Energy subsidies are measures that keep prices for consumers below market levels or for producers above market levels, or reduce costs for consumers and producers. Energy subsidies may be direct cash transfers to producers, consumers or related bodies, as well as indirect support mechanisms, as tax exemptions and rebates, price controls, trade restrictions, planning consent and limits on market access. They may include also energy conservation subsidies.
Main arguments for energy subsidies are:
Security of supply - subsidies are used to ensure adequate domestic supply by supporting indigenous fuel production in order to reduce import dependency, or supporting overseas activities of national energy companies.
Environmental improvement - subsidies are used to reduce pollution, including different emissions, and to fulfil international obligations (e.g. Kyoto Protocol).
Economic benefits - subsidies in the form of reduced prices are used to stimulate particular economic sectors or segments of the population, e.g. alleviating poverty and increasing access to energy in developing countries.
Employment and social benefits - subsidies are used to maintain employment, especially in periods of economic transition.
Main arguments against energy subsidies are:
Some energy subsidies counter the goal of sustainable development, as they may lead to higher consumption and waste, exacerbating the harmful effects of energy use on the environment, create a heavy burden on government finances and weaken the potential for economies to grow, undermine private and public investment in the energy sector.
Impede the expansion of distribution networks and the development of more environmentally benign energy technologies, and do not always help the people that need them most.
The study conducted by the World Bank finds that subsidies to the large commercial businesses that dominate the energy sector are not justified. However, under some circumstances it is reasonable to use subsidies to promote access to energy for the poorest households in developing countries. Energy subsidies should encourage access to the modern energy sources, not to cover operating costs of companies. The study conducted by the World Resource Institute finds that energy subsidies often go to capital intensive projects at the expense of smaller or distributed alternatives.
Types of energy subsidies are:
Direct financial transfers - grants to producers; grants to consumers; low-interest or preferential loans to producers.
Preferential tax treatments - rebates or exemption on royalties, duties, producer levies and tariffs; tax credit; accelerated depreciation allowances on energy supply equipment.
Trade restrictions - quota, technical restrictions and trade embargoes.
Energy-related services provided by government at less than full cost - direct investment in energy infrastructure; public research and development.
Regulation of the energy sector - demand guarantees and mandated deployment rates; price controls; market-access restrictions; preferential planning consent and controls over access to resources.
Failure to impose external costs - environmental externality costs; energy security risks and price volatility costs.
Depletion Allowance - allows a deduction from gross income of up to ~27% for the depletion of exhaustible resources (oil,gas,minerals).
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According to the Energy Information Administration, electricity production subsidies and support per unit of production (dollars per megawatt hour, MWh) in the U.S. vary greatly by fuel: electricity from coal (the fuel that produced the most electricity, 1,946 billion kilowatt hours, kWh, in FY 2007) got 0.44 dollars/MWh, while refined coal (72 billion kWh) got 29.81 dollars/MWh, solar (1 billion kWh) got 24.34 dollars/MWh, and wind (31 billion kWh) got 23.37 dollars/MWh.
Skeptics have sometimes dismissed clean energy technologies such as solar and wind power by arguing that these technologies "can't compete on price without public subsidies". However, the history of coal, oil, natural gas, and nuclear power shows that no energy sector was developed without subsidies.In the US, the federal government has paid US$74 billion for energy subsidies to support R&D for nuclear power and fossil fuels from 1973 to 2003. Nuclear power R&D alone accounted for nearly US$50 billion of this expenditure. During this same time frame, renewable energy technologies and energy efficiency received a total of US$26 billion. It has been suggested that a subsidy shift would help to level the playing field and support growing energy sectors, namely solar power, wind power, and biofuels.
Many energy analysts have suggested that energy subsidies need to be shifted away from mature and established industries and towards high growth clean energy. They also suggest that such subsidies need to be reliable, long-term and consistent, to avoid the periodic difficulties that the wind industry in the USA has had.
According to the OECD, subsidies supporting fossil fuels, particularly coal and oil, represent greater threats to the environment than subsidies to renewable energy. Subsidies to nuclear power contribute to unique environmental and safety issues, related mostly to the risk of high-level environmental damage. Subsidies to renewable energy are generally considered more environmentally beneficial, although the full range of environmental effects should to be taken into account. Moreover, Research by the Environmental Law Institute showed that from 2002 to 2008, the U.S. government provided about $72 billion in fossil fuel subsidies compared to $29 billion for renewables. Note that a big chunk of those renewable subsidies went toward the increasingly dubious investment in ethanol.) Most of the largest subsidies to fossil fuels were written into the U.S. Tax Code as permanent provisions. By comparison, many subsidies for renewables are time-limited initiatives implemented through energy bills, with expiration dates that limit their usefulness to the renewables industry.