A new study finds 6.5% of
global GDP goes to subsidizing dirty fossil fuels
Monday 7 August 2017 06.00 EDT
Fossil fuels have two major
problems that paint a dim picture for their future energy dominance. These
problems are inter-related but still should be discussed separately. First,
they cause climate change. We know that, we’ve known it for decades, and we
know that continued use of fossil fuels will cause enormous worldwide economic
and social
consequences.
Second, fossil fuels are
expensive. Much
of their costs are hidden, however, as subsidies. If people knew how large
their subsidies were, there would be a backlash against them from so-called
financial conservatives.
A
study was just published in the journal World Development that quantifies
the amount of subsidies directed toward fossil fuels globally, and the results
are shocking. The authors work at the IMF and are well-skilled to quantify the
subsidies discussed in the paper.
Let’s give the final numbers
and then back up to dig into the details. The subsidies were $4.9 tn in 2013
and they rose to $5.3 tn just two years later. According to the authors, these
subsidies are important because first, they promote fossil fuel use which
damages the environment. Second, these are fiscally costly. Third, the
subsidies discourage investments in energy efficiency and renewable energy that
compete with the subsidized fossil fuels. Finally, subsidies are very
inefficient means to support low-income households.
With these truths made plain,
why haven’t subsidies been eliminated? The answer to that is a bit complicated.
Part of the answer to this question is that people do not fully appreciate the
costs of fossil fuels to the rest of us. Often we think of them as all gain
with no pain.
So what is a subsidy anyway?
Well, that too isn’t black and white. Typically, people on the street think of
a subsidy as a direct financial cost that result in consumers paying a price
that is below the opportunity cost of the product (fossil fuel in this case).
However, as pointed out by the authors, a more correct view of the costs would
encompass:
not only supply costs but also
(most importantly) environmental costs like global warming and deaths from air
pollution and taxes applied to consumer goods in general.
The authors argue,
persuasively, that this broader view of subsidies is the correct view because
they “reflect the gap between consumer prices and economically efficient
prices.”
Without getting too deep into
the weeds, the authors discuss both consumer subsidies (when the price paid by
a consumer is below a benchmark price) and producer subsidies (when producers
receive direct or indirect support which increases their profitability). The
authors then quantify what benefits would be achieved if the fossil fuel
subsidies were reformed.
Interested readers are
directed to the paper for further details, but the results are what surprised
me. Pre-tax (the narrow view of subsidies) subsidies amount to 0.7% of global
GDP in 2011 and 2013. But the more appropriate definition of subsidies is much
larger (8 times larger than the pre-tax subsidies). We are talking enormous
values of 5.8% of global GDP in 2011, rising to 6.5% in 2013.
The authors also broke the
results down by fossil fuel type and usage (coal, petroleum, natural gas,
electricity). It is not clear to me how the authors separated the various fuel
sources out of electrical generation; however, the results show that petroleum
and coal receive much larger subsidies compared to their counterpart fuels. The
authors organized results by geographical region and found that the top three
subsidizers of fossil fuels are China, USA, and Russia, respectively. The
European Union is a bit less than half of the entire US subsidy. Other notable
countries and regions are discussed.
There are two key takeaway
messages. First, fossil fuel subsidies are enormous and they are costs that we
all pay, in one form or another. Second, the subsidies persist in part because
we don’t fully appreciate their size. These two facts, taken together, further
strengthen the case to be made for clean and renewable energy. Clean energy
sources do not suffer from the environmental costs that plague fossil fuels.
I asked one of the authors,
Dr. Coady, why their work is important. He told me:
A key motivation for the paper
was to increase awareness among policy makers and the public of the large
subsidies that arise from pricing fossil fuels below their true social
costs—this broader definition of subsidies accounts for the many negative side
effects associated with the consumption of these fuels. By estimating these
costs on a global scale, we hope to stimulate an informed policy debate and
provide renewed impetus for policy reforms to reap the large potential benefits
from more efficient pricing of fossil fuels in terms of improved public
finances, improved population health and lower carbon emissions.
As a climate scientist, I
focus almost exclusively on the scientific questions related to climate change.
But equally important are the economic issues that, when dealt with, will usher
in a new era of energy.
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