The economic case for a large scale move to clean energy is undermined because, incredibly, government subsidies for fossil fuels are larger than the size of the global renewable energy industry. This subsidy amounts to a greater incentive to emit carbon dioxide than the market price put on carbon emissions, by a factor of more than ten to one on current prices.
In a previous post I promised to look further into the calculation of the fossil fuel subsidy to understand who is benefiting and what is covered. This is me fulfilling that promise.
In November 2010, the International Energy Agency (IEA), World Bank and OECD met a request of the G20 to produce a second report on the international energy subsidy. In it, they define the fossil fuel subsidy as any action taken by a government to decrease the costs to the fossil fuel industry or to reduce the price of fossil fuels or fossil fuel based energy to consumers. It is essentially the opposite of a tax.
They list the main reasons that the subsidies exist. It could be to alleviate energy poverty. It could be to boost domestic energy supply or to support industry development. It could be to redistribute wealth in rich oil producing nations from the producers of the oil to the rest of the population.
The report argues how the downsides outweigh the positives. The subsidies encourage wasteful consumption. They increase energy price volatility (by disguising market signals). Crime is increased as fuel intended for one purpose or market is used for something else or sold elsewhere. They tend to disproportionally benefit the well-off, increasing the poverty gap. Above all (for me) they undermine the competitiveness of renewables. And of course the money used for the subsidy could be used for other purposes, such as healthcare, or increasing energy efficiency.
So, who is giving out these subsidies, and who is benefiting? The IEA have available on their website a breakdown of the subsidies by country in an interactive map – have a play. They are mainly in the oil producing countries of North Africa and Middle East, due to consumers within the country paying artificially lower for their energy than the country could in theory make by selling the energy on the international market. For example in Kuwait domestic prices are 87.8% lower than they should be. Iran has the largest subsidy of $82bn (17% of GDP), which needlessly lead the country to be a net importer of oil – fortunately they recognise this and are tackling it.
You would have thought that calculating the subsidy would be simple – you just add up the money given to consumers or producers, don’t you? Perhaps unsurprisingly that is not the case, as the subsidies take many different forms, from direct money transfers, through creating a separate market or guaranteeing low prices for domestic consumption, to tax breaks or de-regulated access to government land for producers.
There are therefore several different methods for calculating the fi
gure. The method used by the IEA is called price-gap analysis. This method doesn’t include all diffe
rent types of subsidy (such as research and development into new technologies) by its definition, which is to calculate a reasonable market value available to a country, and then compare that with the price paid by consumers for energy within the country. If they are paying less than the market rate, then their use is being subsidised. If more, it is being taxed.
The encouraging news is that many countries that do subsidise fossil fuels do seem to be taking steps. This gives us a chance that at some point everyone will be paying the market rate for fossil fuel use. Capitalism will have that bit of an extra chance to prove that it is the right system to improve our lives while resources dwindle and without damaging our future.
Thoughts below please!
If you take the IEA definition, then the most important instance is the current gas boom in the States. The natural gas price has tumbled in the US as a result of the fracking revolution *and* the fact that congress passed a law to ban exports. As a result, US natural gas prices are way below international market prices. (I don’t see much wrong with this myself.)
The price signal which the US gas price misses is the international supply and demand for natural gas. This has no (direct) relation to environmental concerns. Neither the local, subsidised, nor international prices fully take into account the cost of pollution.
I don’t really get this whole thing. From an environmental perspective, what’s so special about the international market price — which doesn’t assign cost to pollution anyway?
Coincidently, the fact that the largest consumer is substituting natural gas for coal at a higher rate than if they paid international prices is probably a good thing from an environmental perspective.
Interesting! I certainly agree with the point about fossil fuel prices not taking into account the full cost of their use.
And so does the International Monetary Fund (IMF) it would seem, as they have recently released a report on fossil fuel subsidies, where the put the annual figure at $1.9 Trillion – largely due to the future cost of carbon emissions, which they determine using a conservative figure of $25 per tonne of CO2. I’ve not yet read the report in full, which I will do for a future post…
On the last point about substituting coal for gas, that would be good news on its own. Unfortunately as gas prices dropped in the states and coal was replaced, the coal produced in the US found a market overseas. Coal use has risen dramatically in Europe, including the UK.
Read this with interest – I think you can look at this another way. The oil/gas markets are incredibly distorted with OPEC controlling the overall supply and managing up the price (as the 1970s oil price rises showed) so in these other countries you highlight they may not in fact be being subsidised but they are instead actually paying closer to the ‘true’ market rate!
This over-pricing may have been far more beneficial in transferring money/capital from the West to other parts of the world in assisting their development more than any Aid Budgets have in the past and will be in future. The fact that this money has not always trickled down further in some countries with corrupt leaders is then a major issue.
If OPEC didn’t exist it would be interesting to see what the market price of oil would be. By inflating the cost of oil this may well be a positive benefit for the funding of alternative energy?
Just some thoughts.
Funnily enough,the same thought crossed my mind when I was putting the post together. In hindsight maybe I should have addressed it.
Looking in to it a little deeper, it seems to me that the OPEC countries have some influence on oil prices, but are certainly not able to set them or control them. They supply 35% of the world’s oil, which means they can have some influence by regulating how much oil they let into the global market, but have historically not been able to achieve that much. See the following for a potted history and for the argument to be made in more detail: http://www.wtrg.com/prices.htm
This is actually irrelevant to the point you are making I believe. These countries could clearly get more for their oil on the world market than they ask from the domestic market, ergo the domestic market is subsidised. It’s like an employee getting a discount when buying from the company for which they work – you wouldn’t say that the true market value was that which the employees pay.
Take rail as an example. Staff get discounts and free travel. That is a perk of the job. The market rate is definitely not the amount that rail staff pay. The market rate is that which the market is willing to pay.
John, I get the idea that renewables are unlikely to take off in these subsidising countries but unless I’m misunderstanding things, I don’t think it’s all bad news. Increased consumption in these countries surely reduces supply to the international market, increasing prices (and making renewables more competitive) in other countries. I’m not sure what the *net* effect is. Especially as two (maybe three) most populus countries are subsidisers.
When the oil runs out will we see money flowing back from former oil producers to buy the renewable technology developed by the countries that never had the oil? (Slightly off-topic I know!)
I thought about this a bit while writing the post and since. I’m not sure that lower prices meaning we get through the oil reserves quicker so we can get on to cleaner energy sources sooner is really the way I’d like to see us go!
The way I see it, increase consumption in these countries doesn’t really reduce supply that much, as the supply from these countries is already self-regulated. The bigger effect is that the demand for oil from these countries does not compete on the international market. If they did not get subsidies and were to compete for oil on the international market, demand overall would increase, leading to increases in the world price for oil.