[Scott] Up next on "Energy Switch," the world of energy relies on subsidies.

We'll learn all about it.

- This is a large amount of federal budget expenditure and it's uncertain, because the total amount of a lot of these tax credits in the IRA are indeed uncapped.

- The Goldman Sachs estimate from 2023 was 1.2 trillion in the first 10 years.

In the long run, it depends on what did you get for all this money that you've spent.

My own view is for a lot of it, you're not gonna get anything.

[Scott Tinker] Coming up on "Energy Switch," different perspectives on energy subsidies.

[Narrator] Funding for "Energy Switch" was provided in part by, The University of Texas at Austin, leading research in energy and the environment for a better tomorrow.

What starts here changes the world.

[upbeat music] - I'm Scott Tinker, and I'm an energy scientist.

I work in the field, lead research, speak around the world, write articles, and make films about energy.

This show brings together leading experts on vital topics in energy and climate.

They may have different perspectives, but my goal is to learn, and illuminate, and bring diverging views together towards solutions.

Welcome to the "Energy Switch."

In some way, all energy is subsidized.

That helps support energy infrastructure and development with the intent of benefiting consumers, but we pay for it mostly in deficit spending.

These include tax credits for producers and investors, direct payments, standards and mandates for low carbon technology, accelerated expense schedules for oil and gas, and R&D funding.

If you want to know energy, you need to know energy subsidies.

My expert guests help unpack them.

Jonathan Lesser is the president of Continental Economics, an energy economics consultancy, and a senior fellow at the National Center for Energy Analytics.

Ryan Kellogg is also an economist, professor, and deputy dean at the University of Chicago Harris School of Public Policy, and a research associate at the National Bureau for Economic Research.

Next on "Energy Switch," we'll dig into energy subsidies.

Really looking forward to this.

It's a huge topic and probably one that not everybody knows too much about.

So, why should our viewers care about subsidies?

Ryan, just start with you.

- Pretty much every country in the world uses them, and they play a big part in how society meets its goals for energy, which I tend to think of as revolving around people wanting energy to be low cost.

We want it to be reliable.

You flip the switch, power should be there, and we want it to not harm the environment, and subsidies play a role in trying to meet any one, or perhaps all three of those goals at once.

- That's a tough triangle [laughs].

Lot of trade offs in that one.

- That's the nut.

- People should care about subsidies because we're spending literally trillions of dollars on them, and it's money we don't have.

I have to disagree a little with Ryan, because a lot of it is not the kind of subsidy you'd want, which is how do we advance technology, but it's more, how do I claim my subsidy?

So you have people actually trying to steer their business to capture a subsidy, and that's not very efficient.

- Interesting.

Let's get into it.

- You know, what energies are subsidized, just in a broad sense, and what do those subsidies look like?

- Most forms of energy, at least in this country, have some form of subsidy.

There's three major categories.

There's tax expenditures, which deals with adjustments to the tax code in some way.

There's direct expenditures, which just, "Here's some money," and then there's R&D expenditures, and that's how the Energy Information Administration actually characterizes subsidies.

- What's a production tax credit?

What does that mean?

- Let's say I'm a new, say solar producer.

For every unit of energy I produce, every megawatt hour, I'm gonna receive a tax credit on the order of $30, and effectively what that does is it reduces my tax liability to the federal government by $30, so it's not quite literally the government handing me a pile of cash, but effectively it's the same.

- It's pretty close.

- It's pretty close, yeah.

I think the one difference being, if I don't have enough tax liability, I need to basically transfer or sell that tax credit to some other entity that has enough tax liability to go ahead.

- And I can sell that to somebody else, or give it?

- You can sell that to somebody else.

- It's tradable?

- Pre-IRA, you'd have to form a financial partnership with some other entity.

This was called tax equity financing.

Post IRA sort of, they smooth the process by which those tax credits can be transferred, and if, let's say you're a developer, and you're a nonprofit or a government so that you don't have any tax liability by construction, you actually now get direct paid.

- Wow.

Compare a production tax credit to an investment tax credit.

- Well, an investment tax credit is basically money off the top of your construction cost, and in fact, it can go up as high as 60% of what's called the overnight capital costs, and what that means is the capital cost without including all the financing costs.

[Scott] Right, and that again, is for any project that meets certain criteria.

- You have to pay prevailing local wages when you build the facility, and you need to be located in what's defined as an energy community, which sort of typically means some combination of like some local unemployment, a lot of historic fossil fuels that people are sort of worried about what happens as we phase out fossil fuels.

What happens to those jobs and those workers?

And you get bonus credits for that.

- And is there a cap to the amount of money you can actually get, or is it 30 to 60% of whatever you just spent?

- It's uncapped.

- It's uncapped.

- It's uncapped, so they will phase out when electricity sector emissions targets are met, which in the context of the IRA means we reduce emissions to 25% of, I think it's 2020 levels, so a 75% reduction.

[Scott] And until that happens, you just keep getting them?

- Yeah, anything built new will be eligible.

- Wow.

[Ryan] Yeah, whatever you build, if you elect the ITC-- - That's real money.

- It is real money indeed.

- It's real money.

- Yeah, is that independent of anything they might get from the states?

- Yes, it would be completely independent of anything from the states.

- So let's get into another renewable portfolio standard, another kind of, is that a subsidy?

What is it?

- So what it is, it's a requirement that electric utilities, or in deregulated states, retail sellers of electricity, provides service with a minimum percentage of renewables that they say are qualifying renewables.

States don't define renewables all the same.

Pennsylvania, for example, you can burn used tires.

That counts as renewable.

Of course it's a kind of subsidy, a mandate to essentially buy something whether there's an electric vehicle, or it's electricity that's generated by a solar plant, or a burning tire plant.

That's a subsidy.

- So let's talk about mandates.

That's been mentioned a couple times.

Is a mandate a subsidy?

Electric vehicles, for example, is that a subsidy?

- I mean, I would think of it as just the massive tax on whatever the thing you're trying to get rid of is, so if it's a mandate for EVs, which the federal government doesn't have, but California does.

We'll see if it sticks [laughs].

That's a separate question, but that's kind of the equivalent of an infinite tax on a gas car.

[Scott] If I'm being told I have to buy one, does that go back to-- - Well you're not being told you have to buy one.

You're being told you can't buy a gasoline car, that's the distinction.

- So you can either ride your bike, walk?

- Ride your bike, take transit, carpool with somebody who bought the EV, these other things.

- Look, this is a subsidy.

You're forcing people, basically saying, "If you wanna buy a new car, it's gonna be one of these."

- Mandates, I mean, tell me again if I'm oversimplifying, mandates tend to reduce options.

Optionality seems to me to be what markets like?

[Jonathan] That's right.

- What happens when we start reducing options?

What are some of the consequences of that?

- One consequence is consumers are worse off because, you know, a lot of the arguments are, for example, for EVs, well, they're superior technology.

They're lower costs than gasoline engines.

They're easier to maintain.

They're just the most wonderful things since sliced bread.

Great.

Why does it need a subsidy?

- Yeah, no I completely agree with the skepticism.

The reason that, when you look at federal policy, it's about subsidies and trying to promote EVs but without a mandate, because Congress knows full well that people don't want a mandate, and the country just simply isn't ready for a mandate.

- Except there is a mandate for EVs now at the federal level.

It's implicit.

It's the CO2 standards the EPA has imposed on new gasoline powered vehicles.

- Yeah, is that a sneaky mandate, or what?

- I'm not, I mean, I'd call that a fleet standard.

I dunno if I'd call that a mandate, 'cause like the people who have really strong preferences to buy a standard internal combustion engine vehicle will be able to do so.

The people who wanna switch to an EV will be able to do so.

Is the standard gonna be realistic and achievable?

I don't know.

I think a lot's gonna depend on sort of progress commercially with EVs.

- We also hear oil and gas gets heavy subsidies.

What does that mean, and what form does that take?

- Yeah, the oil and gas subsidies we have on the books are fairly modest.

I'd say the biggest one right now, and it really costs a few billion dollars a year, is basically advantageous expensing of most drilling costs.

For the most part, when companies in the U.S. make an investment that you're gonna build some new equipment, or build a new factory, whatever it is, you spend a bunch of money up front and then, for tax purposes, you can't deduct that expense off your tax bill right away.

You have to treat it as an asset, and then you depreciate that asset over a very long period of time, which means your tax deductions are out in the future, which means they're worth less to you.

Oil and gas, for a very long time now has allowed much more accelerated expensing of investment, which, you know, I would argue is potentially reasonable policy you'd want across the board, and the Tax Cut And Jobs Act that was passed under Trump several years ago actually did that for a time.

- So accelerated basically depreciation of the asset.

- Almost immediately, or over a very short period of time.

As it currently stands, and how it's been for the most part, with the exception of the Tax Cut And Jobs Act period, oil and gas industry has kind of had an exception for itself carved out.

- No, you'll literally hear political leaders say it's the most heavily subsidized industry in the country.

What does that mean?

What do they, I mean, is it just not telling the truth?

Or what does that mean?

- I think when you hear that, I think what is meant is that what we allow fossil industries to do is not pay for the cost of the CO2 emissions that are associated with the combustions of their product.

- By other industries.

- By other industries, or by end use consumers.

We're not requiring them to say, pay a carbon tax commensurate with an estimate of the damages associated with climate change.

- And is that what people mean by an externality?

- Yes, exactly, yeah.

We're not requiring them to pay for the externality.

- Yeah, well, let's talk about the IRA.

What are some of the new subsidies and incentives in that program, and what are they intended to do?

- Obviously there's continuation of existing subsidies like production tax credit, the investment tax credit.

Those have been altered, expanded in some sense, but there's new subsidies for green hydrogen.

- Green hydrogen being hydrogen made from water.

- The idea of green hydrogen, yeah, is hydrogen manufactured by electrolysis, which basically is running current through water to separate it.

It's a little more complicated than that, but-- - And using solar and wind for the current?

- And using solar and wind.

So there's up to a three dollar per kilogram subsidy for that.

There's subsidies for battery technology, subsidies for energy efficiency investment, you know, if you're a homeowner or something, some subsidies for nuclear.

There's some, a little bit of R&D money, and I'm probably forgetting some.

- I can think of a few others, and there will be some we forget because it's a really massive bill.

I do think one very useful change was harmonizing the PTC and ITC across essentially any form of electricity that produces megawatt hours without any emissions.

So before the IRA, it used to be that solar was eligible for an ITC, but didn't get the PTC.

Wind got a PTC, would sometimes get an ITC.

Other things like geothermal weren't eligible for this.

New nuclear wasn't eligible for anything.

It made no sense.

Like why are we differentiating across technologies?

So the IRA, starting January, 2025, basically harmonizes that PTC or ITC, basically telling the market, you know, "We want clean electricity.

Market, you figure out what makes sense, and what's cost effective."

- It's probably important for people to know that you can't, a generator can't get both the PTC and the ITC.

They have to choose.

[Scott] You can't double dip.

So, kind of lumping it all together, what does it cost, and how does it actually get paid for?

- This is a large amount of federal budget expenditure, and it's uncertain because the total amount of a lot of these tax credits in the IRA are indeed uncapped.

The original estimate when the bill passed in 2022 was about 300 billion-ish of federal expenditure.

Other estimates more recently suggested could be up to a trillion dollars.

To me, I look at those figures and compare that to what I see as prospective damages from climate change.

That seems like a good trade to me.

- The Goldman Sachs estimate from 2023 was 1.2 trillion in the first 10 years, and on top of that, they didn't include the cost of financing all that, basically debt spending.

One of the major things for the IRA is they were talking about economic development, and it's gonna create all these green jobs, and somehow our economy will be transformed into this sort of green nirvana economy.

But if you actually look at what are those jobs costs?

And so I've done some work on offshore wind for this.

The amount comes to several million dollars every year for every job created.

- Per job?

- Per job, per year.

All that money is being paid by someone else, typically in the form, a lot of it's higher electric prices, and all the studies you see touting the thousands of jobs created, they never actually count what happens to economic growth and jobs when electricity prices go up?

And so that's one of the, I guess, unintended side effects.

- Interesting.

Other things that could be unintended?

- You know, I think in the long run, it depends on, you know, what did you get for all this money that you've spent?

My own view is for a lot of it, you're not gonna get anything.

It's a very expensive and inefficient way of trying to reduce carbon and, you know, advance technologies.

- You agree with that, or see it different?

- I think like Jonathan's comments like really hit at what I think of as one of the court's tensions in the IRA, which is that it's not a bill that's just about decarbonization.

It's that plus a clean jobs program bolted onto it.

But by doing that, you are effectively saying, "We're gonna forego some emissions reductions that could have been done at lower cost by importing sort of intermediate products, or even just end consumer products."

We're not gonna see the cheap Chinese BYD vehicles here anytime, in part because of IRA, in part because of tariffs, but you're gonna start seeing them in lots of other places throughout the world, including Europe, which decarbonization is great, but again, the IRA is not just about that.

It's bolted onto this industrial policy, and it would not have passed without that.

- Right, given that it's a double thing, it can be lower emissions and reliable, but we're gonna pay more.

- We're gonna pay more, or you could think of it as instead of a triangle, you have a, what's it called?

A tetrahedron, I think, where you also have this, we want to build it in the U.S., which like doing three things at once is hard enough.

Now we're gonna try to do four.

Whew.

[Ryan laughs] [Scott] Yeak, okay.

How we doing?

Is it working?

Is it starting to work?

Are we reaching goals?

- In a word, no.

It's not working.

It's inefficient.

You know, in my view, it's a complete waste of money.

We're essentially spending all this money on the least efficient forms of energy, wind, solar.

- What does that mean, inefficient?

- Well, they're not dense.

They're not energy dense at all.

They take huge amounts of space, which has its own impacts and costs.

They're intermittent.

For specifically wind and solar, you have the problem of, they don't have any inertia for the electric system, which is a problem.

Then you have to add tons of storage.

That's very expensive, and then there's the whole issue of minerals, so if you wanna focus on energy resources, what you wanna do is get the most valuable types of energy.

- Do you agree with that?

Are wind and solar and batteries, whether they're chemical or pump tied to other, is it too expensive?

- So here's how I would think about it.

Jonathan is absolutely right in that if your goals about energy come down to low cost and reliable, fossil fuels are amazing at delivering that.

They're energy dense, they're plentiful, they're easy to store, they're easy to move around.

The problem, of course, is climate along with other externalities, and then the question is then what are we willing to pay to deal with that externality?

So like when I think about sort of what should we be focusing on?

We should be focusing on, you know, deploying technologies that we think are already reasonably mature and actually kind of low cost, the way the energy system is currently set up.

It's like we're kind of at a stage where wind and solar at the levels they're currently being deployed are there.

Eventually we're gonna hit a point where we start to have to complement them aggressively with storage or other technology.

And then when it comes to thinking about full global decarbonization, we really need to think about developing technology and business models that other countries, especially low income countries that are trying to grow their economies, and ideally not do so on a fossil fuel based path, are gonna be willing to sort of take up these technologies, because, you know, look at India, look at Pakistan.

They're desperately trying to grow.

They're not gonna be terribly interested in sacrificing any of that growth for the sake of the global climate, and I can't blame them.

The only way they're gonna hold back is if it's gonna be relatively cheap for them to do it.

So the way I will judge the success of the IRA, and we're not gonna know for a while, unfortunately, is if it leads us to, not just the development, but also the deployment of technologies and business models and policy models that actually enable that.

[Scott] Okay.

- I don't quite agree with that.

You know, I would tend to do focus much more on nuclear power.

It's not just small modular reactors which are being developed, but you know, just advanced, you know, APR 1100 reactors for example.

- Those are kind of the big ones we have now.

- Those are the newest generation nuclear plants, because that way you can avoid a lot of the infrastructure and lower the cost.

So if you're not building wind and solar in the far reaches of rural America, you know, then you don't have to build thousands of miles of high voltage transmission lines.

You don't have to build battery storage.

You can avoid all those costs and have reliable power supply.

- And no emissions.

- And no emissions.

But when the government picks winners and losers, inevitably they pick wrong, and that's been the history of this government for the last half-century.

And I think the government's role is best in promoting true research and development to advance new technologies and lower costs, rather than picking, "Well we want wind to win, we want solar to win, or you know, we want green hydrogen to win."

You know, whatever.

No, don't do that.

Markets are much better and much more efficient at doing that.

[Scott] Interesting.

- So I'll agree in part and disagree in part.

So like one, I completely agree that like there's tremendous value in the government doing like basic R&D research that the private industry tends not to be interested in.

We're on board with that, and I think where the tension really comes in is sort of like the gap between, "Oh here's this idea or technology like fusion, an idea for a nuclear reactor design, some new way of doing geothermal," whatever it is.

It's like an idea that works on a lab bench or something like that, and how do we sort of get the gap between that and something that's actually commercial and scalable.

Having the government involved in loans or grants for those stages of innovation, and sort of early stage deployment, pilot studies, whatever you want to call it.

Like inevitably you do kind of have to start picking and choosing winners and losers, 'cause you know, some ideas get the grants.

Some ideas won't, and you have to choose.

- But maybe what's better to do then is try small demonstration projects.

Can you do it at the local level?

Because if you can't do it at the local level, your chance of doing it at the national level is, you know, that's not gonna happen either.

- Pretty challenging.

[laughs] - Yes, very.

- So, let me wrap with this question.

What gives you hope?

What makes you hopeful in all this?

- Oh, I like this question.

So we do see costs of, you know, at least some clean technologies coming down.

Batteries keep getting cheaper.

Solar PV keeps getting cheaper.

You know, and you look around the world and you start to see evidence of substantial decarbonization.

So Norway is almost entirely electric vehicle now.

China is something like 30, 35%.

Then you're starting to see at least parts of the world try to figure out how do we have an electricity grid that runs without fossil thermal generation in it.

There's a lot to figure out, but like the progress we've made over the past 10, 15 years is more than I would've thought.

- Nice, good.

How about?

- Well, despite being a cynical economist, [Scott laughs] I think there's a inherent resilience to people.

There's kind of a, especially in this country, an innovative spirit that I don't think is going to be squelched.

And if you think technology got us into this mess, that technology is gonna get us out.

I think that's going to, you know, be our salvation, if you will, in the coming years.

- Inherent reliance and innovative spirit doesn't sound so cynical [laughs].

- Well-- [Scott] Watch it.

- Don't tell anyone.

- You might lose your reputation here.

That's great, just great, great dialogue.

Thank you.

Scott Tinker, "Energy Switch."

Investments from the Inflation Reduction Act are changing, but at the time of this filming, the IRA included a broad range of subsidies for low carbon energies, and a bill that could exceed one trillion dollars.

Production tax credits and investment tax credits offset the cost of new projects.

Oil and gas has been able to deduct its upfront capital expenses, a change that has come to other energies.

Portfolio standards, mostly on the state level, require a certain amount of renewables in the mix, but state mandates for EVs reduce access to other options.

Subsidies for nuclear, carbon capture, and much more, all low carbon technologies, are eligible for similar support.

Ryan argues that expense could offset what may be even higher costs of climate change.

Jonathan counters that the current subsidies are inefficient and support the wrong energies, solar and wind, which are low density and intermittent; instead, suggesting more support for nuclear.

They agreed that more new energy R&D could be a good place for energy subsidies.

♪ ♪ ♪ ♪ ♪ ♪ [Narrator] Funding for "Energy Switch" was provided in part by The University of Texas at Austin, leading research in energy and the environment for a better tomorrow.

What starts here changes the world.