Energy Subsidies: A Historical Perspective

12/12/11

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100 million acres of public land. The U.S. railroad industry flourished in the next few decades, acting as a leading catalyst of the economic boom.

Between 1921 and 1971 the U.S. Federal Transportation budget for highways totaled $122 billion, averaging a little over $2 billion a year. The U.S. Interstate system took shape in this time period and laid the foundation for population and worker mobility.

Iron and steel-making

U.S. steel makers have received a steady stream of taxpayer-funds subsidies throughout history. Ernst and Young estimated federal, state, and local government subsidies amounted to over $30 billion between 1959 and 1989. A more recent study, using more conservative assumptions and measurements, has calculated the combined total (through 1999) at over $16 billion.

The cost to U.S. taxpayers has come from special exemptions from federal environmental regulations granted specifically to the steel industry, largely from the Clean Air Acts of 1981 and 1990. Steel companies have also greatly benefited from various “Buy American” acts. Under the provisions of these acts, foreign steel companies are foreclosed from competing for contracts in a number of highway construction, mass transit, pollution abatement, state and local public works, and airport construction programs.

Petroleum

Tax breaks to the petroleum industry date back nearly a century, when they were intended to encourage exploration. The Tariff Act of 1913 allows oil companies to claim deductions for the lost value of tapped oil fields far beyond the amount the companies actually paid for the oil rights. In an attempt to deter Soviet influence in the Middle East in the 1950s, the State Department backed a Saudi Arabian accounting maneuver that reclassified the royalties charged by foreign governments to American oil drillers. Over the last 10 years, oil companies have also been aggressive in using foreign tax havens.

What does all this mean?

Industries at the core of U.S. national growth and security have historically benefited from subsidies—that is a fact. Some have benefitted in their early stages while others have needed that extra push to grow and mature. Some have utilized tax breaks while others have benefited from loans. The energy sector is no different. There appears to be a marked and acrimonious schism developing (if it has not already) between advocates of traditional (translation: fossil-fuel derived) energy and alternative energy (renewable) with arguments on erasing subsidies. This is not productive. Rather than arguing for eliminating subsidies for specific groups, let’s focus our attention on efficient and effective mechanisms for maintaining and developing a long-term energy strategy for the U.S. and the world. Subsidy is not a bad word. Used effectively, today’s subsidy is tomorrow’s tax revenue.

Mahesh Konduru is currently a Principal at the Potomac Energy Fund. He is an alumnus of the MIT Sloan School of Management. Follow @

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