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Mr. Trump, Tear Down Those Subsidies!

 by John Brian Shannon

A hundred years ago in America, the federal government decided to help a new industry take its first baby-steps by legislating oil and gas subsidies which were paid for by increased citizen taxation.

It’s commonly done by governments everywhere and it’s not the worst thing for a nation to do.

Here’s how that works: (1) A new industry appears (2) the government sees economic potential (3) citizens are told they must pay more tax to support the new industry (4) the subsidies continue long after they’re no longer required (5) the subsidies tend to increase over time and expand into other areas of the business (6) until the subsidies reach obscene amounts and the taxpayers revolt.

In short: Subsidies are a ‘good thing’ — until they aren’t

United States energy subsidies from 1918-2009. Image courtesy of Nancy Pfund.

United States energy subsidies from 1918-2009. Image courtesy of Nancy Pfund.

Energy subsidies accumulate over time

Arithmetic tells us that U.S. oil & gas subsidies total $442 billion from 1918-2009.

It’s worse if you add the additional $80 billion/yr in U.S. oil & gas subsidies paid from 2010-2017, which total $560 billion.

Here’s what U.S. oil & gas subsidies look like when totaled over the entire 1918-2017 timeframe: $1,002,260,000,000.

U.S. oil and gas subsidies since 1918 total one trillion dollars

And U.S. taxpayers paid every penny. That’s a trillion dollars of income tax and fuel tax paid by U.S. citizens to subsidize American oil & gas companies since 1918.

Subsidies are a fine thing for new industries taking their first baby-steps. Wherever the federal government sees economic potential for a new industry, subsidies are the way to grow the opportunity and help stabilize the new industry UNTIL it can stand on its own two feet.

But Mature Industries Don’t Need Subsidies

The problem with oil & gas subsidies is that by 1950 they were 100% redundant. No longer needed. At all.

When mature industries continue to receive taxpayer-funded subsidies long after the original need for them disappears, that revenue goes to support pro-industry advertising, pro-industry organizations and pro-industry politicians.

In that way, some $80 billion/yr in oil & gas subsidies became available for pro-industry causes as it was no longer required to support a new industry taking its first steps.

Note: Not all oil and gas subsidies are bad! Additional subsidies paid for research on ‘cleaner-burning’ fuels via high-tech additives, a transformation that began slowly in the 1970’s and continues — to remove lead from gasoline, and for catalytic converter research in the 1980’s, are two such examples. Billions of dollars were well spent and were very cost-effective. But once the research has been done and the clean-burning fuel goals have been achieved, no reason exists to continue to pay such subsidies.

Except for the dollar amounts, much that applies to U.S. oil and gas subsidies also applies to U.S. nuclear power subsidies.

So let’s skip directly to the nuclear power numbers, shall we?

Simple arithmetic tells us that U.S. nuclear power subsidies amounted to $182 billion from 1947-2009.

It’s worse if you add the additional $102 billion (conservative estimate) in U.S. nuclear power subsidies that were paid by taxpayers from 2009-2017.

Here’s what all (federal) U.S. nuclear power subsidies look like when totaled over the entire 1947-2017 timeframe: $284 billion.

U.S. nuclear power subsidies since 1947 total $284 billion

But if one were to include all nuclear power subsidy costs including; safe storage, disposal, or reprocessing of spent fuel, transportation of spent fuel to other countries for safe storage or reprocessing, the decommissioning of nuclear power sites such as Hanford, the cleanup and cost of replacement electricity due to U.S. nuclear power plant malfunctions, and future reactor design spending, nuclear power subsidies could total $500 billion. Perhaps as much as $1 trillion.

NOTE: That’s not including billions of dollars worth of grants awarded by the federal government for new nuclear power reactor designs to replace America’s aging reactors.
Nor does it include the tens of billions paid to store and defend so-called ‘spent fuel’ which is highly radioactive and useful to terrorists.
Nor does it include reprocessing costs for spent fuel.
Nor does it included shipping costs to ship spent fuel to other countries for storage or reprocessing.
Nor would it include any costs associated with nuclear power plant malfunctions.
Nor would it include any costs associated with nuclear powered US Navy ships.
Due to the sensitive nature of nuclear materials some information is difficult to obtain, therefore, the $102 billion
nuclear power subsidies figure used for the 2009-2017  timeframe is an estimate.

Biofuels are a new-ish industry. It’s about where the U.S. oil & gas industry were, in their first 20-years. It’s an industry where subsidies can make a difference to get the thing up-and-running and add stability to the new industry.

Biofuel energy subsidy in the early years was subsidized at $1.00 per gallon, which then declined to $.66 per gallon, but since 2011 has fallen to $.45 per gallon.

Total U.S. biofuel subsidies amount to $31 billion from 1980-2009 and an additional $65 billion from 2010-2017.

For a grand total of $96 billion from 1980 to 2017.

U.S. biofuel subsidies have totaled almost $100 billion since 1980

Note: The original U.S. biofuel subsidies enacted by President Carter during the 1970’s fuel crisis were later expanded to allow U.S. biofuel producers to compete with the much larger and more heavily subsidized Brazilian biofuel producers.

Coal subsidies follow the pattern described in the introduction to this post (subsidy steps 1 to 6) and subsidy costs are in the same neighborhood as oil & gas.

But U.S. coal subsidies in all its forms — including so-called ‘Externalities’ might total half a trillion dollars annually. Here is what a landmark Harvard Medicine study said about the externality costs of U.S. coal:

“Each stage in the life cycle of coal—extraction, transport, processing, and combustion—generates a waste stream and carries multiple hazards for health and the environment.

These costs are external to the coal industry and are thus often considered “externalities.”

We estimate that the life cycle effects of coal and the waste stream generated are costing the U.S. public a third to one-half of a trillion dollars annually.

Many of these so-called externalities are… cumulative.

Accounting for the damages… doubles to triples the price of electricity from coal per kWh generated, making wind, solar, and other forms of nonfossil fuel power generation, along with investments in efficiency and electricity conservation methods, economically competitive…” — Harvard Medicine Full cost accounting for the life cycle of coal

This study illustrates the most vexing problem with U.S. energy extraction, refining, processing, storage, end use, and decommissioning of energy sites — energy ‘externalities’. And such externalities aren’t limited to the coal industry.

Energy production externalities (also called ‘Indirect Subsidies’) may cost America $1 trillion per year due to higher healthcare and infrastructure maintenance costs.

Damage to infrastructure arrives in the acid rain falling downwind from fossil fuel power stations, causing damage to bridges, buildings, and roads constructed with concrete (so-called concrete spalling) and causes paint damage on cars and trucks, and is responsible for crop losses downwind or downstream from fossil fuel extraction sites or power stations, and harms aquatic life found in rivers and coastal areas near river outlets.

Terms to remember: Energy ‘kind’ and ‘type’

There are only two ‘kinds’ of energy: Non-renewable and Renewable energy.

There are many ‘types’ of energy:

Natural gas-fired, oil-fired, coal-fired, nuclear energy, solar photovoltaic, solar thermal, wind turbine, hydro-electric, ocean thermal, ocean wave, ocean tidal, biomass, wood-burning, and pellet-burning.

United States - kinds of energy. Planetary energy graphic. Image courtesy of Perez and Perez 2009.

United States – The graphic illustrates various kinds of energy. Planetary energy graphic image courtesy of Perez and Perez 2009.

The trend of large subsidies in a sector like the energy sector, is that subsidies reward less efficient energy producers and punish more efficient producers in relative terms.

“Just pump it Fred, we’re getting our subsidy money per barrel of oil, who cares if it’s #4 sour crude oil? We get paid to pump oil, not look for better quality oil.”

Although there’s a separate ‘oil exploration’ subsidy too.

And let’s not forget the more ‘sour’ the crude oil, the more processing it requires at the refinery, and because #4 sour is very tough on oil refinery maintenance budgets, it further increases costs at the gas pump.

The more oil you pump of whatever quality, the more subsidy money you get — and that isn’t the way to maximize the efficiency of money in the energy market.

The oil industry delivers an easy example, but every energy subsidy scheme changes the behavior of the principals involved towards lower quality energy, whether it’s subsidized non-renewable energy or subsidized renewable energy.

In the primary energy segment (electricity and district heating) the type of energy varies by region.

Hydro-electric, coal-fired, and nuclear power are astonishingly costly to build and couldn’t have been built without massive subsidies. And even with huge subsidies for R&D, construction, millions of acres of land grants, generous tax incentives and more, some of those energy types still require small per kW/h subsidies to compete in the marketplace. In their favor, all of these have been extremely reliable primary energy producers for decades, but are mature industries that no longer require subsidies as financing such projects in the 21st century is considered routine. But it wasn’t always so.

In secondary energy (transportation) oil and gas infrastructure is also costly to build and the necessary infrastructure couldn’t have been built without massive subsidies. Yet, with sufficient refinery capacity already available there is little need for new refinery capacity, and today’s fuel prices support easy financing for future capacity additions.

Especially for vertically integrated oil companies that own their oil concessions (oil fields) their own distribution system (pipelines, or rarely, rail) and their own refineries, these can thrive during times of low crude oil prices.

Removing oil & gas subsidies would cause oil companies to become vertically integrated with no loss in profits. But why bother, when there’s no incentive due to a high subsidy scheme?

That won’t be the only change. Every subsequent change to the business would necessarily be designed to improve the overall efficiency of the company, sans-subsidies. That’s been missing since 1918.

By leveling the playing field for all kinds and types of energy, the most efficient energy kind and type will become king, and energy investors will earn more profit. (Because profits are earned on the ‘spread’ — the difference between what energy costs to produce and what it can be sold for. Subsidies make markets significantly less efficient and muddy the waters)

In summary: Removing energy subsidies will cause every energy producer to concentrate their efforts on the most efficient kind and type of energy in their region of the country, instead of choosing their energy kind and type by how many subsidy dollars they can capture via their energy choice.

President-elect Donald Trump, please tear down these subsidies!

And let the marketplace determine the most efficient energy.

Federal energy subsidies should return to their proper place. That is; When the federal government sees a new industry with economic potential; To invest, subsidize, and promote that new industry using taxpayer dollars for only as long as it remains a new industry. And not one day longer.

Markets are perfectly efficient when left to their own devices. Massive, taxpayer-funded subsidies for mature industries only serve to warp the markets and punish the most cost-efficient U.S. energy producers.

People either believe in free markets or they don’t

We can’t say we believe in free markets AND THEN massively intervene in the market with humongous, taxpayer-funded energy subsidies for some kinds and types of energy, but not other kinds and types energy.

With the greatest respect Mr. President-elect, I urge you to allow all U.S. energy producers to compete in a free market by phasing-out energy subsidies for every kind and type of energy over the next five years.

Has Trump got the right economic plan?

by John Brian Shannon | December 5, 2016

Donald Trump won the 2016 election in an upset defeating the expected winner Hillary Clinton, because to voters, he represented change while Hillary represented the status quo.

His potential second term in office four years on, depends upon one thing; Will he have addressed the concerns of those who voted for him?

Disaffected and disillusioned voters put Mr. Trump into office. And just who are those people?

They’re the bottom-two economic quintiles, with some votes coming from the other quintiles, to be sure. But protest votes aren’t cast by those happy with their lot in life — which is to say; The Wealthy.

The protest voters are those among the 100 million that have given up looking for work — not the wholly unrealistic 4.9% official unemployment rate statistic, which shouldn’t ever be considered a metric on it’s own.  It’s a junk stat. Not true at all. Meaningless.

Any official unemployment stat should tell the whole truth — both regular unemployed’s, long term unemployed’s that have simply ‘given up’ looking for work, and it should include those on welfare willing to work (if they could find a job that would pay them enough to cover their basic needs) because most of those people were workers until their jobs were off-shored and their income tax contributions ended.

If Donald Trump solves inequality or even beats it back to a reasonable degree, he will likely win a second term in office; It will mean he listened to his constituents

Solving it via government handouts seems to be ‘out’ in a Trump administration but solving inequality via a $1 trillion infrastructure plan seems eminently reasonable, logical, and inspires hope for individuals and will work to add confidence to markets.

If 100 million people were to ‘suddenly’ get jobs (that’s the 100 million unemployed over and above the false official stat of 4.9%) in the United States over the next four years, watch the economy leap forward, the debt-to-GDP stat fall, total tax revenue will surge dramatically, and deficit spending could (and should) become a thing of the past.

Revenue-neutral? I’d like to hear more about that!

Privatizing America’s national parks? Confiscating the wealth of the 1 percent? Selling NASA to a group headed by Elon Musk? Selling the SouthWest to Mexico?

There are all kinds of ways to raise $1 trillion dollars to fund a national infrastructure program, but do we really want to do those things? Not really.

Well… selling NASA to Elon Musk (were he able to raise such a huge amount of capital) could inject some interesting entrepreneurial vigor into that legendary administration.

Incentivizing corporations via tax relief always results in more profits but rarely results in more infrastructure spending. Proved history on that

So where will that trillion come from?

IF ‘The Donald’ is thinking American citizens and U.S. corporations will invest in America’s infrastructure by buying ‘road building bonds’ and thereby lower their overall tax bill, it’s a brilliant plan

For individuals or corporations buying such bonds, whatever money they put toward it should be considered ‘taxation-free’ money by the IRS. (No tax payable on any money used to buy national road building bonds, and no tax payable on those bond dividends)

American citizens, U.S. corporations, and U.S. investor groups should get first dibs on it. From a psychological perspective, having American citizens and U.S. corporations ‘buying-in’ to such a goal is almost as good as getting the investment itself.

After two years it could be opened up to non-Americans and global institutional investors.

Also, the U.S. corporate tax rate should be harmonized to Canada’s lower corporate tax rate.

That should’ve been a part of the original NAFTA agreement, and it’s still not too late to add it in.

United States - Has President-elect Donald Trump got the right economic plan? Image courtesy of Statista.com

United States Economy: Has President-elect Donald Trump got the right economic plan? Image courtesy of Statista.com

It’s ridiculous that the NAFTA partners have three different corporate taxation levels

Remember when senior executives at Burger King wanted to move their corporate HQ to Canada to save billions in taxes?

I’m sure it’s not the only example that wreaked havoc in the political relations between NAFTA partners and caused some to wonder if America’s commitment to ‘Free Trade’ was serious, as the proposed Burger King move was overruled by the Obama administration.

You either believe in Free Trade or you don’t, you can’t have it both ways. Capitalism OR Statism — your choice.

With a corporate tax rate standardized to the lowest of the three NAFTA partner countries (Canada’s is the lowest) such moves and threats of moves, would become a thing of the past, while the lower tax rate would find some of those extra profits moving to U.S. infrastructure spending, “To Make America Great” again.

Finally, the UK should be invited to join NAFTA and match their corporate tax rate with Canada/U.S.A./Mexico

Such trade harmonization will lead to better political relations and less economic infighting between existing and potential NAFTA partners, concomitant with a trillion dollars earmarked for federal infrastructure spending courtesy of a tax-free road building bond scheme.

That’s the way to ‘Make America Great’

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