What Would Jefferson Do? - The Historical Role of Federal Subsidies in Shaping America's Energy Future
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What Would Jefferson Do? The Historical Role of Federal Subsidies in Shaping America’s Energy Future by Nancy Pfund and Ben Healey september 2011
About the Authors: Nancy Pfund is a Managing Partner of DBL Ben Healey is a joint degree (MBA/MEM) grad- Investors, a “double bottom line” venture capital uate student at Yale University, studying at both firm based in San Francisco, CA. DBL’s strategy the School of Management and the School of is to invest in companies that can deliver top-tier Forestry and Environmental Studies. Prior to grad venture capital returns while working with its school, Mr. Healey worked as the Staff Director portfolio companies to enable social, environmen- to the Committee on Environment and Natural tal and economic improvement in the regions in Resources in the Massachusetts legislature, where which they operate. Ms. Pfund currently sponsors he served as lead staffer for the Committee in or sits on the board of directors of a number of helping to pass the Commonwealth’s Green Jobs private companies, including Primus Power, Eco- Act. Mr. Healey is also a graduate of Yale College Logic, SolarCity, Solaria, OPXBIO, and Bright- and a former member of the New Haven Board source Energy. Ms. Pfund also worked closely of Aldermen. Mr. Healey lives in New Haven, CT with exited portfolio company Tesla Motors. and can be reached at benjamin.healey@yale.edu. Previously, Ms. Pfund was a Managing Director at JPMorgan. Ms. Pfund joined JPMorgan (then Hambrecht & Quist) in 1984 as a securities ana- lyst and later joined its venture capital department as principal and then Managing Director in 1989. In addition to her private equity responsibilities, Ms. Pfund also built and directed H&Q’s external affairs and philanthropic programs from 1996 to 2001. Ms. Pfund speaks frequently on subjects re- lating to environmental investing, environmental policy, and mission-related investing. Ms. Pfund received her BA and MA in anthropology from Stanford University, and her MBA from the Yale School of Management and can be reached at nancy@dblinvestors.com. what would jefferson do? - pfund and healey, september 2011 dbl investors 2
Acknowledgements The authors wish to thank the following individuals for giving us access to their research and data, as well as invaluable guidance throughout the process of writing this paper. They deserve much credit for our ability to analyze the historical data effectively, but no blame for anything we’ve gotten wrong: Jordan Diamond, Environmental Law Institute Marshall Goldberg, MRG Associates Mona Hymel, University of Arizona James E. Rogers College of Law Doug Koplow, Earth Track Molly Sherlock, Congressional Research Service Eric Toder, Urban Institute-Brookings Institution Tax Policy Center what would jefferson do? - pfund and healey, september 2011 dbl investors 3
Table of Contents
i. Executive Summary 6
ii. Introduction 8
iii. Timber & Coal in the 19th Century 11
iv. Categorization of 20th Century Subsidies 15
v. Key Historical Subsidies by Sector 18
vi. Findings and Analysis 26
vii. Discussion—Subsidizing Apple Pie:
Are the Slices Getting Smaller? 31
viii. Conclusion—In Energy We Trust 33
ix. Appendix: Data Sources 35
what would jefferson do? - pfund and healey, september 2011 dbl investors 4Some argue that the consumer can purchase warmth or work or mobility at less cost by means of coal or oil or nuclear energy than by means of sunshine or wind or biomass. The argument concludes that this fact, in and of itself, relegates renewable energy resources to a small place in the national energy budget. The argument would be valid if energy prices were set in perfectly competitive markets. They are not. The costs of energy production have been underwritten unevenly among energy resources by the Federal Government. — August 1981 report of the DOE Battelle Pacific Northwest National Laboratory what would jefferson do? - pfund and healey, september 2011 dbl investors 5
Executive Summary
This paper frames the ongoing debate about the - As a percentage of inflation-adjusted federal
appropriate size and scope of federal subsidies spending, nuclear subsidies accounted for more
to the energy sector within the rich historical than 1% of the federal budget over their first
context of U.S. energy transitions, in order to help 15 years, and oil and gas subsidies made up half
illuminate how current energy subsidies compare a percent of the total budget, while renewa-
to past government support for the sector. From bles have constituted only about a tenth of a
land grants for timber and coal in the 1800s to percent. That is to say, the federal commitment
tax expenditures for oil and gas in the early 20th to O&G was five times greater than the federal
century, from federal investment in hydroelectric commitment to renewables during the first 15
power to research and development funding for years of each subsidies’ life, and it was more
nuclear energy and today’s incentives for alterna- than 10 times greater for nuclear.
tive energy sources, America’s support for energy
innovation has helped drive our country’s growth - In inflation-adjusted dollars, nuclear spending
for more than 200 years. averaged $3.3 billion over the first 15 years of
subsidy life, and O&G subsidies averaged $1.8
Using data culled from the academic literature, billion, while renewables averaged less than
government documents, and NGO sources, in this $0.4 billion.
paper we examine the extent of federal support (as
well as support from the various states in pre-Civ- The charts below clearly demonstrate that federal
il War America) for emerging energy technolo- incentives for early fossil fuel production and the
gies in their early days. We then analyze discrete nascent nuclear industry were much more robust
periods in history when the federal government than the support provided to renewables today.
enacted specific subsidies. While other scholars
have suggested that the scope of earlier subsidies
was quite large, we are—as far as we know—the
first to quantify exactly how the current federal
commitment to renewables compares to support
for earlier energy transitions. Our findings suggest
that current renewable energy subsidies do not
constitute an over-subsidized outlier when com-
pared to the historical norm for emerging sources
of energy. For example:
what would jefferson do? - pfund and healey, september 2011 dbl investors executive summary 6during the first 15 years of each subsidies’ life, and it was more than 10 times greater for nuclear.
- In inflation-adjusted dollars, nuclear spending averaged $3.3 billion over the first 15 years of subsidy
life, and O&G subsidies averaged $1.8 billion, while renewables averaged less than $0.4 billion.
The charts below clearly demonstrate that federal incentives for early fossil fuel production and the
nascent nuclear industry were much more robust than the support provided to renewables today.
Historical Average of Annual Energy Subsidies:
Historical
A Century of Federal Average of Annual Energy Subsidies:
Support
A Century of Federal Support
6
5
4
2010$,
3
billions
$4.86
2
$3.50
1
$1.08
$0.37
0
O&G, 1918-2009 Nuclear, 1947-1999 Biofuels, 1980-2009 Renewables, 1994-2009
Executive Summary
6
What Would Jefferson Do - Pfund and Healey, August 2011
Comparative Energy Subsidy Trends
Comparative Energy Subsidy Trends
7
6
5
4
2010$,
billions
3
2
1
Renewables trendline based on
first 15 years of subsidy life
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Year of Subsidy Life
Energy Subsidies as Percentage of Federal Budget
0.25
0.20
what would jefferson do? - pfund and healey, september 2011 dbl investors executive summary 7
0.151
Renewables trendline based on
first 15 years of subsidy life
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Year of Subsidy Life
Energy Subsidies as Percentage of Federal Budget
Energy Subsidies as Percentage of Federal Budget
0.25
0.20
0.15
O&G
Nuclear
0.10 Biofuels
Renewables
0.05
0.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Years of Susbsidy Life (Year 1 equivalent to inflation-adjusted 1918 Federal Budget)
7
What Would Jefferson Do - Pfund and Healey, August 2011
what would jefferson do? - pfund and healey, september 2011 dbl investors executive summary 8Introduction
Over the course of decades, contentious debates In 1950 and 1951, Congress increased a number
have raged in Washington, DC about the ap- of taxes to pay for the United States’ entry into
Introduction
propriate size and scope of federal subsidies to the Korean War. With prevailing 1951 mar-
the energy
Over sector,ofincluding
the course decades,support for both
contentious ginal income
debates have raged tax rates DC
in Washington, ranging
aboutuptheto appropriate
a high of 91
traditional fossil fuel industries and the emerging percent and capital gains tax
size and scope of federal subsidies to the energy sector, including support for both traditional rates at 25 fossil
percentfuel
renewable energy sector. Certainly, a quick survey regardless of income, the reclassification
industries and the emerging renewable energy sector. Certainly, a quick survey of existing subsidies was
of existing subsidies
demonstrates demonstrates
that critics thatof
have plenty critics have reasons
legitimate primarily adoptedTake
to complain. to insulate certain
the capital owners of
gains
treatment of royalties on coal as an example.
plenty of legitimate reasons to complain. Take the This subsidy allows owners of coal mining rights
coal mining rights from high marginal income to
reclassify income
capital gains traditionally
treatment subject
of royalties to the
on coal income taxtax
as an as rates
royalty
… payments, therebyadditional
thus encouraging allowing produc-
owners
to pay a reduced tax rate:
example. This subsidy allows owners of coal min- tion. Since then, both income and capital gains tax
ing rights to reclassify income traditionally subject rates for individuals have fallen, and the capital
In 1950 and 1951, Congress increased a number of taxes to pay for the United States’ entry into
to the income tax asWar.
the Korean royalty
Withpayments, thereby
prevailing 1951 gains
marginal income taxtax rateranging
rates for individual owners
up to a high of 91currently
allowingpercent
ownersandto pay a reduced tax rate: stands at 15 percent. However, the credit
capital gains tax rates at 25 percent regardless of income, the reclassification was is still
primarily adopted to insulate certain owners of coalavailable
mining rights from highofmarginal
to members the coalincome tax1
industry.
rates … thus encouraging additional production. Since then, both income and capital gains tax
rates for individuals have fallen, and the capital gains tax rate for individual owners currently
1
stands at 15 percent. However, the credit is still available to members of the coal industry.
This subsidy totaled well over $1.3 billion in government tax expenditures from 2000 – 2009:
This subsidy totaled well over $1.3 billion in government tax expenditures from 2000 – 2009:
Cumulative Capital Gains Treatment of Royalties on Coal, 2000 – 2009
(2010$, billions) Cumulative Capital Gains Treatment of Royalties on Coal, 2000 - 2009
(2010$, billions)
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Joint Committee on Taxation
Source: Joint Committee on Taxation
True, this Korean War-era tax break seems grossly out of place in the 21st century, but not all subsidies
are created equal. Historically, policymakers have justified intervention in energy markets “1) to
promote a new technology during the early developmental stages and 2) to pay the difference between
1D
the value of an activity to the private sector and its value to the public sector.”2 Thus,
avid Sher, Environmental and Energy Study Institute, “Fossil Fuel Subsidies: A Closer Look at Tax Breaks, Special Accounting, and
it is worth
Societal Costs” (June 2011).
evaluating our current energy subsidies through a longer historical lens, so that we can better
understand how current incentives compare to past government support for the energy sector.
1
what would jefferson do? - pfund and healey, september 2011
David Sher, Environmental and Energy Study Institute, dbl investors
“Fossil Breaks, Special 9
Fuel Subsidies: A Closer Look at Tax introduction
Accounting, and Societal Costs” (June 2011).
2
Mona Hymel, Arizona Legal Studies Discussion Paper No. 06-15, “Americans and Their ‘Wheels’: A Tax Policy forTrue, this Korean War-era tax break seems grossly between the value of an activity to the private
out of place in the 21st century, but not all subsi- sector and its value to the public sector.”2 Thus, it
dies are created equal. Historically, policymakers is worth evaluating our current energy subsidies
have justified intervention in energy markets “1) through a longer historical lens, so that we can
to promote a new technology during the early better understand how current incentives compare
developmental stages and 2) to pay the difference to past government support for the energy sector.
U.S. Growth and Historical Energy Transitions
U.S. Growth and Historical Energy Transitions
Primary U.S. Energy Consumption
Primary U.S. Energy Consumption
45
40
35
Petroleum
30 Natural Gas
Coal
25 Nuclear
Quadrillion
BTUs Hydro
20 Wood
Biofuels
15
Geothermal
Solar
10
Wind
5
0
1897
1996
1645
1654
1663
1672
1681
1690
1699
1708
1717
1726
1735
1744
1753
1762
1771
1780
1789
1798
1807
1816
1825
1834
1843
1852
1861
1870
1879
1888
1906
1915
1924
1933
1942
1951
1960
1969
1978
1987
2005
Source: Energy Information Administration
Source: Energy Information Administration
We can read the history of the United States—our country’s geographic and economic expansion—
through the history of our energy production and consumption. Through war and peace, through
westward expansion and our rise to economic and military superpower status, we find that energy
transitions fueled it all. Wood and small hydro powered our country’s early, rural days. As cities
expanded, railroads crisscrossed the nation, and the Industrial Revolution took hold, coal dominated.
With the invention and improvement of the internal combustion engine, oil catapulted into our
preeminent fuel. Large hydro became a reality thanks to Depression-era initiatives that have continued
to drive economic development programs across the country decades later, followed by nuclear power
on the heels of World War II. And today, in pursuit of greater energy security, enhanced environmental
quality and economic growth on a globalized playing field, renewable energy sources are transitioning
from the margins to the mainstream. As the chart below starkly illuminates, our wealth and our energy
usage are intimately intertwined.
2 Mona Hymel, Arizona Legal Studies Discussion Paper No. 06-15, “Americans and Their ‘Wheels’: A Tax Policy for Sustainable Mobility” (February 2006).
Primary U.S. Energy Consumption vs. GDP
120 $16,000
what would jefferson do? - pfund and healey, september 2011 dbl investors $14,000
introduction 10
100
$12,000
80U.S. Growth and Historical Energy Transitions
Primary U.S. Energy Consumption
We can read the history of the United States—
45
field, renewable energy sources are transitioning
our country’s geographic
40 and economic expan- from the margins to the mainstream. As the chart
sion—through 35the history of our energy produc- below starkly illuminates, our wealth and our
tion and consumption. Through war and peace, energy usage are intimately intertwined.
Petroleum
Natural Gas
30
through westward expansion and our rise to Coal
economicQuadrillion
and military superpower status, we find
25
Energy innovation has drivenNuclear America’s growth
Hydro
BTUs
that energy transitions fueled it all. Wood and
20 since before the 13 colonies came Wood together to
small hydro powered 15 our country’s early, rural form the United States, and government
Biofuels
Geothermal
support
days. As cities expanded,
10
railroads crisscrossed has driven that innovation forSolar nearly as long. In
the nation, and the Industrial Revolution took this paper, we identify specific government inter-
Wind
5
hold, coal dominated. With the invention and ventions in the energy sector during moments of
improvement of0 the internal combustion engine, transition, and we attempt to quantify that sup-
1897
1996
1645
1654
1663
1672
1681
1690
1699
1708
1717
1726
1735
1744
1753
1762
1771
1780
1789
1798
1807
1816
1825
1834
1843
1852
1861
1870
1879
1888
1906
1915
1924
1933
1942
1951
1960
1969
1978
1987
2005
oil catapulted into our preeminent fuel. Large port in order to compare it to current support for
Source: Energy Information Administration
hydro became a reality thanks to Depression-era emerging renewable sources of energy. Although
We initiatives
can read thethathistory
have continued to drive
of the United economiccountry’s
States—our most of our quantitative
geographic and economic analysis focuses on
expansion—
development
through the history programs across the
of our energy country decades
production federalThrough
and consumption. support,war
it isand
important to note that states
peace, through
westward expansion
later, followed and ourpower
by nuclear rise toon
economic
the heelsandof military have
superpower status, we
also contributed to find that energy
the American energy
transitions fueled it all. Wood and small
World War II. And today, in pursuit of greater hydro powered our country’s early, rural days. As cities
narrative throughout our history, from the sup-
expanded, railroads crisscrossed the nation,
energy security, enhanced environmental quality and the Industrial
portRevolution took
of coal in the hold,
19th coal dominated.
century to incentives for
With the invention and improvement
and economic growth on a globalized playing of the internal combustion
renewable energy production into
engine, oil catapulted 200 our years later, and
preeminent fuel. Large hydro became a reality thanks to Depression-era initiatives that have continued
we will not ignore the role of the various states in
to drive economic development programs across the country decades later, followed by nuclear power
on the heels of World War II. And today, in pursuit of greater theenergy
discussion that follows.
security, enhanced environmental
quality and economic growth on a globalized playing field, renewable energy sources are transitioning
from the margins to the mainstream. As the chart below starkly illuminates, our wealth and our energy
usage are intimately intertwined.
Primary U.S. Energy Consumption vs. GDP
Primary U.S. Energy Consumption vs. GDP
120 $16,000
$14,000
100
$12,000
80
$10,000
Quadrillion
60 $8,000
BTUs
$6,000
40
$4,000
20
$2,000
0 $0
1690
1753
1852
1645
1654
1663
1672
1681
1699
1708
1717
1726
1735
1744
1762
1771
1780
1789
1798
1807
1816
1825
1834
1843
1861
1870
1879
1888
1897
1906
1915
1924
1933
1942
1951
1960
1969
1978
1987
1996
2005
Total Energy Consumption Real GDP (2010 $B)
Source: Energy Information Administration and MeasuringWorth
Source: Energy Information Administration and MeasuringWorth
9
What Would Jefferson Do - Pfund and Healey, August 2011
what would jefferson do? - pfund and healey, september 2011 dbl investors introduction 11Overall, what we find, in contrast to much of today’s headline-grabbing rhetoric, is that today’s govern-
ment incentives for renewable energy pale in comparison to the kind of support afforded emerging fuels
during previous energy transitions.
Look back to the 1700s: From Battelle National Lab – “The first
recorded commercial coal transaction in the
United States was a 32-ton shipment from
the James River district in Virginia to New
York in 1758.”3
…Into the 1800s: From Stanford’s Center for International Se-
curity and Cooperation – “As a pamphleteer
wrote in 1860, a year after Uncle Billy Smith
struck oil at Oil Creek in Titusville, Penn-
sylvania, ‘Rock oil emits a dainty light, the
brightest and yet the cheapest in the world;
a light fit for Kings and Royalists and not
unsuitable for Republicans and Democrats.’”4
From the Renewable Energy Policy Project –
“The first attempt to transport natural gas on
a large scale was in Rochester, New York in
1870. A 25-mile line was constructed of hol-
lowed pine logs. It was a failure.”5
…Through the 1900s: From Greenpeace – “In December, 1953,
President Eisenhower inaugurated an ‘Atoms
for Peace’ [nuclear energy] program that…
would ultimately swallow the lion’s share of
federal dollars for energy research.”6
3 R.J. Cole, et. al., DOE Battelle Pacific Northwest Laboratory, “An Analysis of Federal Incentives Used to Stimulate Energy Consumption” (August 1981).
4 Richard Rhodes, Stanford University Center for International Security and Cooperation, “Energy Transitions: A Curious History”
(September 19, 2007). Rhodes is a Pulitzer Prize-winning journalist and historian.
5 Marshall Goldberg, Renewable Energy Policy Project, “Federal Energy Subsidies: Not All Technologies are Created Equal” (July 2000).
6 Komanoff Energy Associates, Greenpeace, “Fiscal Fission: The Economic Failure of Nuclear Power” (December 1992).
what would jefferson do? - pfund and healey, september 2011 dbl investors introduction 12Timber and Coal
in the 19th Century
Although we think of today’s subsidies in terms land grants subsidized the use of timber, and that
of tax policy, government research and develop- only half of that amount was actually for energy
ment initiatives, or direct spending on behalf of an purposes, still it would amount to about a 25
industry, the 19th century had its own vehicle of billion-dollar a year energy subsidy, as an equiva-
public support: land. From the Preemption Act of lent percentage of today’s federal budgets. This
1841 to the Homestead Act of 1862 to the Tim- estimate does not even include indirect support
ber and Stone Act of 1878, it was official policy for the timber industry though land grants to the
of the early U.S. government to make land grants railroads: “As early as the mid-nineteenth century,
to its citizens at below-market prices in order to logging operations were highly capital intensive,
encourage settlement, expansion, and economic requiring spur railroad lines and other equipment
development. Rather than actual land, though, to handle the huge logs of the virgin forests. 8”
government policy took the form of distribut-
ing warrants for land ownership, which industry
representatives often purchased at a discount. Ac- A Native American Approach to Subsidies:
cording to one historian:
Indeed, the notion of awarding special control over
he land, including natural resources, constituted an
T key natural resources to those considered best
enormous stock of assets available for transfer. As positioned to develop them was not true solely of
a rough estimate of the order of magnitude, the land western expansionists: several Native American
transfers were tantamount to an annual deficit of traditions restrict tribal access to key plants and
about 30 percent of the latter 19th century annual trees used in basket-making to selected apprentices
federal budgets. [In total,] over 13.5 million acres of and allow only certain elders and other respected
timber land was alienated, amounting to four-fifths of elites to actually make the baskets. One might con-
the forest domain.7 sider this role the “oil refining” of this particular
natural supply chain.9
Of course, it would be inappropriate to consider
these land grants as subsidies solely to the tim-
ber industry in and of itself. If we conservatively
estimate, however, that only 5% of these massive
7 Fred E. Foldvary, Southern Economic Association Meetings, “Ground Rent Seeking in U.S. Economic History” (November 21, 1997).
Foldvary is a lecturer in economics at Santa Clara University.
8 Gary D. Libecap and Ronald N. Johnson, The Journal of Economic History Vol. 39, No. 1, “Property Rights, Nineteenth-Century Federal Timber Policy, and the
Conservation Movement” (March 1979).
9 Lois Conner (Yokuts basketmaker) and Ruby Pomona (Mono Elder) presentation on June 7, 2011 at the “Trails of Fire: Signatures of Cultural and Environmental
Transformations on the American and Australian Frontiers,” conference at Stanford University held June 6-9, 2011.
what would jefferson do? - pfund and healey, september 2011 dbl investors timber and coal in the 19th century 13al level, in the late 1700s, Congress enacted a protective tariff, one of a number of early
onomic legislation that has left an import/export tension embedded in American economic
s day: Early support for coal did not lag far behind timber: Pennsylvania, “State officials exempted anthracite
from taxation, provided incentives for smelters
is extremely bulky,Each
making it expensive to transport. In the colonial
state had its own energy policy—which, taken era, British to promote its use, and publicized its advantages
merchants
transported coal totogether,
Americancreated
ports free-of-charge as ballastand
a highly fragmented for some-
ships. The first federal
withintariff
and outside the state.” Even more impor-
mported coal dated from 1789 … *and until 1842] the tariff remained at least 10 percent the
what than
e of foreign coal—more chaotic regulatory
enough to giveregime that
domestic encouraged
producers tant than
a major cost advantage.
11 the industry’s exemption from taxation
the production and consumption of vast quantities was the state’s use of corporate charters to encour-
tection was critical in the coal industry’s early days, but
of coal. Nature made coal abundant; public policy the real action age
was at new production:
the state level.
scovery of anthracite
madeinitPennsylvania,
cheap. 10 “State officials exempted anthracite from taxation,
centives for smelters to promote its use, and publicized its advantages within and outside the
The Pennsylvania legislature carefully regulated the
more important than the industry’s exemption from taxation was the state’s use of
At the federal level, in the late 1700s, Congress granting of corporate charters. To promote corpo-
harters to encourage new production:
enacted a protective tariff, one of a number of rate mining … the legislature permitted incorpora-
early pieces of economic legislation that has left
Pennsylvania legislature carefully regulated the granting of corporate charters. To tion only in coalfields in which the industry had yet
promote
orate mining … thean legislature permitted
import/export incorporation
tension embedded onlyininAmerican
coalfields in whichtothebecome well established, designating the territory
stry had yet to become well established, designating
economic policy to this day: the territory in which they could
in which they could operate and the amount of capi-
12
rate and the amount of capital they could raise.
tal they could raise.12
n in Pennsylvania Coal is extremely
quickly spread: bulky, making it expensive to trans-
port. In the colonial era, British merchants had trans- What began in Pennsylvania quickly spread:
r time, states competed ever more vigorously to promote the
ported coal to American ports free-of-charge asproduction and consumption of
—perpetuating a tradition of rivalistic state mercantilism that had been a pillar of state-
ballast for ships. The first federal tariff on imported Over time, states competed ever more vigorously
nsored public works programs in the early republic. … For states that had yet to develop a coal
stry, one common—and often effective—legislative stratagem was to sponsor a to
coal dated from 1789 … [and until 1842] the tariff promote the production and consumption of
geological
ey. In 1823, North remained at least
Carolina hired 10 percent
a geologist the price
to catalog of foreign
the state’s coal—perpetuating
mineral resources; by 1837 a tradition of rivalistic state mer-
teen states had followed North Carolina’s lead. State geological
coal—more than enough to give domestic producers surveys were at once
cantilism that had been a pillar of state-sponsored
ntific and economic: by inventorying the state’s 11 mineral resources, they would, or so
a major cost advantage. public works programs in the early republic. … For
latures hoped, identify rich deposits of precious metals—including coal. In Pennsylvania and
states that had yet to develop a coal industry, one
ois, the legislature went so far as to instruct geologists to map the coalfields. … [These]
ished survey reportsFederal protection
contained valuablewas
datacritical in the coallowered
that substantially indus- the costcommon—and
of often effective—legislative stratagem
13
oration. try’s early days, but the real action was at the state was to sponsor a geological survey. In 1823, North
Early American anthracite miners
level. After the discovery of anthracite in Carolina hired a geologist to catalog the state’s
mineral resources; by 1837 fourteen states had
followed North Carolina’s lead. State geological
surveys were at once scientific and economic: by in-
ventorying the state’s mineral resources, they would,
or so legislatures hoped, identify rich deposits of
precious metals—including coal. In Pennsylvania and
Illinois, the legislature went so far as to instruct ge-
ologists to map the coalfields. … [These] published
survey reports contained valuable data that substan-
Early American anthracite miners 14
Source: U. of Toledo Professor Gregory Miller’s Great Americans series
14
Source: U. of Toledo Professor Gregory Miller’s Great Americans series tially lowered the cost of exploration.13
s.
s.
s. 10 Sean Patrick Adams, The Journal of Policy History Vol. 18, No. 1, “Promotion, Competition, Captivity: The Political Economy of Coal” (2006).
t http://greatamericansclass.blogspot.com/2010/03/1902-anthracite-coal-strike.html.
11, 12, 13 Ibid. Adams.
14 Available at http://greatamericansclass.blogspot.com/2010/03/1902-anthracite-coal-strike.html.
12
Jefferson Do - Pfund and Healey, August 2011
what would jefferson do? - pfund and healey, september 2011 dbl investors timber and coal in the 19th century 14arly state-sponsored geologic surveys, intended to spur coal developmen
ifferent from today’s attempts by the Department of the Interior to adva
velopment:
Government Land Surveys,
from Coal to Solar
The Interior Department has identified some two dozen potential sites for
large-scale solar
These early state-sponsored geologic surveys,
power installations
intended to spur coal development, are
on public lands in six Western states as
The Interior Department has identified some two
dozen potential sites for large-scale solar power
part of an effort to encourage
not so different development
from today’s attempts by of renewable
installations on public lands in sixenergy on public
Western states
15
the Department of the Interior to advance
lands and waters.
solar development:
as part of an effort to encourage development of
renewable energy on public lands and waters.15
15 John M. Broder, The New York Times, “Officials Designate Public Lands for Solar Projects” (Dec 16, 2010).
r coal only grew as technology helped drive further demand for the fuel:
what would jefferson do? - pfund and healey, september 2011 dbl investors timber and coal in the 19th century 15
g the Civil War, the railroads expanded tremendously. … The trains themselves uEarly support for coal only grew as technology Along with these charters, legislatures granted
helped drive further demand for the fuel: special rights to railroad companies that allowed
them to vertically integrate so as to drive further
Following the Civil War, the railroads expanded coal production. In 1861, for example, “Pennsyl-
tremendously. … The trains themselves used a vania granted railroads the ability to purchase the
great amount of coal. Steam locomotives switched stocks and bonds of other corporations, a valuable
to coal from wood, which was starting to become concession they previously had been denied.”17 In
less available and more costly in some areas. … [In 1869 the legislature made explicit its intent in the
addition,] the Bessemer process for steelmaking … 1861 bill by clarifying the right of railroad com-
made possible the large-scale, low-cost production panies to invest in coal-mining corporations.
of steel and greatly increased the demand for coal.
Finally, the railroads made expansion of coal mining Since the end of the Civil War / Reconstruction
possible by providing the transportation network Era, tremendous subsidies have continued to flow
necessary for serving the expanding markets.16 to the coal industry. However, since our aim in
this paper is to discuss government subsidies to
It almost goes without saying, of course, that the the various energy sectors in their early days, we
transportation network created by the railroads will not return to a lengthy discussion of later
would never have been possible without the same government support for the coal industry. Suf-
kind of federal land grants that so benefitted the fice it to say, domestic coal did not arrive on the
timber industry. Any proper accounting of early scene as a mature, low-cost and competitive fuel
government support for the coal industry must source. Rather, government support over many
factor in these grants, which served to promote an years helped to turn it from a local curiosity in
exponential increase in coal consumption nation- Schuylkill County, Pennsylvania into the domi-
wide. nant fuel source of its time.
As the railroads grew, “The high price of coal and
iron … created a furor … amounting almost to a
mania, and the files of both houses [in Pennsylva-
nia were] filled with bills for chartering new Coal
and Iron Companies,” according to a contempo-
rary 1864 piece in the influential Miners’ Journal.
This craze was not unique to Pennsylvania, with
newly discovered coal deposits driving the grant-
ing of corporate charters around the country.
16 Op. cit. Cole, et. al.
17 Op. cit. Adams.
what would jefferson do? - pfund and healey, september 2011 dbl investors timber and coal in the 19th century 16Categorization of
20th Century Subsidies
As we turn from a qualitative account of 19th E. Government Services
century subsidies towards a quantitative analysis This category refers to all services traditionally and
of more recent federal support for the various historically provided by the federal government
energy sectors, it is useful to establish a framework without direct charge. Relevant examples include
of the different kinds of subsidies that have played the oil industry and the coal industry. U.S. govern-
a role in shaping today’s energy infrastructure and ment policy is to provide ports and inland water-
markets. Management Information Services, Inc., ways as free public highways. In ports that handle
a Washington D.C.-based economic research and relatively large ships, the needs of oil tankers
management consulting firm, has provided a clear represent the primary reason for deepening chan-
subsidy taxonomy that we lay out below: nels. They are usually the deepest draft vessels that
use the port and a larger than‐proportional amount
A. Tax Policy of total dredging costs are allocable to them.
Tax policy includes special exemptions, allowances,
deductions, credits, etc., related to the federal tax F. Disbursements
code. This category involves direct financial subsidies
such as grants. An example of federal disburse-
B. Regulation ments is subsidies for the construction and oper-
This category encompasses federal mandates and ating costs of oil tankers.18
government‐funded oversight of, or controls on,
businesses employing a specified energy type. Fed- This taxonomy is quite helpful in laying out the
eral regulations are an incentive in the sense that complete universe of subsidies that we could
they can contribute to public confidence in, and potentially explore. Many of these subsidies,
acceptance of, facilities and devices employing a however, are quite difficult to measure, and a lively
new or potentially hazardous technology. Federal debate exists in the NGO and academic literature
regulations or mandates also can directly influence about which should fully count as subsidies to the
the price paid for a particular type of energy. energy industry. Let’s look at a few examples:
C. Research and Development One of the key factors in bringing natural gas to the
This type of incentive includes federal funding for East Coast was the conversion to natural gas of
research, development and demonstration programs. the Big Inch and Little Inch oil pipelines, which had
been built during World War II as means of bringing
D. Market Activity crude oil to the East Coast without fear of German
This incentive includes direct federal government submarine attack.”19
involvement in the marketplace.
18 Management Information Services, Inc., prepared for The Nuclear Energy Institute, “Analysis of Federal Expenditures for Energy Development” (September 2008).
19 Op. cit. Cole, et. al.
what would jefferson do? - pfund and healey, september 2011 dbl investors categorization of 20th century subsidies 17Sticking with natural gas, consider the development of the combustion turbine:
Its pedigree traces back to jet engines. For decades, utility managers found generating units
based on jet technology cheap, but inefficient and unreliable. Largely through government-
funded R&D on combustion turbines for aircraft use, the technology improved. Reportedly, th
Defense Department invested an average of $425 million per year in jet engine R&D from the
mid-1970s to the mid-1980s, reaching $750 million annually in the late 1980s. In the 1990s, th
independent power sector used these cheap, effective, government-enabled “aeroderivative”
How should one value this contribution to According
turbines to todominance
challenge the the Congressional
of establishedResearch
utilities. Service,
20
America’s natural gas network, which clearly acts “For the 63-year period from 1948 through 2010,
as an ongoing subsidy to gas despite its original, Of the hundreds of millions
nearly 12% of [of
dollars
DOE spent R&D by the government
spending] developing
went to these turbines, ho
much—if any—should be charged to the natural gas subsidy account?
defense-related purpose? renewables, compared with 9% for efficiency, 25%
21
Of course, just tofor lookfossil,
at theand 50% for
renewable sidenuclear.” The chart
of the equation, therebelow
is a long history of NASA
Sticking with natural gas, consider the develop- research and development
shows the breakdown for the most recent 10-yearas well. Managemen
money supporting solar energy technologies,
Information Services estimates that from 1950 – 2006, NASA spent nearly $1 billion (in 2010$
ment of the combustion turbine:
Sticking with natural gas, consider the developmentperiodofofthe our history. turbine:
combustion But since this graphic fails
on R&D devoted to solar. While significantly smaller than the hundreds of millions of dollars
spent
Its pedigree traces back to annually
jet engines.on
to account
Forcombustion
for the spillover
decades, utilitydevelopment,
managers foundthis
benefits of Depart-
early government
generating units support for solar was
Its pedigree traces back to jet engines.
based Fornonetheless
on jet technology ment
dec-cheap, butcritical
inefficient ofunreliable.
to and
the Defense
technology’s or NASA
eventual
Largely R&D spending, it
commercialization.
through government-
funded R&D on combustion turbines for aircraft use, the technology improved. Reportedly, the
ades, utility managers found Defense
generating unitsinvested
Department based clearly
of $425gives
million us
per only
year inajetsmall
engineportion
R&D from of the full
Accordingantoaverage
the Congressional Research Service, “For thethe63-year period from 1948 through
mid-1970s to the
on jet technology cheap, but inefficient andnearlymid-1980s, reaching
unreli-12% [of DOE R&D
$750
R&Dpicture.
million annually in the late 1980s. In the 1990s, the
spending] went to renewables, compared with 9% for efficiency, 25%
independent power sector used these cheap, effective, government-enabled “aeroderivative”
able. Largely through government turbinesfunded R&D
and
to challenge on
the50% for nuclear.”
dominance
21
Theutilities.
of established chart20below shows the breakdown for the most recent 10-year pe
combustion turbines for aircraft use, the technology history. But since this graphic fails to account for the spillover benefits of Department of Defe
Of the hundreds of millions of dollars
NASA R&D spent by theitgovernment
spending, clearly gives developing
us only athese
smallturbines,
portionhow
of the full R&D picture.
improved. Reportedly,much—if
the Defense Department
any—should DOE
be charged to the natural gas Energy Technology Share of Funding,
subsidy account?
invested an average of $425 million per year in jet fy2001– fy2010
Of course, just to look at the renewable side ofDOE theEnergy
equation, there is aShare
Technology long history of NASA
of Funding, FY2001-FY2010
engine R&D from the mid-1970s to the mid-1980s,
research and development money supporting solar energy technologies, as well. Management
reaching $750 millionInformation
annually inServices
the late 1980s.that from 1950 – 2006, NASA spent nearly $1 billion (in 2010$)
estimates
on R&D devoted to solar. While significantly smaller than the17.1% hundreds of millions of dollars
In the 1990s, the independent power sector used
spent annually on combustion development, this early government support for solar was
these cheap, effective,nonetheless
government-enabled “aero-
critical to the technology’s eventual commercialization. 27.7%
derivative” turbines to challenge the dominance of
According to the Congressional Research Service, “For the 63-year period from 1948 through 2010,
established utilities.20 nearly 12% [of DOE R&D spending] went to renewables, compared with 9% for efficiency, 25% for fossil, Fossil Energy
Nuclear Energ
and 50% for nuclear.”21 The chart below shows the breakdown for the most recent 10-year period of our
16.8% Electric Syste
history. But since this graphic fails to account for the spillover benefits of Department of Defense or
Of the hundreds of millions
NASA R&Dofspending,
dollarsitspent
clearlyby
gives us only a small portion of the full R&D picture.
Renewables
Energy Efficie
the government developing these turbines, how
much—if any—should be charged to DOEthe natural
Energy Technology Share of Funding, FY2001-FY2010 Caveat: DOE funding
gas subsidy account? represents only a small
23.2%
17.1% 15.2% portion of the full
government R&D picture
Of course, just to look at the renewable side of the 27.7%
equation, there is a long history of NASA research Source: Congressional Research Service
and development money supporting solar energy Caveat: DOE funding represents Fossil Energy
20 only a small portion of the full Nuclear Energy
technologies, as well. Management Information Op. cit. Goldberg.government R&D picture Electric Systems
16.8%
21
Fred Sissine, CRS, “Renewable Energy R&D Funding History: A Comparison with Funding for Nuclear
Services estimates that from 1950 – 2006,Fossil NASA Energy, and Energy Efficiency R&D” (January 26, 2011).
Renewables
Energy Efficiency
spent nearly $1 billion (in 2010$) on R&D de-
voted to solar. While significantly smallerWhat thanWould
the Jefferson Do - Pfund and Healey, Caveat: DOE funding
Augustonly
represents 2011 a small
hundreds of millions of dollars spent annually 15.2% on 23.2%
portion of the full
combustion development, this early government government R&D picture
support for solar was nonetheless criticalResearch
Source: Congressional to theService
technology’s eventual commercialization.
20
Op. cit. Goldberg.
21
Fred Sissine, CRS, “Renewable Energy R&D Funding History: A Comparison with Funding for Nuclear Energy,
Fossil Energy, and Energy Efficiency R&D” (January 26, 2011).
20 Op. cit. Goldberg.
21 Fred Sissine, CRS, “Renewable Energy R&D Funding History: A Comparison with Funding for Nuclear Energy, Fossil Energy, and Energy Efficiency R&D” 16
(January 26, 2011). What Would Jefferson Do - Pfund and Healey, August 2011
what would jefferson do? - pfund and healey, september 2011 dbl investors categorization of 20th century subsidies 18The challenge of determining what subsidies to include is not simply about parsing historical data appropriately. Even today, a wide variety of ongo- ing subsidies to every sector of the energy indus- try might merit inclusion in our study, including many that are hot-button items. For example, a recent article in the New York Times lays out existing oil and gas loopholes that are currently under fire: More than $12 billion [in government savings] would have come from eliminating a domestic manufacturing tax deduction for the big oil compa- nies, and $6 billion would have been generated by ending their deductions for taxes paid to foreign governments. Critics suggest that the [oil and gas] companies have been able to disguise what should be foreign royalty payments as taxes to reduce their tax liability.22 This is certainly contested terrain. The domestic manufacturing tax deduction applies to many companies—not just the major O&G players—so is it fair to count something so generally applica- ble against their subsidy scorecard? Perhaps, but the oil and gas industry would certainly argue not. Similarly, the fight about “dual capacity” taxpayers and foreign royalty payments is far from cut-and- dried. The current tax treatment is clearly benefi- cial to the oil and gas industry, but does it count as a subsidy, or is it simply an appropriate method of avoiding double taxation? This is complicated stuff, so in the following section, we do our best to lay out the boundaries of our own study, in an ef- fort to be transparent and to demonstrate that the historical comparisons we are making are as close to “apples-to-apples” as possible. 22 Carl Hulse, The New York Times, “Senate Refuses to End Tax Breaks for Big Oil” (May 17, 2011). what would jefferson do? - pfund and healey, september 2011 dbl investors categorization of 20th century subsidies 19
Key Historical
Subsidies by Sector
In researching this paper, we took a very practical 4 No, LIHEAP actually diminishes our abil-
approach to data collection, asking ourselves four ity to make meaningful comparisons, since it
questions: potentially subsidizes multiple energy resources
at differing levels. It is difficult to separate the
1 Was a given subsidy actually designed to in- subsidy’s contribution to each source.
crease domestic production of a given resource
(or does it do so in practice, even if that was Having failed three out of our four necessary
not its original intention)? conditions for inclusion in this analysis, we left
LIHEAP out of our subsidy calculus. Royalty
2 W
as the data related to that particular subsidy relief for offshore oil leases in the Gulf of Mexico
available? is another example: although clearly measur-
able and relevant to increased oil production, a
3 Did the subsidy exist during the early stages of subsidy created in 1995 does little to shed light
a resource’s domestic production? on our historical understanding of early-stage oil
and gas production in America. Similarly, many
4 Did inclusion of that subsidy increase our abil- of the modern-day subsidies examined in excel-
ity to compare subsidy levels across resources lent papers by the Environmental Law Institute,
and over time? Earth Track, Friends of the Earth, and the Green
Scissors Campaign, not to mention recent EIA
Let us look at the Low Income Home Energy reports on the subject, have no place in our paper,
Assistance Program (LIHEAP) as an example of since we focus on historical subsidies that had an
a subsidy not included in our calculus. impact as a particular energy source emerged.
1 No, LIHEAP is not specifically designed to Rather than articulating all of the subsidies that
increase domestic production of any given fuel we exclude from this analysis due to our need for
resource. It is questionable as to whether or not clear and consistent boundaries, then, let us in-
the extra dollars that LIHEAP injects into the stead lay out how we actually have treated each of
energy market actually increase production, or the major energy sources that have emerged over
simply redistribute consumption. the last 100 years of American history:
2 Yes, the data on LIHEAP is available. Oil and Natural Gas:
3 No, LIHEAP is a more recent program than We looked solely at the subsidies embodied in
some of the resources that it subsidizes (i.e. oil the expensing of intangible drilling costs and the
and gas), since it began in 1980. excess of percentage over cost depletion allowance.
what would jefferson do? - pfund and healey, september 2011 dbl investors key historical subsidies by sector 20From the Congressional Research Service: with significant refining or retail activity). Marginal
effective rates can be near zero for independent
For more than half a century, federal energy tax (i.e., nonintegrated) producers eligible for percent-
policy focused almost exclusively on increasing age depletion, a favorable tax treatment for depleta-
domestic oil and gas reserves and production. ble costs. These relatively low marginal rates already
There were no tax incentives promoting renewable provide incentives to make petroleum production
energy or energy efficiency. During that period, two investments that have pretax returns below those
major tax preferences were established for oil and of investments in other industries—i.e., relatively
gas. These two provisions speed up the capital cost inefficient investments. Some petroleum production
recovery for investments in oil and gas exploration investments face negative marginal effective rates.
and production. First, the expensing of intangible This means that such investments are actually more
drilling costs (IDCs) and dry hole costs was intro- profitable after taxes than before taxes because they
duced in 1916. This provision allows IDCs to be help reduce taxes on other income.24
fully deducted in the first year rather than being
capitalized and depreciated over time. Second, the *Authors’ note: in 2009, domestic production of petro-
excess of percentage over cost depletion deferral leum accounted for a little more than 40% of total U.S.
was introduced in 1926. The percentage depletion consumption, and domestic production of natural gas
provision allows a deduction of a fixed percentage accounted for more than 90% of total consumption.
of gross receipts rather than a deduction based on
the actual value of the resources extracted. Through According to one analysis considering the im-
the mid-1980s, these tax preferences given to oil pact of Reagan era tax reform on the oil and gas
and gas remained the largest energy tax provisions industry, “Effective tax rates on other industries
in terms of estimated revenue loss.23 average[d] about 28 percent under pre-1986 law,
compared to rates on oil investments ranging
And from a 1990 report of the General Account- from -6 percent to 24 percent under pre-1986
ing Office: law.”25 Given the high profile of these two major
tax expenditures, we felt on firm ground basing
… The marginal effective federal corporate tax our analysis of oil and gas subsidies on this pair
rates—i.e., the tax rates on genuinely incremental of long-lived government incentives. As one early
investments—for domestic petroleum production are researcher wrote, “Our findings reveal that several
already among the lowest for a major industry, due public policies significantly affected investment
to the effects of existing tax incentives. These analy- in crude petroleum reserves. … Our empirical
ses estimate marginal effective rates on petroleum estmates support the position that the special fed-
production investments to be about half of the statu- eral tax provisions… have induced the petroleum
tory rate for integrated producers (i.e., producers industry to maintain a larger investment in proved
reserves than it would have in the absence of these
policies.”26
23 Molly F. Sherlock, CRS, “Energy Tax Policy: Historical Perspectives on and Current Status of Energy Tax Expenditures” (May 2, 2011).
24 Thomas J. McCool, et. al., GAO, “Additional Petroleum Production Tax Incentives are of Questionable Merit” (July 1990).
25 Robert Lucke and Eric Toder, The Energy Journal Vol. 8 No. 4, “Assessing the U.S. Federal Tax Burden on Oil and Gas Extraction” (1987).
26 J ames C. Cox and Arthur W. Wright, Studies in Energy Tax Policy, “The Cost-effectiveness of Federal Tax Subsidies for Petroleum: Some Empirical Results
and Their Implications” (Brannon, ed. 1975).
what would jefferson do? - pfund and healey, september 2011 dbl investors key historical subsidies by sector 21Take it from an even more storied source: “In planner with a broad background in resource and
1937, President Franklin Roosevelt declared that land use policy and impact analysis. In his work,
percentage depletion was ‘perhaps the most glar- Goldberg includes principally the costs of regu-
ing loophole in our present revenue law.’” 27 lation, civilian R&D, and liability risk-shifting
(the Price-Anderson Act), while also taking into
Coal: account both payments from the government to
industry and government receipts from industry—
The Green Scissors Campaign is a 15-year old thus coming up with a net annual figure for every
effort “to make environmental and fiscal respon- year from 1947 to 1990. Although “on-budget”
sibility a priority in Washington,” sponsored by expenditures for the nuclear industry have been
a variety of D.C.-based public interest groups. enormous, we especially value Goldberg’s analysis
In their 2010 report, the Green Scissors analysts because he attempts a rigorous quantification of
make the claim, “Subsidies to the coal industry the “off-budget” value of the Price-Anderson Act
began in 1932, when the federal government first of 1957, which “provided federal indemnification
began allowing companies to deduct a portion of of utilities in the event of nuclear accidents, thus
their income to help recover initial capital invest- removing a substantial (and perhaps insurmount-
ments (the percentage depletion allowance).” 28 able) barrier to nuclear power plant develop-
Of course, what they mean is that modern, in- ment.”29
come tax-based subsidies began in 1932. Those
who have made it this far in this paper already Congressional testimony at the time of passage
know that both the federal government and the confirms the importance of Price-Anderson:
various states heavily subsidized coal in the 19th
century. But since we do not have access to data For instance, the Edison Electric Institute noted
quantifying the coal subsidies that go back to the “We would…like to state unequivocally that in our
fuel’s true origins in the early 1800s, we have cho- opinion, no utility company or group of companies
sen not to include coal subsidies in our compara- will build or operate a reactor until the risk of nuclear
tive quantitative analysis. accidents is minimized.30
Nuclear:
In considering how best to quantify nuclear data,
we considered multiple sources and decided to use
the analysis conducted by lifelong energy analyst
and consultant Marshall Goldberg, a resource
27 Mona Hymel, Loyola University of Chicago Law Journal Vol. 38, No. 1, “The United States’ Experience with Energy-Based Tax Incentives: The Evidence Sup-
porting Tax Incentives for Renewable Energy” (Fall 2007).
28 Autumn Hanna and Benjamin Schreiber, the Green Scissors Campaign, “Green Scissors 2010” (2010).
29 Op. cit. Komanoff Energy Associates.
30 Op. cit. Goldberg.
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