We subsidize our own destruction

$557 billion was spent by governments world-wide to subsidize the production and consumption of fossil fuels, according to the International Energy Agency (“IEA”). In a flier announcement, the IEA says that it has undertaken an extensive investigation to determine the amount of government subsidies for this greenhouse-gas-producing industry. It has found that the 2008 subsidy of more than one-half a trillion dollars is substantially higher than $342 billion spent in just the previous year.

The effect of these various subsidies is to “reduce prices of fossil fuels below levels that would prevail in an undistorted market, thus leading to higher levels of consumption than would occur in their absence.”

Leading the way is Iran, which spent in 2008 $101 billion — nearly 1/3 of its annual budget — to subsidize fossil fuel production. “Chronic under-pricing of domestic energy in Iran has resulted in enormous subsidies and a major burden on the economy that is forcing reliance on imports of refined products.”

The IEA says that eliminating these subsidies “would provide an incentive to use energy more efficiently, and trigger switching from fossil fuels to other fuels that emit less GHGs [greenhouse gases].” They estimate that if all subsidies were eliminated by 2020, the effect would be to

  • Cut primary global energy demand by 5.8% by 2020. This is equivalent to the current energy consumption of Japan, Korea, Australia and New Zealand combined.
  • Cut global oil demand by 6.5 mb/d in 2020, predominately in transport sector. This is around one third of current US oil demand.
  • Reduce CO2 emissions by 6.9% by 2020 – or 2.4 GT of CO2. This is equivalent to the current emissions of France, Germany, Italy, Spain, and the UK combined.

The amount of global subsidies greatly exceeds the subsidies granted for the nascent alternative energy industry. A report by Bloomberg New Energy Finance (subscription only; see Bloomberg news report) shows that global subsidies of fossil fuel product are more than 12 times greater than the “$43 billion to $46 billion of support to renewable energy through tax credits, guaranteed electricity prices known as feed-in tariffs and alternative energy credits.”

“One of the reasons the clean energy sector is starved of funding is because mainstream investors worry that renewable energy only works with direct government support,” said Michael Liebreich, chief executive of New Energy Finance. “This analysis shows that the global direct subsidy for fossil fuels is around ten times the subsidy for renewables.” (id.)

Chart from the Energy Collective

The disparity in subsidies is illustrated by the graph from The Energy Collective‘s website. The graph shows the enormous steps that will be necessary to comply with the G-20 Toronto Summit Declaration of June 26-27, 2010, which, among other things, the participants: “welcome[d] the work of Finance and Energy Ministers in delivering implementation strategies and timeframes, based on national circumstances, for the rationalization and phase out over the medium term of inefficient fossil fuel subsidies that encourage wasteful consumption, taking into account vulnerable groups and their development needs.” (¶ 42.)

The language of the G-20 drafters makes it sound as if much of the subsidies were used to assist impoverished areas or aid in development efforts. The IEA, by contrast, found that 37 countries represented 95% of the total subsidies. Since 2008 the IEA found that several countries have made efforts to bring their domestic energy prices in line with world prices. These countries are China, Russia, India and Indonesia. The IEA speculates that this will result in lowering of total global subsidies.

With respect to the disparity in subsidizing newer energy sources, Michael Liebreich says: “Setting aside the fact that in many cases clean energy competes on its own merits – for instance in the case of well-situated wind farms and Brazilian sugar-cane ethanol – this analysis shows that the global direct subsidy for fossil fuels is around ten times the subsidy for renewables. And that is without taking into account the enormous security and public health costs of fossil fuels, as well as the appalling pollution catastrophes on the Gulf Coast, the Niger Delta and elsewhere.” (quoted in the Renewable Energy World report of July 29, 2010.)

A joint report on subsidies was submitted to the G-20 by the EA, OPEC, OECD, and World Bank, entitled “Analysis of the Scope of Energy Subsidies and Suggestions for the G-20 Initiative.” Not surprisingly OPEC (the Organization of Petroleum Exporting Countries) refused to endorse the findings of the amount of global subsidies, arguing that “the benchmark price to be used in the case of energy resource well-endowed countries should be the cost of production.” It also argued that the “$100 billion per year spent to subsidize alternatives to fossil fuels make renewable energy sources and biofuels are subsidized at a much higher rate than fossil fuels. The per unit basis subsidies to renewables and biofuels are equal to US cents 5.0 per kWh, compared with US cents 1.7 per kWh for nuclear power, and US cents 0.8 per kWh for fossil fuels.” (p4.) Even granting that point (which of course does not consider the nascent state of renewable energy production and fails to compare the negative externalities of the respective fuel production and use — in other words the respective value of subsidies for the different energy sources), the report cites a World Bank study which found that:

“subsidies to fossil fuel use tend to benefit high-income households more than the poor, due to the former‘s higher consumption levels … the bottom 40% of the population in terms of income distribution received only 15-20% of the fuel subsidies in developing countries.” (p5)

The fact is that the subsidies contradict the purpose of  the US$ 400 billion (excluding Goods and Services Tax and Value Added Tax) taxes (or negative subsidy) that OECD nations have been imposing on energy (mainly fossil transport fuels) in each year form 2003 to 2008 (p4). The bottom line is that eliminating the subsidies would reduce greenhouse gas emissions because it would increase price (although not completely in the amount of the forgone subsidies; part of that would be absorbed in reduced profits as consumption decreases) and therefore reduce consumption. The OECD (the Organisation for Economic Co-operation and Development) concludes that eliminating the subsidies (in its terms “phasing out” the subsidies) would result in a 10% reduction in greenhouse gases by 2050.

The question is whether there is any political will to end subsidies. This should be the easiest of all the many “fixes” proposed (albeit inadequate in itself). But given the hold that economic interests (particularly the oil industry) has on governments, even this seems unlikely. In the wake of the Deepwater Horizon disaster it was the Senators and politicians from the states most damaged by the catastrophe that fought the hardest to keep liability caps on oil drillers and who contended against even a temporary moratorium on the (patently) dangerous practice of off-shore drilling.

It nevertheless is particularly ironic that humans have organized themselves in such a way that they cannot stop creating a grave risk to the planet and human society. It recalls what Lenin is supposed to have said: “The capitalists will sell us the rope with which to hang them.” Only this time it is Exxon-BP and not the Kremlin that will profit; and the transaction will be a straight up cash payment.

[Thanks to Fiona Thompson for tracking down citations.]

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