Government Subsidies: Friend or Foe to Renewable Energy

Since the 1970s, there has been an overwhelming body of scientific evidence linking the use of fossil fuels to climate change, which has resulted in a push to find renewable, cleaner sources of energy. Still, despite the urgent need for energy reforms, the U.S. still relies mainly on coal, oil, and natural gas to power residential and commercial areas. Although the convenience and reliability of fossil fuels have set industry standards, they are non-renewable and their damaging effects on the environment and public health are profound. Alternative energy technology has improved significantly over the past three decades, yet in the U.S., renewable energy still supplies less than 15 percent of the total power used by homes. In 2014, American residencies used 6,203 trillion British thermal units (Btu) of fossil fuels. This is approximately seven times more than the 871 trillion Btu’s of renewable fuel used, which includes geothermal, solar, and biomass energy.

There are a host of reasons why the U.S. has not embraced renewable energy. For one, technology such as solar panels and wind farms can be an eyesore and can carry high up-front costs, with the average cost of solar panel installation running anywhere from $15,000 to $29,000 before tax breaks. However, despite the possibility of initial expenses, most Americans are unaware that renewable energy is usually less expensive than traditional energy in the long run. Another obstacle is that the major players in the oil and gas industry, such as the Koch Brothers and special interest groups like the ALEC, lobby for policies that stifle the growth of the sustainable energy industry. These parties argue that increased usage of renewable energy will decrease the total number of households that rely on the grid as their main source of power— a shift that would significantly increase remaining families’ monthly bills and incentivize them to make the shift to alternative energy as well.

However, there is another, less obvious reason why sustainable energy remains in the background of the energy industry: government subsidies. Subsidies in the energy industry typically take the form of direct spending and tax relief as well as the provision of services like land, water, and infrastructure at below market rates. Subsidies make sense in theory, but critics claim that they work against the public interest by using taxpayer dollars to offset the costs of production, which does little more than artificially decrease costs and inflate profits.

It is undeniable that the current subsidy system is broken; still, the answer is not to abandon government subsidies completely. Subsidies are necessary in many industries to encourage innovation and increase demand, and renewable energy is no exception. However, the current system requires some important changes. First, it is common for subsidies for renewable energy to be given in the form of investment tax credit, which provides tax breaks to investors based on how much money is invested rather than how efficient the project is. This policy removes the incentive to create renewable energy plants that operate at optimum efficiency because it makes no difference to investors’ bottom line. Second, a larger share of subsidies should be allocated to research and development. This large upfront investment would lead to technological innovation that would, in turn, make renewable energy more affordable and lucrative to home and business owners.

Another flaw in the subsidy system that stifles the growth of renewable energy is the overwhelming allocation of funds to fossil fuels. Right now, fossil fuels heavily dominate the energy industry, but renewable energy is capable of providing a much greater percentage of America’s power. While it is unrealistic to propose that renewable energy can ever replace 100 percent of fossil fuels, there is a large amount of untapped potential. Over the past 70 years, subsidies for fossil fuels have been about 12 times larger than those for renewable energy. As a result, fossil fuels’ dominance in the world energy market is reinforced, investors opt to invest in technology for traditional energy, and renewable energy cannot be priced as competitively as fossil fuels. Increased subsidization, at least in the early stages, is crucial to achieving more widespread usage of renewable energy. Subsidizing renewable energy is also more efficient because it does not carry the same environmental cost as fossil fuels, which reduces negative externalities that prevent subsidies from achieving their desired goal.

Energy in America is an undoubtedly complex topic, made even more complicated by the politics that surround it. Countries that have made renewable energy a priority, such as Denmark and Germany, demonstrate how subsidies can be used to change the way entire nations are powered, but in most cases such an overhaul is simply not realistic. Yet, to sit back and say that meaningful change is not possible is untrue. While we may be far past the point of remedying climate change entirely, the decisions that we make today regarding renewable energy do have the power to shape the world we live in tomorrow.