Posts Tagged subsidy
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My first reaction was “Wow! Did I just read that correctly?!”
It was one of those “ah-ha moments” when a seemingly mundane statement leapt out of the page and whacked me on the forehead. This time the catalyst was a twitter reply from Chris Pragman (@ChrisPragman) who describes himself as an “Avid Podcast listener, Engineer, Nuclear Power, Fire Protection, and beer geek with a long commute!”
You see, I had posted a tweet earlier in the day about the cost to taxpayers of some “green energy” jobs. There’s a new wind farm in Oregon called Shepherds Flat that received federal cash grants totaling $490 million under the guise of job creation. For that grand sum the Shepherds Flat project will create 35 new jobs. The math is easy; $14 million per “green energy” job. Our tax dollars at work!
This tidbit about Shepherds Flat was part of a larger report by the Energy Tribune that among other things compared the relative size of US government subsidies to various energy industries. The report by Robert Bryce calculated subsidy dollars per unit energy produced and concluded the renewable energy industry receives 6.5 times more federal government subsidies than the nuclear industry, and 12 times more than the oil and gas industry. That fact really didn’t surprise me considering the billions of dollars in grants, production tax credits, and favorable depreciation rules the government lavishes upon anything branded with the “renewable” label. Then Chris asked a great question, “What do they consider nuclear subsidies?”
When I dug into that question I learned the Congressional Budget Office is tasked with tracking the amount the government spends subsidizing various industries, and they publish their findings periodically. There it was on page 3: $900 million in “subsidies” for the “favorable tax treatment of nuclear decommissioning funds.” Hmmm. What could that be?
You see, every nuclear plant owner is required by federal law to set aside funds to ensure there’ll be enough money to pay for decommissioning the plant when the time comes. Typically plant operators add to the fund each year and over time the fund grows until it’s used. The NRC monitors each fund and will require plant owners to make additional payments if they think they’re behind. These funds are essentially forced savings accounts that add to each nuclear plants annual operating expenses.
So what’s the “favorable tax treatment?” It turns out Title 26 of the United States Internal Revenue Code requires interest or other investment earnings of nuclear plant decommissioning funds to be taxed at “only” 20%. Maybe I’m alone in this, but being required by law to set up a fund, then being taxed on that fund’s growth hardly fits the definition of a “subsidy!” Other sources of energy are not required to set up such funds – they carry the potential future costs of dismantling equipment as liabilities on their balance sheets. In the case of nuclear plants they’re forced to set aside capitol in government mandated and monitored funds, then the government takes 20% of the fund’s earnings.
Anyway, in 2009 the CBO calculated this “favorable tax treatment” to be worth $900 million, and they called that a “subsidy.” That’s quite a different kind of subsidy from the cash grants, tax credits, and accelerated depreciation enjoyed by the renewable energy industry. Personally, I have a tough time viewing this as a subsidy at all.
Chris, thanks for asking the question! I learned something new today, and maybe some of you out there did too.
Happy Birthday to This Week in Nuclear!
On Dec 27 This Week in Nuclear will turn seven years old. I would like to express my heartfelt “thanks” to all of you who have supported and continue to support the blog and podcast!
A bi-partisan group of US Senators is pushing for an increase in the nuclear federal loan guarantee program. They argue the USA can not meet air pollution goals without a sizable nuclear expansion, and the loan guarantee program is essential to getting new construction underway. As it stands now the Federal government has approved $18.5 Billion in loan guarantees, but the industry is pushing for $50-100 billion.
Anti-nuclear groups are mounting a full assault, much as they did earlier this year when a small group in the House tried to get a similar provision added to the Waxman-Markey bill. In that case the anti’s succeeded and the pro-nuclear provision was struck from the bill.
Anti-nuclear groups like Greenpeace call the proposal a “massive subsidy,” but that stretches the truth. Loan guarantees are not subsidies, they are a guarantee by the government to repay investors for a portion of the cost if the borrower defaults. Their purpose is to reduce the risk of the loans so lenders can offer lower interest rates. The borrowers bear the full cost of the program plus administrative fees.
There’s a parallel that many of us are familiar with: the federal college student loan program. The government guarantees student loans so that college students with limited resources can borrower money with favorable terms and at low interest rates. The program allows them to invest in an education they might otherwise be unable to afford. Even though the government backs student loan, the borrower is still required to repay the loan. If the borrower suffers some kind of financial catastrophe and is unable to repay, then the government pays off the loan and works with the borrower to recoup their losses. The program helps people invest in their future and the cost to the government is very, very low because the default rate is almost zero.
Think of the loan guarantees as student loans for nuclear plants. The government stands behind the loans, allowing the borrowers to get favorable terms for large investments they otherwise could not afford. The borrowers pay for the program, and they pay back the loans. Just like the student loan program, the nuclear loan guarantees are a wise investment in our future!