You may have heard that renewable energy sources like wind and solar are uneconomical and can’t compete without huge tax subsidies from the government. But is there any truth to these claims? Read on for answers.
Governments around the world use economic incentives to encourage specific types of activities, or to help individuals, businesses, or entire industries. Examples of government incentives are all around us. For instance, the U.S. government provides approximately $25 billion annually to U.S. farmers in the form of price supports and insurance programs, some $20 billion annually to the fossil fuel industry in direct tax breaks alone, and states offer huge tax cuts to attract automakers and tech giants like Google and Amazon to locate operations in certain areas.
Tax credits play an important role in encouraging investment, providing financial security for families and businesses, and helping shape the economy in ways that benefit society. For these reasons, the U.S. federal government as well as many state governments have created both policies and financial incentives that are designed to facilitate the transition to cleaner sources of energy.
Clean energy incentives provided in the 2022 Inflation Reduction Act have sparked huge investments in communities across America and created tens of thousands of new jobs.
The most widely used incentives for renewable energy are tax credits. Tax credits encourage investment in renewable energy projects by offering project owners reductions in their federal taxes. These credits come in two forms: investment tax credits (ITC), which are based on the total investment in a project and are awarded once that project achieves commercial operation; and production tax credits (PTC), which are awarded based on the amount of energy a project produces, typically over a period of ten years.
For many years, ITCs were used to finance solar projects and PTCs were used to finance wind project development. Passage of the Inflation Reduction Act (IRA) in August 2022 expanded the ways in which wind and solar developers can use ITCs and PTCs, and also created a new tax credit for standalone energy storage projects, in addition to other new incentives for clean energy, energy efficiency, and electric vehicles.
Fossil fuels such as oil, natural gas and coal receive huge direct subsidies, and many more times that in indirect subsidies. Let’s take a look at each type of subsidy:
Direct subsidies are pretty straightforward – they happen when a government gives a company a direct benefit for a specific activity. For example, in the U.S., companies can deduct a majority of the cost of drilling a new oil or gas well, and they can also deduct “depletion” of a resource, which is similar to depreciation on an asset like a building. A 2017 report conservatively estimated that U.S. subsidies for fossil fuels totaled “around $20.5 billion annually, including $14.7 billion in federal subsidies and $5.8 billion in state-level incentives.”
Today, solar power costs less than getting electricity from coal or natural gas. While it’s true that the price of solar benefits from tax credits the same is true for the U.S. fossil fuel industry, which has benefitted from generous, permanent subsidies for more than 100 years.
Indirect subsidies can be a little bit fuzzier. They basically boil down to harm, losses, or costs that are caused by one set of actors but paid for by someone (or everyone) else. Pollution is the perfect example. Did you ever think about the dollar value of clean air or clean water? Many people would say these things are “priceless,” yet they are taken away from us every day by pollution – and the polluters don’t have to pay.
Instead, ordinary Americans – all of us – foot the bill. And pollution costs a lot, because it makes people sick, and if you aren’t healthy, you can’t be productive. A 2019 article published by Stanford University found that “Air pollution negatively impacts the U.S. economy, costing the [country] roughly 5 percent of its yearly gross domestic product (GDP) in damages ($790 billion in 2014). The highest costs come from early deaths, attributable to exposure to fine particulate matter (PM2.5).”
Chronic illnesses like bronchitis and asthma, as well as debilitating conditions like decreased lung and heart function, take a heavy toll on the quality of people’s lives, and can even cost them their lives. Numerous scientific studies have documented that poor air quality is a leading cause of premature death across the U.S., claiming thousands of lives annually. A recent study found that even with the reduction in coal-fired generation in recent years, “air pollution from fossil fuel power plants is still associated with an estimated 4,000 to 9,000 annual premature deaths in the U.S.”
In summary, the answer to the question “Are fossil fuels subsidized?” is YES, they receive a lot of subsidies. In 2023, it’s estimated that globally, fossil fuels received $7 trillion in subsidies: $1.3 trillion of that was direct, and $5.7 trillion was indirect.
In the U.S., the economic support provided by the ITC and PTC has helped the solar and wind industries expand dramatically over the past ten years, with corresponding significant drops in price. The cost of solar power fell nearly 90% between 2009-2019, and the cost of wind energy fell 70% over the same period. By supporting investment, research, and the technological advances that come as a result of an industry maturing, subsidies have lowered the cost of clean power for families, businesses, and communities.
Today, solar power costs less than getting electricity from coal or natural gas. While it’s true that the price of solar benefits from tax credits, as noted above, the same is true for the U.S. fossil fuel industry, which has benefitted from generous, permanent subsidies for more than 100 years. In addition, increasing the amount of electricity we get from clean sources like solar will help reduce the societal and environmental costs of using fossil fuels, which (as noted above) are estimated to exceed $5 trillion a year globally.
Not in any amount that you’d notice. According to the National Institute for Policy Studies, in 2022, just 0.7 cents – seven tenths of a penny – of every taxpayer dollar went to federal spending on energy and the environment. In contrast, 27.1 cents went toward Medicare and health, 17.8 cents went to the Pentagon and the military, and 12.9 cents went to pay down the national debt.
Meanwhile, the clean energy incentives provided in the 2022 Inflation Reduction Act have sparked huge investments in communities across America and created tens of thousands of new jobs. And it’s worth noting that clean energy projects predominantly benefit rural areas. In 2023 alone, existing wind, solar, and energy storage projects delivered $3.2 billion in revenue for communities throughout the U.S. in the form of lease payments to landowners, as well as state, local, and property taxes.
America's rural communities keep the country running by producing the food and energy we need to power our nation. In places where agriculture is a way of life, harvesting the wind is just like any other kind of farming – and it offers a predictable, drought- and weather-resistant source of income that can help stabilize a farm’s finances, particularly in lean years.
In terms of wildlife, wind projects are understood to have greater potential for risk than solar or energy storage projects, which are relatively low to the ground and don’t have moving parts. Fortunately, many of the issues seen with the first U.S. wind farms built some 40 years ago have been addressed and resolved.
Across the United States, many rural communities have deep roots in agriculture and a long history of using the land to generate value. Often, these places are also attractive to companies seeking locations to build solar farms. But is a solar farm really farming? And how does solar interact with other agricultural activities like growing crops and ranching?
