Subsidy Briefs, June 1, 2015
Another roundup of interesting tidbits from the world of government subsidies.
1) Nuclear: A new age of nuclear energy is about to dawn? Optimism is a good thing, and Michael Brush of the Fiscal Times certainly exudes it. But optimism probably shouldn't lead you to invest your 401(k) in a bunch of nuclear utility stocks.
In a recent article ("A new age of nuclear energy is about to dawn"), Brush connects rising prices for uranium to rising fortunes for the nuclear industry overall -- a "move that could signal trouble ahead for the anti-nuke crowd..." Recent spot prices ar $40 per pound are up sharply from last summer he notes, and
More importantly, it reverses a grinding three-year decline that seemed to signal the end of the nuclear era following the horrible 2011 disaster at Fukushima, Japan.
Is this just a typical bear market rally that will peter out? Or is the recent strength in uranium a sing of a new nuclear era ahead that will drive uranium prices and mining stocks even higher?
It's probably the latter.
His rationale? (1) Rising populations and demands for electric power -- not the intermittent type, but "real" power like centralized nuclear. (2) Large nuclear investments from China, South Korea, India, Russia -- as well as a bunch of smaller countries that "plan to add plants." (3) Dwindling supply of uranium as companies shuttered mining capacity when uranium prices fell.
I'm willing to concede that uranium prices may spike for awhile as supply readjusts from the recent downturn. But uranium prices are a very small cost factor in the overall economics of nuclear plants, and nukes are being roundly outcompeted in a host of more important criteria such a cost, flexibility, and build times.
Brush had similar views back in 2010, when he argued that the oil spill in the Gulf opened the door to more nuclear energy (no matter that oil barely competes in power markets). We'll check back in on the issue in 2020.
2) Ecosystems: Subsidies and Biodiversity Loss. There is a clear connection between subsidies to water, timber, agriculture, energy, construction, and road networks and the inevitable loss of habitat as human industry and homes displace natural landscapes. Unfortunately, there have been few systematic attempts to document the interactions between all of these areas and loss of critical biodiversity. Ideally, I'd like to see this type of review examining the role of government subsidies on the loss of pristine natural areas (like the Arctic) and biodiversity hotspots around the globe.
Absent the perfect study, a workgroup led by Guillaume Sainteny a few years back did a pretty good one -- examining many relevant pressures, albeit in France instead of in global biodiversity hotspot. But the detailed look is very helpful for France, and also a good model for what could, and what should, be done elsewhere. Although the original study (in French only) was released in 2011, an English translation has just come out. You can access both versions here.
3) Fossil Fuels: IMF study finds fossil fuel subsidies even larger than before. The International Monetary Fund released an update to earlier versions of its work to quantify global subsidies to fossil fuels. Last time around, they found that the subsidies were really, really big (about $2 trillion per year). This time, they found they are really, really, really big -- $5.3 trillion per year.
This IMF paper deserves a more detailed blog posting, as there is a great deal to talk about and their continued focus on this area -- particularly on trying to monetize the externalities, is very important. I will hopefully have time to do a more detailed discussion of the paper in the near future. For the time being, however, it is useful to keep in mind that the IMF's numbers are much larger than other estimates (for example, by the OECD, IEA, and World Bank) primarily because of their incorporation of negative externalities (environmental as well as those related to traffic) and their imputation of baseline taxes on fuels if current levels are too low or non-existent (such as a national sales tax on motor fuels in the US).
Each iteration of their work adds more detail on their externality estimates, and this extra detail should over time help broaden consensus on externality valuation. As of now, however, there is still fairly wide disagreement on some of these values and the IMF's attribution to fuels of some costs more directly linked to patterns of travel, vehicle type, or vehicle weight. There are also some disagreements between institutions on which costs should be lumped together: the others focus more on fiscal subsidies, where government actions provide subsidies to particular market players. Externalities, in contrast, result from government inaction. I personally feel both elements are important, though mixing them together may not result in a greater impetus or political ability to reform the distortionary policies.
As a practical matter, I'm not sure that whether annual subsidies are $1 trillion or $5 trillion makes that much difference in terms of accelerating the transition away from fossil fuels. Subsidy reform even at the lower levels would create a very substantial tailwind on fossil-fuel substitutes and conservation; and trying to modify the policies at the upper end of the range may instead trigger widespread political gridlock or riots (since the prices of core commodities would rise so much).
For more discussion on some of the methodological differences between global subsidy estimates, have a look at this recent World Bank working paper I co-wrote with Masami Kojima. There's also an introduction we did on the World Bank's Let Talk Development blog.
4) Fossil Fuels: GSI modeling of reforming fossil fuel subsidies to consumers indicates ghg reductions of 6-13% by 2050. More important analysis from my friends at the Global Subsidies Institute. The work was conducted with the Nordic Council of Ministers. You can read more details here.
The Nordic countries have been strong supporters of increased transparency on fossil fuel subsidies for many years.
5) Nuclear: NRC "caves" on foreign ownership of US nuclear reactors. The issue was central enough to be part of the original Atomic Energy Act, but the Nuclear Regulatory Commission recently voted unanimously to allow a "graded" approach to foreign ownership. This would still prevent 100% foreign ownership, but would allow much higher levels of foreign ownership, control, and financing than is currently permitted. And having unanimous votes on standards weakening in the nuclear sector never seems a good thing.
NEI has viewed the old regulations as unnecessarily hampering foreign investment. That's par for the course: pretty much any regulation unnecessarily hampers nuclear progress in their view. But if foreign money from China or Russia comes in to build subsidized reactors in the US, it will raise all sorts of complicated trade, geopolitical, and competitive issues - both in the nuclear sector and beyond. It seems a bit odd that the Obama administration was so worried about the terms and transparency of Chinese-led $100 billion Asian Infrastructure Investment Bank, yet seems fine with Chinese money building what will inevitably be subsidized nuclear infrastructure in the US.
Maybe the best case outcome for the NRC's recent vote would be if the subsidized reactors come from France instead...
6) Nuclear: French nukes not doing so well. So I'm linking to two Michael Mariotte posts in a row. He raises interesting and important issues, and presents them well. And in this post, he notes that the nuclear powerhouse known as France has been messing up items both big and small, and is having an increasingly difficult time convincing people to take a risk on their services going forward (not that the problems with France's nuclear program are actually new). So I guess maybe we ought not count on France being the country to subsidize new foreign-controlled reactors in the US.