Costly Clean Energy Subsidies Yield Minimal Return on Taxpayer Investment

Lawmakers looking for potential cutbacks on programs whose costs exceed their benefits should look closely at subsidies of clean energy including the wind, solar power, biofuel and ethanol industries.  ACCF Senior Vice President and Chief Economist Dr. Margo Thorning testified today before the Senate Subcommittee on Energy, Natural Resources and Infrastructure and highlighted the high costs of renewable energy sources compared to other more traditional energy sources.

“Contrary to what supporters might say, wind, solar and biofuel are far from ‘infant industries’ in need of a government jump start,” Thorning said.  “These are long standing industries that have been incapable of meeting market demand because of their high costs and inefficiencies.”  For example, states with renewable portfolio standards tend to have higher electricity costs than those without RPS mandates (see Figure, CLICK TO ENLARGE).

Citing data from Department of Energy’s Energy Information Agency, Thorning noted that that by 2035, the Clean Energy Standard (CES) will raise electricity prices by 20% to 27 % and reduce GDP by $124 billion to $214 billion.

Despite their high costs and economic drag, renewable energy sources enjoy the lion’s share of federal energy subsidies.  In 2010, an estimated 76% of the $19.1 billion in federal tax incentives went to renewables, for energy efficiency, conservation and for alternative technology vehicles while only 13% went to fossil fuels according to the Congressional Research Service (CRS). Some renewable electricity enjoys negative tax rates: solar thermal’s effective tax rate is -245 % and wind power’s is -164%.

Thorning noted that subsidies for research and development of clean energy sources might be warranted in some cases.  However, subsidizing individual companies to encourage the deployment of energy technologies that are more expensive than conventional energy is forcing consumers and industry to spend more on energy and have less for other purchases or for productive investment. As a result, GDP and job growth will be lower than otherwise as resources are diverted from their highest and best use.

“If markets are allowed to select the energy technologies that are deployed rather than government officials using tax incentives, subsidies or a CES mandate, costs to consumers and the federal government’s budget will be reduced. Policies that encourage the responsible development and transportation of U.S. oil and gas resources should be accelerated in order to promote a cleaner environment and stronger economic and job growth,” Thorning concluded.