posted on 27 November 2015
from the Congressional Budget Office
The federal government provides financial support for the development, production, and use of fuels and energy technologies both through tax preferences and through spending programs administered by the Department of Energy (DOE). Policymakers have provided that support with several goals in mind, including increasing domestic energy production, reducing greenhouse gas emissions, and encouraging research that might benefit society but that would not be profitable for private firms to undertake without government funding.
In fiscal year 2015, tax preferences provided the bulk of federal support for energy development, production, and use. Whereas tax preferences are estimated to have resulted in $15.8 billion in forgone revenues, lawmakers appropriated funds equal to about one-third of that amount - $5.4 billion - for DOE to fund the relevant spending programs.
How Does the Federal Government Support the Development, Production, and Use of Fuels and Energy Technologies?
One way in which federal support is provided is through tax preferences - special provisions of tax law that reduce tax liabilities for certain activities, entities, or groups of people - for both producers and users of certain fuels and energy technologies. Preferences aimed at producers increase the profitability of investing in a particular technology (tax credits for generators that produce electricity from wind, for example) or lower the cost of producing certain fuels (depletion allowances for producing oil and natural gas, for example). Preferences aimed at users lower their after-tax cost of purchasing certain products; for instance, tax credits subsidize homeowners' investments in energy-efficient windows.
Federal assistance is also provided through DOE in the form of funding for basic research and technology development. In particular, DOE funds research that furthers the understanding of the basic science underlying energy or that supports the development of new energy technologies. It provides funding for universities and government laboratories, demonstration projects, and loans or loan guarantees for energy technologies. Other federal programs (both within and outside DOE) affect energy markets and the supply of energy resources; for example, the government's leasing of federal lands for oil production boosts the supply of oil. This report, however, examines only federal spending that encourages either basic research or the development of new energy technologies.
How Has Federal Support Changed Over Time?
From the introduction of tax preferences for oil producers in the Revenue Act of 1916 until 2005, the largest share of energy-related tax preferences went to domestic producers of oil and natural gas. Beginning in 2005, the composition of those preferences changed: An increasing share of them was aimed at encouraging the use of energy-efficient technologies and of energy generated from wind, the sun, and other renewable sources. Along with those changes came a fivefold increase in the inflation-adjusted cost of tax preferences, from $4.9 billion in 2004 to a peak of $25.4 billion in 2012. Since then, the value of tax preferences has fallen by almost 40 percent, to an estimated total of $15.8 billion in 2015.
DOE's funding has also changed over time, but with the exception of the substantial amounts provided in 2009 by the American Recovery and Reinvestment Act (ARRA), it has generally been less, adjusted for inflation, since 1998 than it was between 1985 (the first year included in this analysis) and 1998. Whereas such funding (measured in 2015 dollars) averaged $7.6 billion each year in the early 1990s, it has averaged $4.7 billion a year since 2010.
DOE's funding includes appropriations to cover the subsidy costs of loans and loan guarantees for the development of new energy technologies. In recent years, DOE has extended credit through three major programs, although the authority to make new loan guarantees for one of those programs expired on September 30, 2011. Of the $9.5 billion in funding for credit subsidies that lawmakers have provided since 2009, DOE has obligated $4.7 billion thus far. The department's funding for 2015 included only small amounts for the administrative expenses of its credit programs; no new funds were provided for loans or loan guarantees.
How Effective Has That Support Been at Increasing Domestic Production, Reducing Greenhouse Gas Emissions, and Spurring Research and Development?
Increasing the domestic production of oil and gas has long been a goal of federal policy, and following the disruptions in the global supply of oil in the 1970s, the emphasis on boosting domestic oil production only intensified. Although U.S. production of crude oil has increased over the past 10 years, by CBO's estimates only a small share of that increase resulted from tax preferences, which cost between $90 and $200 per additional barrel of oil produced. That cost was in addition to the market price of oil, which averaged $80 per barrel over the past decade.
In the mid-2000s, the share of energy subsidies aimed at reducing greenhouse gas emissions, particularly carbon dioxide (CO2) emissions, began to grow. The most efficient method for reducing emissions would be to set a price on fossil fuels that equaled the damage caused by the production and use of the fuel. Tax preferences and other subsidies for the development and use of favored technologies can also reduce emissions, but they are less costeffective. Although some studies have found that certain technologies, including those for generating electricity from wind, have been responsive to subsidies, a review by the National Academy of Sciences (NAS) concluded that the tax credit for the generation of electricity from renewable sources reduced CO2 emissions at an average cost of $250 per ton. By comparison, federal agencies recently estimated that the value of the benefits of reducing CO2 emissions is between $40 and $60 per ton.
Promoting research and development (R&D) has long been another motivation behind federal energy subsidies. Government funding is most likely to be cost-effective when it supports research that would benefit society but that would not be profitable for firms to undertake on their own, such as research on the basic science of energy or research aimed at the very early stages of technology development. Estimating the returns on investments in basic science research is difficult; however, such research can lead to knowledge that can be used in unforeseen ways, sometimes long after the research is completed, and some evidence suggests that, taken as a whole, the returns from basic science research have been substantial. Estimating returns on investments in applied research is somewhat easier, and evidence suggests that DOE's funding of such research has had mixed results. Funding work in the early stages of developing new energy technologies has generally been more cost-effective than supporting large demonstration projects for new technologies. Despite those mixed results, federal funding of energy research has led to a significant amount of technology transfer to private firms.
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