6 Dollars and Sense

The Rationale Behind Subsides for the Energy Industry

Michael Albrecht

Oil and water may not mix, but oil and money do. Subsidies for the fossil fuel industry have a long and documented history. Dating back to the Industrial Revolution, subsidies have helped grow America’s economy by allowing companies to use money for business expenses and research instead of paying taxes[1]. Governments have found subsidies necessary in a variety of industries for a variety of reasons. Sometimes the purpose is to protect and expand sectors, such as France’s use of subsidies for their film industry[2]. Other times subsides are granted to drive innovation, such as in research and development (R&D) grants for the energy industry[3]. Subsides can even be used for negotiating with a company, such as when municipalities tried to influence where Amazon built their second headquarters[4]. Because of the substantial benefits that subsidies bring with them, the government only uses these grants for businesses that they feel need it. However, the word “need” has shown itself to have much discretion in use.


In 2016, nearly $15 billion in federal government subsidies and support were granted to both non-renewable energy sectors, such as coal, and renewable energy sectors, such as solar[5]. To put this number in perspective, the entire US’s energy production cost was $85 billion in 2016[6]. This means that the average subsidy across sectors covered 18% of the production cost. However, not all industries are granted the same benefits. Government subsidies are given to energy sectors based on various factors, such as how environmentally friendly it is.


Primarily due to environmental concerns, the coal industry has seen a 2.9% decline in energy generated year-on-year from 2000 to 2016[7]. This is a lot of change, especially considering that the coal industry used to produce the most power in the US (51.4% in 2000)[8]. In 2016, that figure dipped below 30%.[9] This decline in energy produced is partially due to the decrease in subsidies granted to the coal industry[10]. While coal is being used less, some renewable resources are exploding in popularity. Solar, which did not even exist in a considerable amount in 2000, has seen an average of 31.8% year-on-year growth through 2016[11]. Similarly, wind, which used to make up a fraction of a percent of the US’s energy, has increased over 26.3% each year through 2016[12]. As the promise for a green and sustainable future continues to manifest itself, subsidies follow in large quantities. In fact, in 2016, 45% of federal grants supported the development of renewable energy suppliers[13]. These energy companies include those heavily invested in biofuels, wind, and solar, among others. An additional 42% of federal subsidies are benefiting efforts to reduce energy consumption through higher efficiency[14]. These “energy end-use” contributions can be seen in programs such as the US Department of Health and Human Services’ Low Income Energy Assistance Program[15]. Out of all of the industries, the biofuels industry has been a favorite for attracting subsidies, as it is the only renewable technology to receive an incremental increase in subsidy support from 2013 to 2016[16]. Despite all of these subsidies and growth, renewable energies only made up 15.2% of the energy market in 2016[17]. However, this is bound to change. Renewables are outpacing non-renewables growth 7:1[18]. The renewable energies sector is slowly taking a larger share of the energy market (9.7 in 2000, 15.2 in 2016)[19]. Even with all of this growth, it is unclear whether these industries will receive more subsidies years from now. This uncertainty is because subsidies are becoming less common. In 2016, $15 billion in energy subsidies were granted: a roughly 60% decline from 2010’s $38 billion[20]. This is primarily due to the expiration of temporary measures, such as programs included in the American Recovery and Reinvestment Act of 2009[21]. However, other factors are contributing to the decrease in energy subsidies. Nearly 60% of all of the subsidies granted have been through the use of 36 large-scope, energy-specific tax code provisions, according to 2016 data[22]. These financial interventions have been shown to support energy corporations more than any other type of subsidy[23]. But as politicians vow to make the US’s tax code less convoluted, these provisions may disappear. Furthermore, beyond the traditional subsidies such as tax expenditures, direct expenditures, and R&D support, the Department of Energy has guaranteed loans to companies promising innovative clean energy technologies[24]. These are considered subsidies since these loans are high risk and cannot obtain private financing. However, no new loans were issued between 2013 and 2016[25]. This is partially due to the controversial funding of non-renewable energy facilities, such as the Vogtle Nuclear Power Plant in Georgia[26]. With temporary initiatives expiring, the streamlining of tax law, and the end of guaranteed government loans, subsidies may soon cease to be a popular policy proposal. Instead, policymakers may opt to lower the corporate tax rate or do nothing at all[27].


Only one thing can be made exceptionally clear while deciphering all of these statistics: many details are not clear. The complexity of federal financial activities is mind-boggling, as government files contain a wide variety of donors and recipients over many years. Therefore, all information outlined must be taken in the context that it is presented. Extrapolating these data is not permissible.


As dull as energy subsidies may seem, they have stirred up quite a bit of controversy. During a time of growing fear over climate change, many people question whether granting tax credits and other benefits to private corporations is acceptable in terms of economic and environmental policy, especially for non-renewable energy companies[28]. As the conversation morphs around which energy projects are should be built, debates over the government’s role in funding these projects convene. We’ll examine a few of the debates surrounding a significant energy project in the Pacific Northwest.


Tacoma is well renowned for its “aroma.” The smelly sulfur, largely believed to be from the Simpson Tacoma Kraft pulp and paper mill, has even forced Bruce Springsteen to leave the town early after a concert[29]. In an attempt to reduce air pollution and provide the Pacific Northwest with reliable energy, Puget Sound Energy (PSE) and the Port of Tacoma have decided to open a liquefied natural gas (LNG) facility[30]. At the center of the project is an 8-million-gallon silo, just twelve feet shorter than the Tacoma dome[31]. The chilled tank, surrounded by three feet of concrete, is essentially a silo for energy. Just as large as the container is the controversy surrounding it. Many environmental advocacy groups, such as 350 Seattle, have allocated much of their time and money to prevent the massive LNG project from being completed. They claim that this project will create a fossil fuel dependence spanning decades and thus threaten residents’ health and safety for years to come[32]. Furthermore, non-environmental groups have also taken a keen interest in preventing further development of the facility. Most noticeably, the Puyallup Tribe of Indians took legal action against the Puget Sound Clean Air Agency for issuing a permit to PSE in 2019[33]. Even less conventional methods are being attempted to maintain pressure on those in power. The Puyallup Water Warriors and Redefine Tacoma organizations have created an informal petition on the popular petition platform, Change.org. Sixty-nine thousand signatures have been collected to tell prominent Washington State politicians to halt further development of the project[34]. Through public engagement, legal action, and less conventional means, the #NOLNG movement has garnered the support of over 80 environmental and social justice organizations as well as tens of thousands of individuals[35]. More information about the #NOLNG movement can be found in this article. All of these organizations would like the facility to cease to exist, but some are trying to prevent it from an economic standpoint rather than an environmental, safety, or legal one. Some of these organizations see an issue with the way the Tacoma LNG plant is being funded, and it is not hard to see why.


$310 million is not just big bucks; it’s Google-sized bucks. Google was recently ordered to pay $310 million in a settlement regarding sexual harassment in their offices[36]. Similarly, taxpayers have been ordered to pay a substantial part of the $310 million required to build the Tacoma LNG facility[37]. Here’s the story. In 2016, plans were announced to build the LNG facility. During talks with Washington State’s Utilities and Transportation Commission, it was decided on how PSE, an investor-owned, private energy company, would structure its corporate group. Talks about how much cost the company would bear in building and maintaining the facility were also discussed[38]. It was decided that the Port of Tacoma will own the plant, and PSE would lease the land for their energy operations. Selling some of the LNG to the local community allows PSE to classify the facility as “peak-shaving,” which in turn allows PSE to pass some construction costs onto the ratepayers. At the time, PSE spokesman Grant Ringel claimed that utility ratepayers would only be responsible for paying for the portion of the facility that they use[39]. Therefore, PSE would be accountable for 57% of the construction costs, and the remaining 43% of the facility would be paid for by PSE’s 1.5 million customers[40]. Ringel claimed that when demand spikes during the coldest days of the year, the utility ratepayer are expected to use more than half of the facility’s reserve. However, this is not true during most days of the year. According to some figures, PSE ratepayers will only use 7% of the facility’s LNG for the first ten years of operation[41]. After these ten years have passed, the facility will provide no benefit to PSE customers. At this point, all of the energy stored at the facility will be used for maritime fuel, and all profits from these sales will solely benefit PSE. And because PSE is a for-profit entity, the plant’s profits will go to the project’s investors, notably PSE’s subsidiary, Puget LNG LLC, and the Australia-based investment bank, Macquarie Group Ltd. To summarize, over the facility’s 40-year life span, ratepayers will use less than 2% of the LNG stored[42].


It is easier to understand all of these values when dealing with cash values. Given that PSE’s ratepayers will be charged 43% of the $310 million price tag, the ratepayers will have to pay $134 million in construction costs. That works out to $89.63 per PSE customer. However, those living in Tacoma bear an additional cost. A brand-new fire station is being built, new roads are being poured, and safety precautions are taking effect. All of this will cost the City of Tacoma $13.5 million[43]. This bill gets passed on to the taxpayers of Tacoma in the amount of $80.97 per citizen. By combining the cost of the LNG facility and the cost of the facilities around the LNG facility, it can be concluded that each resident of Tacoma is responsible for $170.60. But wait, there’s more! Tacoma taxpayers face an additional $12 per year to upkeep the new fire station at the Port of Tacoma. These statistics don’t even include the additional millions of dollars promised to PSE in tax subsidies. The Washington State legislature approved PSE for an $8 million tax break every biennial funding cycle and waved a sales tax on construction cost[44]. These statistics are upsetting to many citizens of Tacoma. John Carlton, a Tacoma resident, founded the group RedLine Tacoma to lobby against these charges. “This is a private venture. It doesn’t make sense that our rates should be attached to this venture’s investment risks”, he said in a 2016 interview[45]. Granting subsidies to PSE has not only raised questions as to what role the government has in funding such projects but has added more fuel to the debate among environmental activists. Groups such as Advocates for a Cleaner Tacoma, Citizens for a Healthy Bay, and 350 Tacoma have listed their main arguments as to why the Tacoma LNG facility should not be built. Among the top points—the negative financial impact on the local community. These issues would only be exasperated if a catastrophe were to ensue[46]. Taxpayers would likely have to bear nearly all of the costs associated with a disaster, financial and otherwise. This is due to PSE’s Limited Liability Corporation, which could declare bankruptcy if damages due to their facility exceeded $50 million, the amount covered on their insurance policy[47]. To make a comparison, the relatively small Williams Plymouth LNG explosion in Eastern Washington in 2014 cost $69 million, not including lawsuits filed on behalf of individuals[48]. Therefore, if a significant accident was to occur, tens of millions of dollars could be placed on the shoulders of those most impacted by the disaster.


While the Tacoma LNG facility is a great case study when analyzing the impact of subsidies on the energy industry, it is far from the only government project receiving financial assistance, and thus, criticism. In 2017, TransAlta received tax exemptions from the Washington State legislative branch to replace the 50-year-old coal plant in Centralia, Washington, with a new natural gas plant. Governor Jay Inslee later vetoed this decision[49]. Some may see this as a win for the environment, as natural gas is prevented from being sold. Some may see this as causing harm to the environment, as coal, a dirtier alternative to natural gas, is still being used[50]. While many focus on the politics regarding which fuels should be used, many overlook another vital question: who will finance the production of the fuels? As a citizen of the State of Washington, understand that all facets of local, state, and the federal government have an impact on you, albeit some larger than others. There is a motive behind the sales tax, property tax, estate tax, and so on. Every dollar spent has a place to be, and when we can track where these dollars go, we can have a greater understanding of the government’s role in all of our lives.

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  2. Springer Link - https://link.springer.com/chapter/10.1007%2F978-3-319-71716-6_18
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  12. U.S. Energy Information Administration - https://www.eia.gov/totalenergy/data/monthly/
  13. The Joint Committee on Taxation - https://www.jct.gov/publications/2018/jcx-34-18/
  14. The Joint Committee on Taxation - https://www.jct.gov/publications/2018/jcx-34-18/
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  23. White House - https://obamawhitehouse.archives.gov/omb/budget/Analytical_Perspectives
  24. U.S. Department of Energy - https://www.energy.gov/lpo/loan-programs-office
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  34. Change - https://www.change.org/p/jay-inslee-stand-with-the-puyallup-tribe-no-lng-fracked-gas-in-the-salish-sea
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  37. Washington Policy Center - https://www.washingtonpolicy.org/publications/detail/paying-for-power-taxpayer-subsidized-electricity-in-washington-state
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