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Economics of Fossil Fuels

image credit: © Cinnamon Energy Systems - The Energy Show

From time immemorial, the fuels that have powered human development have been governed by economics. The cheaper and more available fuels were, the more they were used. And as humanity evolves, we use more and more fuel to meet our energy requirements. We have transitioned from wood to coal to oil to nuclear to gasoline to natural gas -- and now to wind and solar, supplemented by batteries.

More recently in human history, subsidies have been used to encourage the development of new these fuel sources. Nuclear power was (and still is) subsidized by the U.S. government. Hydraulic fracturing (fracking), carbon capture and sequestration (so that we can continue to burn coal with lower emissions), hydrogen production and distribution, and synthetic fuels from biological sources have all been heavily subsidized. And there would not be a viable solar and battery storage industry without significant R&D from government sources.

When I reflect on these past subsidies -- without exception -- every single one mentioned above is still heavily subsidized by both federal and state governments. These subsidies do not only include direct R&D dollars, but also include incentives such as the solar investment tax credit, wind production tax credit, and oil/gas drilling depletion allowance.

But once a new fuel gains production scale and widespread adoption, favorable economics outweigh even large subsidies. We are in such a transition now as clean and cheap wind, solar and battery storage are replacing coal and natural gas fueled electricity. To learn more about the economics of fossil fuels and the market forces that are transitioning our world to new energy sources, p
lease join us on this week’s Energy Show Podcast.

 

Barry Cinnamon's picture

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Discussions

Matt Chester's picture
Matt Chester on Oct 18, 2019 9:17 pm GMT

When I reflect on these past subsidies -- without exception -- every single one mentioned above is still heavily subsidized by both federal and state governments. These subsidies do not only include direct R&D dollars, but also include incentives such as the solar investment tax credit, wind production tax credit, and oil/gas drilling depletion allowance.

This is very true and important to remember any time someone pushes back against new tech incentives or subsidies, claiming that the government shouldn't 'pick winners or losers.' Subsidies have been involved-- both direct subsidies and hidden subsidies-- for over a century. 

Bob Meinetz's picture
Bob Meinetz on Oct 19, 2019 2:52 pm GMT

"We are in such a transition now as clean and cheap wind, solar and battery storage are replacing coal and natural gas fueled electricity."

Barry, there's no evidence "cheap solar, wind, and battery storage" has replaced one coal or natural gas plant. If anything, they're only guaranteeing fossil fuels an extended future - one which will carry atmospheric carbon past tipping points from which there will be no possible return.

Please - don't repeat these dangerous and ignorant myths being furthered by the people profiting from the sale of the very fuels responsible for climate change.

Matt Chester's picture
Matt Chester on Oct 21, 2019 11:54 am GMT

there's no evidence "cheap solar, wind, and battery storage" has replaced one coal or natural gas plant

Well..

Nucla’s Coal-Fired Power Plant Will Close Early As Tri-State Aggressively Focuses On Renewables

Duke Energy To Focus On Renewable Energy, Close Coal-Powered Plants

 

Federal Energy Data: Coal in Death Spiral, Renewables Surge

The Coal Cost Crossover: 74% Of US Coal Plants Now More Expensive Than New Renewables, 86% By 2025

 

I do understand that saying a single coal plant has closed because of competition from renewables alone as a one-to-one replacement isn't accurate, and that gas is no doubt playing a role here, but Barry is not wrong to point out that the economics are changing and favoring clean energy in a way that's bringing coal down

Michael Keller's picture
Michael Keller on Oct 22, 2019 3:47 pm GMT

Economics do not favor green energy. If it did, there would be no need for mandates and subsidies.

Green energy does not lower energy costs. The price of energy has gone up in every place where green energy has been forced on the population. Germany, Denmark and California are classic examples.

Matt Chester's picture
Matt Chester on Oct 22, 2019 10:04 pm GMT

I would argue that green energy technologies getting mandates and subsidies is just a leveling of the playing field compared with the fossil fuel industry being deeply entrenched already and having benefitted from many years of inherent fossil fuel subsidies (both explicit and hidden). And if you factor in the cost of externalities from continuing to pump out pollution and emissions from fossil fuels (both social costs, as well as anticipated carbon pricing), the price comparisons may not look so favorable to the legacy fuels..

Michael Keller's picture
Michael Keller on Oct 23, 2019 7:00 pm GMT

Your argument is not economically sound. As I pointed out, costs have gone up dramatically where ever green energy is required, and that does not include the billions and billions of subsidies green energy has received. That is hardly leveling the playing field and is more akin to loading a card deck.

As far as "externalities" are concerned, such measures are hopelessly subjective and impossible to logically determine. For every "bad" externality, there are "good" externalities. For instance, modern civilization would not exist if it were not for fossil fuels. Trying to put a dollar value on that is impossible, other than to note that it is a very, very big number.

Matt Chester's picture
Matt Chester on Oct 23, 2019 9:38 pm GMT

For instance, modern civilization would not exist if it were not for fossil fuels. Trying to put a dollar value on that is impossible, other than to note that it is a very, very big number.

I agree with this-- civilization certainly owes a debt to the fossil fuels that got our economies this industrious and advanced to the point that we can start to talk about how to utilize technology to get away from them. It's an interesting point that brings up the fairness in various international climate measures-- the Western industry was largely build on these fossil fuels and that helped cement their status today, so should not the emerging economies of today be afforded the same right? That's the argument that comes up a lot, but since emissions into the atmosphere is a global, not a local, problem, the alternative is those nations who have benefitted in this way from years and years of fossil fuels have more of an obligation to shoulder the expense to move away from them. 

Michael Keller's picture
Michael Keller on Oct 24, 2019 8:07 pm GMT

And what is your "right" based on? Redistribution of wealth?
History amply demonstrates some do better than others. The key is being given the opportunity to succeed, as opposed to the right to succeed.

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