Cheap oil? A chance to rethink fossil fuel subsidies

Cheap oil? A chance to rethink fossil fuel subsidies

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The recent dramatic plunge in oil and natural gas prices, to their lowest level since the global recession in 2009, has some observers worried about the effect on clean tech.

But could it be that the current environment — with gasoline at less than $2 a gallon in much of the United States — is actually a good time to double down on policies to move away from fossil fuels to more renewables and efficiency? 

 That’s the conclusion of a special report on energy in the Jan. 17 issue of The Economist headlined “Seize the Day,” even though conventional wisdom has it that renewables have a tougher time competing when fossil fuels are cheap, making grid parity (in the case of natural gas-fired electricity) more elusive for solar and wind power. 

“The fall in the price of oil and gas,” wrote the venerable magazine that dates back to 1843, “provides a once-in-a-generation opportunity to fix bad energy policies.” Chief among these policies are fossil fuel subsidies, at least some of which were born out of decades-old governmental fear of oil scarcity and soaring prices (I’ll let others debate how many came from mere lobbying power).

The Economist called fossil fuel subsidies a “rathole” which swallowed an estimated $550 billion from governments across the globe last year. “Falling prices provide an opportunity to rethink this nonsense,” the magazine continued.

“Why should American taxpayers pay for Exxon to find hydrocarbons?” The Economist is not a big fan of subsidies for clean energy either, and Ron Pernick and I recommended phasing out all energy subsidies in the Seven-Point Action Plan presented in our 2012 book, "Clean Tech Nation."

Renewables and efficiency could compete on their own merits on a truly level playing field, if that is ever possible in the energy sector. The recent plummet of oil and natural gas prices may be grabbing headlines, but it’s nothing compared to the (longer-term) drop in the cost of solar PV panels — by a factor of five in the past six years, according to the International Energy Agency. 

Returning half a trillion dollars to global government coffers obviously could fund myriad infrastructure projects including grid modernization (plus projects such as schools and hospitals, which nations such as India and Indonesia are doing after cutting fuel subsidies).

But low oil prices also create the opportunity to modestly raise taxes on fossil fuels without major economic (and one hopes, political) pain.

This idea has been proposed in Congress — somewhat amazingly, by members of both parties. Sen. Bob Corker (R-Tenn.) recently co-sponsored a bill that would raise the gas tax by 12 cents over two years. Other prominent Republican senators such as South Dakota’s John Thune and (really!) Oklahoma’s Jim Inhofe have said a gas tax increase is on the table.

America’s bridge and highway infrastructure is crumbling, and the current 18.4 cents-per-gallon tax has not been raised in more than two decades. 

And the Congressman from my Northern California district, second-term Democrat Jared Huffman, introduced a bill last month — the Gas Tax Replacement Act of 2015 — that would replace the current per-gallon levy with a tax based on the carbon content of all transportation fuels throughout their life cycles. Huffman thinks that low oil and gasoline prices create an opportunity to open debate on the issue of a carbon tax, and he said some Republicans are quietly supporting the idea. 

In California, a de facto carbon tax on transportation fuel went into effect at the beginning of this year — and drivers hardly even noticed. The "tax" resulted from bringing fuels under the state’s landmark carbon cap-and-trade system. That change was vehemently opposed by the state’s petroleum industry, which warned of 75 cent-per-gallon price jumps which would devastate low-income drivers. Instead, the tax amounted to a few cents, an increase dwarfed by plunging prices at the pump. 

In the electricity sector, the slow-but-steady transformation of the century-old centralized generation model is also upending the traditional price-comparison calculus of renewables and on-site generation vs. centralized natural gas plants.

“Low gas prices can help accelerate distributed generation by making options like CHP (combined heat and power) and fuel cells more cost-effective,” said Richard Kauffman, chairman of the New York State Energy Research and Development Authority. Kauffman is helping lead New York’s efforts to shift utility incentives from new generation plants to demand-side management and better grid capacity use, which currently averages just 54 percent in the state. 

Speaking in a January webinar produced by policy advocacy group Vote Solar, Kauffman noted that utility Con Edison was able to scrap plans for $1 billion in substation upgrades in the Brownsville section of fast-growing Brooklyn, saving ratepayers several hundred million dollars by ramping up distributed generation and demand response assets instead. The plan was approved in December by state regulators, whose Reforming the Energy Vision program is creating new incentives for utilities to focus on the demand side.

“For years, utilities and regulators have operated under the assumption that demand is fixed or growing, and we need production to meet it,” Kauffman said. “We don’t really need to think about the world that way any more.”

It’s a changing and increasingly complex world indeed, one in which fossil fuel vs. clean energy price comparisons no longer tell the whole story. And the calculus of energy and climate politics and policy may be shifting, too.

The November election of the new GOP-controlled Congress inspired a spate of stories about the high percentage of climate deniers now in office, but then a New York Times/Stanford University/Resources for the Future poll released last week found that 74 percent of Americans — and a surprising 51 percent of Republicans — said the government should be taking strong action on climate change. And 67 percent, including 48 percent of Republicans and 72 percent of independents, say they’re less likely to vote for climate-denier candidates.

Few expected oil prices to fall 60 percent in six months. Not many predicted a bold, defiant (if light on specific energy and climate policies) State of the Union address from President Obama after his party’s midterm election setback. And I’d guess even fewer expected The Economist to recommend sweeping energy policy changes to propel clean-energy growth while we’re awash in cheap oil. Here’s to the unexpected. Let’s do this.

 This article originally appeared at CleanEdge.com.