Federal energy incentives such as tax breaks and loan programs are the subject of vigorous public debate. This attention is at least in part due to the politics surrounding the failure of the solar manufacturer Solyndra (which received a $500 million government loan), the cost to government of tax incentives for oil and gas production when industry profits are at all-time-highs, and the level of government debt. However, the debate is also a part of a broader national conversation about the appropriate role of government – and in particular about the role of the federal government in the supply and use of energy.

This role is of particular interest to us here at CPI: energy generation and use in the U.S. is responsible for the lion’s share (87%) of the nation’s greenhouse gas emissions which contribute to global climate change. We’re interested in how federal policy is influencing these emissions, and how well it’s working.

Before we can judge whether the federal government’s actions on energy and climate are appropriate or effective, it helps to understand what it’s currently doing. How does the federal government influence energy supply and use? How much does it spend doing it? Since nearly all federal government activity related to energy depends on support from the U.S. budget process, we analyzed the federal budget looking for spending and revenue collection which substantially influenced energy supply or use in 2010. We found that:

  • Annual energy-related spending is substantial – $290-610 billion (the range reflects different views on what share of security spending is energy-related) or about 6-14% of all federal spending and tax breaks in 2010 (nearly $4.5 trillion). To put this in perspective, the Solyndra loan is less than a day’s worth of federal energy-related spending while the total spent by the Department of Energy on renewables over the last 33 years ($29 billion in 2010 dollars) amounts to about a month of federal energy-related spending.
  • Most energy-related spending is public investment ($240-560 billion), very little of which focuses on reducing emissions. This includes spending on energy-related infrastructure ($104 billion), energy-related security spending ($46-368 billion), and energy procured for government activities ($88 billion). Less than 10% of these investments focus on reducing emissions. Most ($175-500 billion) support petroleum-based transportation such as highways, jet fuel for military aircraft, and defense spending to secure oil supplies. The $27 billion in fees collected from these investments (such as payment for electricity services) recouped merely 5-11% of the investment.
  • Energy incentives ($47 billion) account for less than 2% of federal spending and tax breaks, and just one third of these ($17 billion) are for low-emissions technologies. This includes $11 billion in tax breaks for renewable and energy efficiency technologies and $5.5 billion in grants and loans for low-emissions technologies. The remaining incentives include over $14 billion for fossil fuels, $3 billion for transportation, $6 billion for biofuels, and nearly $5 billion for basic energy-related science. Most of the renewable energy and efficiency tax breaks ($9 billion) have now expired, or will expire in 2012 absent new legislative action.
  • Energy taxes on fossil fuels help reduce emissions and provide revenues ($48 billion) which offset the cost of energy incentives.
  • Total spending to reduce greenhouse gas emissions was $38 billion, less than 1% of federal spending and tax breaks. $13 billion of which is temporary spending from the Recovery Act which has already ended or will end by the end of 2012 without legislative action.

So we see that incentives for clean energy and fossil fuels – the topic that dominates the debate – are a small fraction of energy-related spending. Discussions about the appropriate role of government in energy supply and use would benefit from stepping back and considering the full range of public investments made in energy-related infrastructure, security, and government procurement.

Nevertheless, while they comprise a small portion of overall spending, federal incentives are an important source of global clean energy finance. For low emission technologies, the $5.5 billion of federal grants and loans in 2010 were comparable to global technology venture capital funding of $7.8 billion that year. Similarly, the $11 billion in federal tax expenditures represented a sizeable fraction of the $34 billion U.S. private investment in renewable projects in 2010.

With this basic picture in mind, CPI is focused on the impact this spending has. Does it help reduce emissions by deploying clean energy technology and bringing down its cost in an efficient manner? Or does spending instead support incumbent, higher emissions modes of energy supply and use, thereby making it harder for clean technologies to compete? We will return to these questions in our future work on energy policy effectiveness.


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