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By Russ Finley on Feb 29, 2012 with 6 responses

Do Government Subsidies Ever Pay Off?

The answer largely depends on your definition of a subsidy and what you mean by payoff.

I’d suggest that many, if not most, subsidies are a roll of the dice (crap shoot) when it comes to the purported pay off. They are social experiments without any guarantee of success, which is not to say they should not be undertaken as long as a mechanism is in place to end the subsidy in a timely manner.

There are many examples that have paid off royally, along with many that were (and are) a waste of time and money to varying degrees.

Electric Vehicle Tax Credit

Obama’s latest idea, to increase the maximum federal income tax credit for electric vehicles from $7,500 to $10,000, certainly fits most definitions of a subsidy. The intended payoff is to kick-start an electric car industry for various reasons (job creation, oil import reduction, reelection). And of course, not everybody is happy about it. From Daily Tech:

However, many in Washington have expressed outrage over the tax credit, stating that sales of plug-in electric vehicles have not met specified goals and that it only provides an incentive for people who are already wealthy rather than giving a break to people in lower tax brackets.

I am hopeful that battery technology adequate for use in personal transport is finally on the cusp of mass-marketability. Let’s face it, the dominant battery technology in use today (lead-acid) powered WWI submarines. If these subsidies turn out to be just what the industry needs to get over that hump, great. And if the technology succeeds regardless of the subsidy, well, that happens sometimes also.

Ethanol, Wind, Solar Hot Water Heaters

We just witnessed the anticlimactic end of the “rob Peter to pay Paul” ethanol blenders’ credit. Next up is the wind energy credit. From Politico:

“Although the credit expires at the end of the year, advocates said the long time needed to plan, permit and construct wind projects means it is essentially expiring right now.”

A significant tax incentive way back during the Carter administration put solar hot water heaters on rooftops all over the country. A few years after the subsidy ended, there were rusting hulks on rooftops all over the country because there was no solar version of the Maytag repairman, and no replacement parts either. The industry failed to kick off in the time frame allocated by the subsidy. Was that technology not commercially viable or did the subsidy end too soon? Global warming wasn’t the concern. Energy independence was the big concern — as it still is — and never mind that we don’t heat water with oil (except in places like Hawaii).

Subsidies That Worked

So, you may be wondering, “Where are these examples that paid off royally?” My first examples are projects that were so capital intensive and technologically risky that private investors were hesitant to tackle them without government assist. Here’s an excerpt of a description of one I found on the internet:

“The project was developed despite seemingly insurmountable engineering, administrative, financial, and political challenges. The lessons learned during the design and construction …helped ensure the success of …projects throughout the world – projects that have benefited thousands of people …”

I’ll give you another hint. These projects have paid for themselves many times over and continue to provide gargantuan amounts of affordable, low emission electricity. Give up? The Hoover and Grand Coulee dams–economic stimulus packages writ large. My Leaf is mostly powered by precipitation stored by dams like these.

Ironically, the latest arguments that have been cobbled together by anti-nuclear activists (not a synonym for environmentalist–whatever that is) about the capital intensive nature of new nuclear power plants would have been applicable to these dam projects as well. And there were safety concerns:

“The Colorado River Board found the project feasible, but warned that should the dam fail, every downstream Colorado River community would be destroyed, and that the river might change course and empty into the Salton Sea.”

The real poster child for government subsidies that have paid off royally would have to be nuclear power plants, which provide three times more low-emission electricity than hydro does–without destroying river and desert ecosystems.

Capitalizing on Tax Credits

I have a long and sordid history of capitalizing on tax credits. We received a $3,000 credit when we bought our Prius back in 2006, even though we would have bought it anyway. In hindsight, because the commercial success of the Prius has little if anything to do with that tax credit, I would chalk that subsidy up as an example of one that did not pay off, or to be more exact, a subsidy that did nothing but move money from the public larder into the pockets of lucky citizens in the market for a hybrid at the time, oh, and also into the pockets of dealerships who didn’t have to dicker about price. Before the tax credit, supply was just barely keeping up with demand. After the credit, we all had to put $1,000 down and wait several months for one to arrive.

A few years ago I capitalized on a $1,800 tax credit to upgrade my twenty-year-old furnace to a 95 percent efficient one. Would I have upgraded any way? Probably not because of the expense and added complexity, but I was motivated to upgrade quickly because there was a one year window and I didn’t want the furnace to die the year after the credit expired. In hindsight I realized that this tax credit was, in reality, a carefully crafted means of prying money out of bank accounts into a sagging economy, not so much an attempt to reduce natural gas use.

As the owner of a 23 year-old Cherokee, I desperately wanted to take advantage of the cash for clunkers handout as well and would have done so had the Leaf been an option at the time. Speaking of which, we will soon receive a $7,500 rebate on the purchase of our Leaf (in addition to the $3,000 we did not pay in state sales taxes).

Add that up somebody. Was it worth it? I don’t know, but we sure use a lot less oil than we did five years ago.

Photo courtesy of 401K via Flickr.

  1. By Robert Rapier on March 1, 2012 at 1:34 pm

    You are right that “payoff” is in the eye of the beholder. The ethanol industry would argue that their subsidy has had a massive payoff. It created an ethanol industry that did not exist before. Whether that would be a viable industry minus the RFS is debatable though.

    RR 

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    • By Samuel R. Avro on March 1, 2012 at 1:54 pm

      Well the question in regards to the ethanol industry really comes down to: “How much oil is the industry displacing.” The simple fact that an industry exists because of a subsidy does not necessarily mean that taxpayers are receiving a good return on their money. The benefit would have to be to the economy (or national security, or whatever else benefits Joe the Taxpayer) rather than an ‘industry’.

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      • By Russ Finley on March 1, 2012 at 9:40 pm

        The benefit would have to be to the economy (or national security, or whatever else benefits Joe the Taxpayer) rather than an ‘industry’.

        Bingo. In a properly regulated free market economy, the consumer is king. Businesses compete for their dollars. Consumers pick the winners. When the government picks a winner for them, you have a distortion of the market that benefits business owners at the expense of the middle class. This has been going on for far too long. The American dream that our children will be able to rise up the economic ladder is fading.

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  2. By mac on March 1, 2012 at 3:04 pm

     

    Russ writes:

    A significant tax incentive way back during the Carter administration put solar hot water heaters on rooftops all over the country. A few years after the subsidy ended, there were rusting hulks on rooftops all over the country because there was no solar version of the Maytag repairman, and no replacement parts either. The industry failed to kick off in the time frame allocated by the subsidy. Was that technology not commercially viable or did the subsidy end too soon?

    ——————————————————————————————————-

    At the end of 2010 there were about 40 Gw of solar PV   installed world-wide versus 185 Gigawatts of solar hot water heaters.  

    It’s a big business world-wide.  Something like 30 million homes in China already……  A solar hot water heater only costs as little as 200 bucks in China.  With the yearly cost of $135 for electricity for  an electric hot water heater, it’s a no brainer.  After the initial  payback period, your hot water is essentially free.  

    Solar hot water is subsidized in most places but not all,  In  Israel, 90% of Israeli homes have solar hot water.  It’s not subsidized by the govt.   The same is true in Malta.

    Carter was on the right track,  just way ahead of his time.   Bush took down Carter’s old worn out solar hot water collectors and installed a little solar PV while he was in office.  By the way,  Bush has a geothermal heat pump at his ranch in Texas.  After all, Bush is the guy who informed us that  “America is addicted to oil.”

    Solar hot water heating is starting to catch on in Europe as is solar district heating.  The people who are the most guilty for this trend are probably the Austrians.  I guess they found out that evacuated tube solar collectors work just fine in Northern climates, even in winter.

    Last year about 35,000 solar hot water heaters were installed in the U.S.   Solar hot water heating didn’t die when Carter left office.  Solar thermal water heaters alone far outstrip the useful energy we get from solar PV —185 Gw to 40 Gw, and that 185 Gw doesn’t included the solar thermal being harnessed for district heating.

    ———————————————————————————————–

    The evacuated collector:

    HEAT IN COLDEST WEATHER

    All have the same basic design, a row of sunlight-capturing glass pipes angled below an insulated water tank.

    The key to the demand boom, even in the freezing northeast and chilly western deserts, is the vacuum separating the inner tube with its energy-trapping coating from an outer tube.

    Sunlight travels freely through the glass tubes but the heat it generates is trapped inside the central one where it can be transmitted to water.

    “The vacuum prevents molecules carrying heat away, as there is no direct contact between inner and outer tube,” Huang said.

    The heaters are also easier to produce than better known electricity-generating panels. Himin’s workers making these wear white overalls and hair caps, in rooms sealed to visitors. But downstairs, water-heaters roll off a production line in open warehouses filled with the clanging of giant metal presses, the roar of painting machines and open flame of glass-handlers.

    The relatively low-tech factory floor helps keep costs down to around US$120 to US$150 per square metre, well below the US$700 to US$800 charged for similar heaters in Europe.

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    http://www.planetark.org/dailynewsstory.cfm?newsid=36636

    http://www.treehugger.com/renewable-energy/almost-everyone-has-a-solar-water-heater-in-dezhou-china-video.html

    http://climatelab.org/Solar_Water_Heater_Industry_in_China

    http://www.ren21.net/REN21Activities/Publications/GlobalStatusReport/GSR2011/tabid/56142/Default.aspx

    http://www.ren21.net/REN21Activities/Publications/GlobalStatusReport/GSR2011/tabid/56142/Default.aspx

     

     

     

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    • By Russ Finley on March 1, 2012 at 7:26 pm

      Great comment and links, Mac.

      The tube collectors are a quiet revolution in hot water technology. And solar hot water is far more efficient at collecting energy. However, a home can only use so much hot water.

      They also still need significant amount of sunlight. Even tube collectors produce next to nothing in a Seattle winter, and more than you can use in the summer. The cost effectiveness of solar is highly location dependent.

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  3. By mac on March 1, 2012 at 8:52 pm

    Russ said:

    The tube collectors are a quiet revolution in hot water technology. And solar hot water is far more efficient at collecting energy. However, a home can only use so much hot water.

    They also still need significant amount of sunlight. Even tube collectors produce next to nothing in a Seattle winter, and more than you can use in the summer. The cost effectiveness of solar is highly location dependent.

    ————————————————————————————————————————-

    Solar hot water heaters produce no electricity,  They can’t provide electricity for your home or electrical energy for industry or even light a single streetlamp. 

    The statistic of 185 Gw of solar versus 40 Gw of solar PV is deceptive.  The 185 Gw of solar hot water does not contribute to the grid.   It falls into the category of “dedicated solar”  Yes, it reduces demand on the grid, but it provides nothing directly to the grid.

    As you say. many areas cannot benefit economically from solar hot water.  If solar hot water ever becomes widely popular in the U.S.,  it will no doubt be in the southern tier of States.

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