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By Robert Rapier on Aug 5, 2008 with no responses

Taxes versus Subsidies

The RAND Corporation, a nonprofit research organization, has just issued a report comparing the effectiveness of fossil-fuel taxes versus renewable energy subsidies for increasing the usage of renewable energy:

Impacts on U.S. Energy Expenditures and Greenhouse-Gas Emissions of Increasing Renewable-Energy Use

From their concluding remarks:

Our analysis also indicated that increasing to 25 percent the share of renewables can significantly reduce CO2 emissions. However, the incremental increase in energy cost per unit of CO2 reduction varies widely depending on circumstances, reaching very high levels unless there is very substantial cost-reducing innovation in expanding renewables. Fossil-fuel prices that are higher than the baseline levels assumed in this analysis would induce greater use of renewable energy and thus reduce the incremental cost of achieving 25 percent renewable energy (thereby also lessening the need for setting this as a policy target). High fossil-fuel prices also improve the economics of other alternatives that can reduce GHG emissions and improve energy security, such as energy efficiency and unconventional energy sources.

The latest issue of Subsidy Watch also weighed in:

Rand Institute study favours fossil-fuel tax over renewable energy subsidies

A fossil-fuel tax would increase the cost of fossil fuels, making renewable energies more competitive; subsidies would lower renewable-fuel prices, allowing renewable energies to better compete with fossil fuels; while the revenue-neutral tax-and-subsidy mechanism splits the difference, using a fossil-fuel tax to fund renewable-energy subsidies.

Michael Toman, the study’s lead researcher, told a meeting of congressional staff on Capitol Hill that a fossil-fuel tax would encourage conservation, while also raising revenues which could be returned to the consumers to help offset higher fuel costs. In contrast, renewable energy subsidies shield consumers from real prices, giving them little incentive to conserve. Subsidies would also lead to an increase in government expenditures.

Their conclusion is the same as my oft-stated position: It makes more sense to raise fossil fuel taxes than to subsidize specific biofuels. The reason, as I have argued, is that subsidies attempt to pick technology winners. Taxes simply increase the cost of unsustainable fossil fuels and encourage competitors. In this manner, competitors can compete on a level playing field. A carbon tax should also minimize the kinds of political games we have seen where subsidies are denied for one biofuel and allowed for another.

Maybe the solution is not a biofuel at all. Maybe it is PHEVs powered by solar thermal electricity. But all alternatives are not treated the same with the current subsidy system we have in place.