Coming to Terms With How Our Society Funds Innovation (Part I): Subsidies

While the question of subsidies is a flashpoint for renewable energy bears and bulls, it is a critical point in how our society funds innovation, because on a basic level it represents the viability of a technology. This article will deal with subsidies, while the follow up article will deal with how new technologies are brought to market and the importance subsidies play in the lifecycle of commercial technology development.

My PolicyMic colleague Gillman says, “Fossil fuels are cheap, abundant, and economically competitive, while renewable sources of energy barely survive in the marketplace without significant government subsidies.” Saying that fossil fuels are independently economically competitive is incorrect and confuses the debate. The majority of fossil fuel subsidies are written permanently into the tax code and do not get much attention. In contrast, renewable energy subsidies appear in fits and starts and, as a result, garner far more attention and press.

The Investment Tax Credit (ITC), IRC Title 26 Section 48, has received a lot of attention as a federal subsidy to the renewable energy industry because it has nearly expired several times. In contrast, the Credit for Production of Nonconventional Fuels, which from 2002-2008 provided a $14 billion subsidy to the coal industry (just one of many) through a tax credit in IRC Tax Credit 45K, does the same thing but has flown below the radar. Ironically, between 2002-2008 the ITC cost taxpayers $259 million in lost revenue, far less than $14 billion in lost revenue of the Credit for Production of Nonconventional Fuels.

Both industries receive subsidies but because fossil fuel industries have more money and have become established, they are better able to hide their subsidies. Saying that renewable energy will never be competitive because it is not competitive now is inherently incorrect. It falsely assumes that:

Renewable energy is the only form of energy generation that currently receives subsidies.

Renewable energy and fossil fuels are in the same market position as relates to: deployment, ability to scale, efficiency, and cost (to name a few).

The development and adoption of a new technology has ever happened without public support (read subsidies).

The third point is fundamentally the most important. I will elaborate on it further in a subsequent post in which we will discuss the “valley of death” and the lifecycle of a technology before it becomes commercialized, as well as why the private sector does not get involved in basic research.

I’ll give a hint — it has to do with risk and viability of returns!

Photo Credit: U.S. Army Environmental Command