The Paradox of Global Renewable Energy Subsidies

Lately there has been a fair bit of discussion about whether money from the US stimulus package should go to fund alternative energy projects that, while increasing the country’s renewable energy supplies, go to foreign companies and create foreign jobs. What I find interesting is not necessarily the politics or the macro-economics of the situation (or even the jobs aspect — we live in a globalized world), but rather the policy aspects of why so few US firms are able to compete, so that only foreign companies can carry out these large-scale projects.

A recent report by the American University’s Investigative Reporting Workshop outlines the situation quite nicely:

The reliance on foreign companies for development of wind energy appears to be at least partially tied to the U.S. government’s resistance to subsidize a home-grown wind energy industry until now. With so few U.S. companies in the business, the door was open for foreign companies to walk away with the bulk of the grants. European companies, in particular, are well positioned to collect stimulus benefits for clean energy.

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While the U.S. has dithered with temporary tax incentives for producers, European governments have awarded permanent tax breaks and large subsidies to wind energy companies and poured vast sums into research and technology.

Even as billions in stimulus dollars for clean energy are starting to flow, Congress is still hammering out an agreement to mandate that up to 20 percent of the nation’s energy come from renewable sources by 2020 (a Senate proposal currently calls for 15 percent.) Denmark, by comparison, has already achieved that goal – and in the process became the most dominant wind turbine manufacturer in the world.

This is an interesting dilemma. On the one hand, we want the most efficient allocation of resource, and trust (for the most part) the market to allocate capital to the firms and technologies that have the greatest possible potential. On the other hand, we face world-wide competition within the renewable energy industry, with domestic firms up against foreign firms supported by governments with far greater involvement in the renewable energy market than ours. Economically, our approach is more efficient. However, it has not been effective at spurring growth akin to what Europe has seen within the alternative energy sector.

Facing the realities of a globalized energy industry, where almost every governments offers subsidies, tariffs, or energy standards that distort the market, we cannot pretend that our domestic firms are able to compete on the same scale without government support. An optimal solution? No. But perhaps necessary? Yes.