No Free Market for Energy

If you were to get a $500 billion allowance, how would you spend it?

This isn’t one of those idle, “What would you do if you won the lottery?” fantasies; this is the reality facing the energy industry.

Cumulative global subsidies given to support the traditional hydrocarbon sectors — coal, oil and gas — now exceed $500 billion per year, according to the International Monetary Fund, the Organisation for Economic Co-operation and Development (OECD) and the International Energy Agency (IEA).

Meanwhile, when it comes to the renewable energy sector — hydropower, biomass, biofuels, solar, wind and geothermal — total market share makes up a measly 19% of global electricity generation. The yearly allowance for solar and wind is just $66 billion, with total annual payments projected to reach $250 billion by 2035.

If we’re serious about cutting down on carbon emissions, curbing pollution and preserving precious global resources for future generations, then these numbers simply don’t add up, especially as hydrocarbon production is surging in the United States.

Let’s say, for argument’s sake, that we could divide the energy sector into two categories: the first is the traditional hydrocarbon sector consisting of non-renewable energy sources, and the second is the “non-traditional” sector consisting of renewable energy sources. How could we come up with a figure for cumulative global subsidies for each side of each sector over time and compare them? What would the total cost to taxpayers add up to for coal, oil and gas compared to renewables?

The ultimate goal of this project would be to develop a method for calculating what we’d like to call “subsidy parity.” Subsidy parity can be found by determining the exact future point in time at which the cumulative subsidies received by each side of each the sector reaches perfect equilibrium, based on current payments and projections.

We could begin with the first recorded subsidy payments for industrial-scale hydrocarbon extraction and work our way up to modern day. We would then seek to answer the question: How long would it take for renewables to catch up to hydrocarbons at the current rate of subsidization? More to the point, if we were to speed up the process of reaching parity by increasing support for renewables, how much would it cost? Perhaps the results of this exercise would suggest the need for a 10-year fade-out of subsidies for hydrocarbons and $1 trillion per year in subsidies for renewables over a 50-year horizon to achieve equilibrium.

Determining subsidy parity would obviously require a major, coordinated effort, but the project could help to identify the extent to which this growing gap in the subsidies allocated to each sector is not only costly, but also inefficient and unnecessary. In the meantime, without a reliable estimate for subsidy parity, our global conversation on energy remains in a state of inertia, with a debate that is far too often inauthentic and dangerously misinformed.

The idea that energy is a “free-market good,” for example, leads to poor governance decisions. Such decisions have prevented industrialized countries from developing sustainable, long-term approaches to managing their energy needs more effectively. Critics of renewable energy are often quick to point out that these technologies often need heavy subsidization in order to reach “cost parity” with traditional fossil fuels. That is, in order for renewables to be the same price per kilowatt-hour to the customer, the price has to be artificially driven down through some kind of government intervention in the form of tax breaks, incentives, loan forgiveness, or tariffs. Such activities are often described as governments “picking winners,” and derided for their anti-competitiveness.

It is this logic that is often used as proof that renewable energies aren’t worth the taxpayer’s dime, or at best are a weak player in the energy sector. Critics of renewables accordingly declare that the markets have established that clean technologies are themselves unsustainable, putting burdens on already strained public budgets, and contributing little if anything to energy security and job creation.

This, of course, is utter nonsense. In fact, according to a recent report from the IEA, power generation from renewable sources worldwide will exceed that from gas and be twice that from nuclear by 2016 — and this is without renewables having government support that is anywhere near comparable to the oil and gas industry.

Still, few crucial industries like energy, agriculture or transportation have ever been expected to achieve market success without subsidies. These industries are often deemed too important to a nation’s economic success to leave to the will of the free market. Even so, any new entrant into a 100+ year-old industry is going to face significant obstacles, especially when you consider how much time, money and governmental support has been invested in the hydrocarbon economy.

Fossil fuel subsidies are the elephant in the room that no one talks about when discussing energy challenges and solutions. Bias toward fossil fuels amplifies the inequity in public payments for energy production; in an increasingly resource-constrained world, the consequences of this stance could be dire.

Yet it would be a mistake to adopt an across-the-board, zero-subsidy policy. This would only serve to entrench the status quo and cripple our ability to deliver very needed changes to our energy infrastructure.

We want to be clear: we are not inherently opposed to fossil fuel subsidies or to subsidies in general. Fossil fuels are the lifeblood of the modern economy, and growth brings prosperity and improved quality of life. For sovereign nations, if the economic benefits of this growth are bigger than the lost revenue from the subsidies, then subsidization is smart economic policy.

Ultimately, what concerns us is (1) establishing a level playing field in the energy sector, and (2) transparency in the public debate about what it would take to accomplish this. In order to have an honest discussion on energy, we need to move away from the narrow and myopic idea of cost parity and raise the level of debate to focus on subsidy parity.

A measured look at the financials of the energy sector reveals a state of imbalance. When a system is in such a state, the likelihood of a correction or adjustment of some kind increases. Ours is a proposal of how to account for this possibility while minimizing the risk of disruption. It is unclear how these dynamics will play out in the long run, but we believe that energy managers, operating executives, procurement officers and CEOs all need to be paying attention to the true cost of energy — and the potential implications for their businesses and the economy worldwide.