mistake of referencing the 2014 Polar Vortex to try and support this argument. The cold temperatures associated with that weather pattern caused electricity demand to spike, but as experts have noted, while wind energy produced above expectations during the Polar Vortex, coal power failed (emphasis added):
However, [Perry’s proposal] conveniently fails to mention that nearly 14 gigawatts (GW) of coal capacity was forced offline during the Polar Vortex, roughly 25 percent of all coal capacity in [the region]. 1.4 GW of nuclear was forced offline as well. Most of these generator outages were due to temperatures below the operating limit of power plant equipment ... Additional coal capacity was unavailable due to frozen coal piles.
Perry’s argument is so ludicrous that it bears repeating. He claims that we need to subsidize huge coal piles to ensure grid resiliency to extreme events like the Polar Vortex. But during the Polar Vortex, coal plants were shut down because they couldn’t operate at such low temperatures, and because their big coal piles were frozen. And this isn’t the only example of grid resiliency without coal – during Hurricane Harvey, coal piles were too wet to be transported to power plant boilers. During record heat waves this summer, California’s grid proved reliable as a result of factors like renewables and energy storage, not coal.
It’s abundantly clear that the Trump administration is looking for an excuse to prop up the failing coal industry, because they’ve made it a cog in their culture wars. And so Rick Perry ignored the findings of his own department’s grid reliability report and made up some nonsense about how we need huge piles of coal to justify giving the industry a bailout in the form of taxpayer-funded subsidies.
Big Oil is also dependent on taxpayer subsidies
Along similar lines, a new study published in Nature Energy found that at current oil prices of $50 per barrel, about half of not-yet-developed oil fields are only profitable if the industry receives subsidies to pay for them. Worse yet, the oil industry pockets most taxpayer subsidy dollars in the form of profits:
At the price of US$50 per barrel, we find that a bit more than half (53%) of subsidy value (in net present value terms) goes to projects that would have proceeded anyway. That fraction rises to nearly all (98%) of subsidy value at US$100 per barrel. As others have found, regardless of the oil price, the majority of taxpayer resources provided to the industry end up as company profits.
Oil would obviously only be extracted from a given field if doing so would yield a profit; otherwise it would stay in the ground until something changed to make its extraction profitable (like taxpayer subsidies or higher oil market prices).
To meet the Paris climate target, the US has a budget of 30 to 45 billion tons of carbon dioxide pollution allowed by 2050. At the current price of $50 per barrel, the oil industry subsidies would make an additional 17 billion barrels’ worth of oil reserves profitable, resulting in another 6 billion tons of carbon dioxide pollution. That would eat up 13 to 20% of America’s carbon budget.
Another report by Oil Change International found that American taxpayers are footing the bill for $20 billion in direct fossil fuel industry subsidies every year. That’s about $80 per year per American taxpayer.
Fossil fuel subsidies are perverse
The purpose of subsidies is to keep a product’s prices low and competitive, usually because it somehow benefits society. Some people object that renewables are subsidized, but at least they produce low-carbon energy that also result in cleaner air and water and improved public health. Those are clear societal benefits.
So what is the benefit of subsidizing coal and oil? They have been the dominant fuels for over a century; do they really still need taxpayer money to keep them competitive with newer, cleaner fuel sources and energy technologies? If they do (as the Trump administration admits is the case for coal), why should taxpayers continue to prop them up? The subsidies will help keep gasoline prices low, but only because Americans are paying for it up-front in the form of taxes.
They result in dirtier air and water, worse public health, increased mortality, and accelerated climate change, the latter of which results in additional taxpayer costs. America has been battered by those expensive climate costs over the past few months with numerous intensified hurricanes, floods, heatwaves, wildfires, and droughts. Those climate costs likely amount to several hundred dollars per American taxpayer per year. And as the Nature Energy study lead author Peter Erickson pointed out to me,
Nice article also in The Conversation
Really perverse.
Estimates of deaths per year in the US due to coal pollution range from 12,000 to 24,000. About 70,000 people actually have jobs mining coal.
Do the math. Five miners work for a year, and a person somewhere dies from coal pollution. One miner works for five years and someone else dies.
More disheartening news from the Trump Administration...
E.P.A. Announces Repeal of Major Obama-Era Carbon Emissions Rule by Lisa Friedman & Brad Plumer, Climate, New York Times, Oct 9, 2017
Frustrating, because the meme everywhere is that renewable energy is expensive and only possible due to subsidies, whereas globally the direct subsidies to fossil fuel are 5× larger. Total subsidization of fossil fuels tops Tr$5/year globally, as calculated by the "left-wing" IMF.
This is what happens when you fill government up with people who are ideologues, lawyers, financial people, etc with no technical or scientific knowledge or background. It all starts to go very wrong, and you see it right through the current American government administration.
Fossil fuels subsidies are called "crony capitalism" where I live. They are mostly just favours for lobby groups. There is no value to the public good, no real economic reason like correcting a market failure, and benefits dont outweigh costs.
The only exception might be help with high risk oil or coal exploration. However given climate change, its hard to see why you would subsidies new coal mines or oil exploration. Its not like we need more coal and oil fields.
In contrast it makes sense to subsidise renewables because the climate benefits would outweigh the cost of a small subsidy. It also helps new technology gain some presence and get across the line. It's normally only needed to help the industry get started and efficient, and then subsidies might be phased down.
Well I take some convincing that any subsidy is good idea. Scrap them all. It always involves governments picking winners and the opportunity for cronism or corruption. Better to cost carbon and let market work out best way forward on purely economic and technological grounds. For example, when you need need generation is say wind or solar best? Even if both are subsidized, it would be very hard to set a neutral subsidy on each and so that would always come into the investor equation, potentially on side of a solution that is not as good.
Recommended supplemental reading:
Friendly policies keep US oil and coal afloat far more than we thought by David Roberts, Energy & Environment, Vox, Oct 7, 2017
Scaddenp, subsidies and other government funding are a good idea when they promote a public good.
Examples: National electric grid, national highway system, the internet, etc.
Solar, wind, electric cars, and other clean technologies are also beneficial to the public (when compared to their competitors) and thus it is entirely reasonable to subsidize them.
Imagine, for example, if solar and coal power were equal in nameplate cost, reliability, and every other way... except for their environmental and health impacts (and all other options clearly inferior). Leaving it to the 'free market' with zero government interference would logically result in a roughly 50/50 split between the two. Providing a small subsidy to solar could instead result in nearly 100% solar power... and eliminate health and environmental costs from coal vastly greater than the subsidy.
Nigelj@5:
I'm pretty sure that Neil deGrasse Tyson agrees with what you said in your first paragraph and so do I. We really need leaders and decision makers with a better understanding of the physical world, the scientific method and logical thinking in general!
Scaddenp @6
I think your criticisms of subsidies are reasonable. You do get meddling politicians.
But I think subsidies still have their uses. As pointed out you could regard pretty essential public services and infrastructure grids as effectively a type of subsidy, and it would be strange to say this is inherently wrong.
A carbon price is indeed required but I suspect it would have to be set very high to trigger the development of renewable energy. A small subsidy has already caused quite rapid deployment if wind power in various countries.
And various forms of fee and dividend scheme effectively set a carbon price and allow a subsidy in the same package.
I think it comes down to identifying a good set of principles on subsidies and ideally letting some ageny decide, rather than politicians directly, and also have time limits. I'm pretty sure Singapore, Taiwan and Malaysia have done it like this quite effectively to encourage new industries.
I also don't think its enough to just talk about the public good. It needs to be for the public good, benefits have to outweigh costs, and it has to do something that the free market is poor at doing, and this is the key to it.
A classic example is research. Free markets are not so great at pure science research and my country has a subsidy for this. We actually got rid of most subsidies because they were just senseless favous to industry, but kept some for cases that passed a more objective test.
And another example is new high technology based companies often have a hard time getting traction and face huge sometimes unfair competition or trouble getting capital in smaller countries. A subsidy is used in my country to help them get started, and also to help small business get started. Obviously renewable energy fits this sort of category.
NASA and the space programme is publicly funded. It would never have existed if left to the free market. But that is not to say private enterprise should not now have a role in matters like this.
CBDunkerson - I have no problem with government funding services (even power generation) but I do have a problem with how that funding is done and how a government intervenes.
In your example where coal and solar are an even call when coal is not paying for externalities, the obvious way to fix is by government intervening with a carbon tax so external costs are reflected in coal price. Government is acting against coal in the public good. However, it is not making any choices about which competing technology is better. It doesnt favour solar over wind, hydro or nuclear. Each have their problems and costs and I dont think the government should be trying decide which is best. Competition will improve all those technologies.
I do see a role for government however in supporting fundamental research underpinning improvements in technology. (eg new forms of solar PV, replacements for rare earths in turbine manufacture, ways to reduce degradation on tidal turbines etc).
While provision of an electricity grid could be regarded as a subsidy, the grid is something can be used by any generator. Ideally, the government funds it, but competitive tender decide the builders and operators. In many countries, government see it as their role to build the highways but not build the railways. Without a mechanism to ensure road users pay for the roads, you have even an indirect subsidy potentially distorting the best way to do long distance transport.
Scaddnp @11
You sure hate those subsidies!
I think we need a carbon tax in addition to subsidies, preferably the tax and dividend aproach that returns at least part of it to consumers rather than a black hole of funding government deficits.
But your problem is only a quite a steep carbon tax would impel development of renewable energy. A carbon tax would logically be introduced gradually so might take a long time to cause significant uptake of renewable energy. I dont have the hard maths and numbers to prove this or the time to research it, but my instincts tell me this strongly. We do know a relatively small subsidy has already worked in Britian and Europe, to get wind power going quite well.
And yes there are problems with government picking winners, and getting it wrong or making biased decisions, especially at the scale of specific companies. But why not just have an exactly equal subsidy for renewables, hydro and nuclear? Just only exclude subsidies of coal, which we are clear is a definitly not wanted.
it is not clear to me why you think a carbon tax is less of incentive to renewables that subsidy. You get uptake of renewable because it is perceived to be cheaper. A carbon tax achieves the very same thing. I dont see why it needs to be "steep" to change the differential in pricing. From what I have been read, remove direct subsides on development of new FF is generally enough to ensure that renewables are a cheaper option. Furthermore, if you are distributed even part of the carbon tax back on a per capita basis, then users who switch to renewables get a/ power that is cheaper than coal power b/ an income from those that still paying carbon tax. Looks like a good incentive to me. Seems a better psychological win that just getting back some of your tax by using subsidized power. You are avoiding a tax in first place and screwing over the evil ones burning coal.
I think a truly equal subsidy is very hard to do. Solar, wind, nuclear are very different in terms of material used, energy return on energy invested, land area consumed etc.
Scaddenp @13, I understand where you are coming from and totally respect your views. I do think a carbon tax or fee directly on fossil fuel companies would encourage renewables eventually, as it would push up the price of oil and coal etc and make renewables more attractive.
But theres a problem or two. The sorts of prices on carbon I have seen are moderate to be politically acceptable, and I just think electricity generators might be inclined to suck up these costs, rather than choose renewable energy. Or they may be inclined to try to pass them onto consumers.
'Eventually' the tax would be ramped up high enough to force change and renewable energy, but this could take some significant time, that is the problem, and its a big problem. In comparison subsidies can be at virtually any level immediately, and have been quite immediate in their effect.
The tax or fee should be at least partly returned to consumers. But this would go presumably mainly into buying an electric car or more fuel efficient car etc, or could be more petrol, and neither actually encourage renewable energy as such. It would only encourage electric cars.
I dont see why an equal subsidy on different electricity sources is so hard. Why not just on megawatts generated? Then its all equal and market forces can pick the best alternative as you alluded to I think.
The other alternative is to just mandate by law that generators do renewable energy. However that is quite heavy handed.
Even $15/ton is pretty big cost to swallow and "pass it on to the consumer" is exactly the effect it is supposed to have - confront the consumer with real price of electricity so they go source from a renewable suppliable - including putting solar panels on your roof.
If you spend your tax credit buying FF energy, then you are just paying the tax. Neutral position. If you arent paying a carbon tax, then the money returned is real increase in your spending power.
Does say a subsidy of 2c/kWh on wind power (paid to generator), exactly equal a 2c/kWh bonus on the price paid to solar rooftop owners for electricity paid back to the grid? If you are offgrid, (or generating as much as you use), then you get no subsidy. I think it is complicated.
Every objection raised to subsidies in this discussion is equally applicable to taxes (e.g. carbon tax). Both are subject to potential abuse by politicians and corporate owners... see, for example, Trump's expected import tax on solar panels.
Whether the government assists an industry by providing them with money or taxing their competitors the potential positive and negative results are the same. For that matter, fee and dividend is both a tax AND a subsidy.
The debates about taxes and subsidies in this string, and in general, commonly spin endlessly because they miss a major consideration ... the Objective! CBDunkerson@8 opened with that key point.
"... subsidies and other government funding are a good idea when they promote a public good."
What I would add is the criteria for determining the 'public good'. The term 'public good' is used a lot but seems to be very open to interpretation.
I consider the Sustainable Development Goals published in 2015 by the UN to be the best compilation of criteria for the 'public good'. It is a very detailed and robustly based set of criteria that are open to improvement 'if a Good Reason for the improvement with a Solid Basis' is developed/presented.
Using that Objective Reality as the basis for determining the Public Good, rather than leaving the term open to everyones' subjective reality (personal interest) potentially contradictory to the objective reality (public interest), it becomes very apparant that the Trump Administration and many other 'supposed leaders/winners in the USA and elsewhere' are up to No Good because they can get away with benefiting from that understandably less acceptable behaviour.