Saturday, May 14, 2011

Oil Subsidies vs. Clean Energy Subsidies: The Doctrine of Externalities

      With the rumblings on Capitol Hill about elimination of tax incentives to the oil industry, conservatives and oil industry defenders have complained that fossil fuel organizations are being unfairly singled out and that if those advocating for the elimination of oil and gas subsidies were consistent, they would also advocate for the elimination of subsidies and tax incentives for renewable energy producers.

   Though this argument, on its face makes sense, and even had me - the economic conservative - convinced, upon further study the two types of subsidies cannot be correlated. The basis for this statement is found within the economic doctrine of negative externalities. Negative externalities, for those readers who are not familiar with the term, are societal costs of production of a resource or product - such as pollution - that are not taken into account in the market value of a certain product. With the pollution example, it could be said that the market - by keeping gasoline prices low based upon supply and demand (or other forces) - does not accurately measure the overall social costs in heathcare, environmental cleanup, and worker productivity etc.  that the pollution from gasoline has. In fact, it could be said that the market does not measure these overall social costs - these externalities - at all.

     It is with the concept of externalities in mind, that the discussion of tax incentives for fossil fuel producers vs. clean energy producers can be examined. In this case, it can be said that the market inherently favors those industries that have negative externalities - fossil fuel producers - vs. those industries that have neutral or even positive externalities - clean energy producers, because the benefit of the latter are not found within the price of the product, but that which the product prevents.  Thus, it can be asked, would it not be better for government to encourage the production of clean energy through tax incentives - thereby lowering their upfront higher market prices, while keeping tax rates at current levels or even higher of those companies that produce products that though immediately cheaper, have higher social and long term economic costs?

     Though this idea makes sense economically, it depends upon one key element, an element that has prevented its widespread acceptance and use. Though most everyone agrees that there are negative externalities associated with fossil fuel production, how can those externalities be measured economically? For example, how can one definitively measure the economic impact of worker productivity because of increased pollution?  Conversely, how can one measure the economic value of the positive externalities from clean energy production and convert that into real tax incentive and subsidy numbers? This is a difficult question to answer, and a discussion that needs to be had.

     But, even if the specifics and technicalities of clean energy tax breaks are discussed, the comparison of them to fossil fuel subsidies is not warranted. The product of fossil fuel corporations have direct societal impact, a societal impact that is not fully appreciated or taken into account by market forces. Thus, for this reason, there is a fundamental difference between fossil fuel producers receiving tax incentives and clean energy producers receiving them. One group is in effect "taxing" society twice, for on one hand it is given tax revenue by the government while on the other hand has society and that same government paying for the negative effects of its product. Clean energy producers are not participating in this double taxation scheme, and thus the discussion on the legitimacy of tax incentives for their products should not be discussed in the same breath as ending fossil fuel subsidies.  

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