fossil fuels

Cost of Subsidizing Fossil Fuels Is High, but Cutting Them Is Tough

...Moreover, citizens and companies that rely on fossil fuels usually do not pay the full cost of resulting environmental  problems like oil spills, sludge from coal mines and greenhouse gases, and for health problems from polluted air.

Estimates of the cost of these effects — or “externalities” in the ungainly jargon of economists — vary.

Natural gas fracking well in Louisiana

Last week, the New York Times ran an article ("Future of Solar and Wind Power May Hinge on Federal Aid" by Kate Galbraith) discussing the reliance of solar and wind energy on federal subsidies. Bernard L. Weinstein, associate director of the Maguire Energy Institute at Cox School of Business, Southern Methodist University, wrote a letter critiquing these subsidies, advocating instead a policy to push for more oil and gas exploration, arguing they would require "no new subsidies."  The Institute was funded by Cary Maguire of the Maguire Oil Company and prepares students for jobs in the field.

The Times requested responses to the letter for their Sunday Dialogue yesterday.  Mine was not selected, but covers some points not raised in the letters that were.  It is reprinted below.

To the Editor:

Bernard Weinstein has concluded that the “renewable power industry has become addicted to federal subsidies and probably can’t stand on its own without them.”  After more than twenty years of tracking subsidies to energy both in the US and abroad, allow me to suggest that the addicts’ ward is overflowing.  The nuclear industry has been pushing for massive government subsidies for decades, and won’t build a new facility without them.  Arguments that somehow other countries know how to “do it right” are more often based on an incomplete understanding of foreign subsidies than to some miracle economic model.    

New petrol refinery?  Coal plant with carbon capture and sequestration?  Big subsidies also rule.   Liquid biofuels producers (still mostly corn ethanol) are addicts too.  They are fighting hard to keep expiring subsidies alive even though the Renewable Fuel Standard (forcing us to buy their products at above-market prices) will quickly pick up the slack.

Weinstein’s figures are also inaccurate.  He focuses only on tax breaks, though it is total subsidies through all mechanisms that distort energy markets and investment patterns.  Missing are the critical, and often enormous, subsidies that flow to various fuels through loan guarantees, royalty exemptions, liability caps, nationalized supply security or waste management obligations, purchase mandates, and subsidized government-owned energy enterprises.  Even his tax break tally is picked from problematic data from the Energy Information Administration (EIA).  EIA’s numbers have consistently been at the far low-end of subsidy reviews.  They miss many tax breaks of great benefit to the energy sector; and ignore quite large variance in the tax subsidies they do include.  Incorporating tax subsidy estimates from both of the federal sources (Joint Committee on Taxation and Treasury) rather than just Treasury, for example, would have boosted EIA’s 2007 total subsidy estimates by a third, and the share to oil and gas by nearly 125 percent.

Expand beyond just fiscal subsidies and Weinstein’s academic framing of the simplistic “drill, baby, drill” argument totally dissolves.  A recent analysis by economists Nicholas Muller, Robert Mendelsohn, and William Nordhaus estimated that petroleum-fired electric power generation caused gross external damages five times the industry’s value added.  Coal-fired power had damages more than twice its value added.  A Harvard Medical School study in February pegged the external damages from coal well above $100 billion per year.  Shortfalls in federal highway funding, which is supposed to be paid through taxes on (the mostly petroleum) motor fuels, were $70 billion in 2007 according to analysis by Pew’s Subsidyscope project.  That number alone far exceeds total energy subsidies reported by EIA; and at $700 billion over ten years would cover more than half the initial deficit reduction target for the Super Committee.

Price signals do need to play a much bigger role in energy markets, including renewables, if we are move towards a cleaner energy future in an economically-efficient way.  However, Weinstein’s selective and inaccurate vision of market reform is unlikely to take us in the right direction.


Doug Koplow
Earth Track, Inc.
Cambridge, MA 02140


What Would Jefferson Do? The Historical Role of Federal Subsidies in Shaping America’s Energy Future

Using data culled from the academic literature, government documents, and NGO sources, in this paper we examine the extent of federal support (as well as support from the various states in pre-Civil War America) for emerging energy technologies in their early days. We then analyze discrete periods in history when the federal government enacted specific subsidies.

Green view: How to save $300 billion

LAST time it met, in 2009, the G20 took a stand against a little discussed problem that unites environmentalists and economists: fossil-fuel subsidies. Over the course of the subsequent year, the nations contributed to a list of the “inefficient” subsidies they supported and the things they planned to do about it. So far, this list is unimpressive.

Natural gas fracking well in Louisiana

Ben Sills of BusinessWeek reports today that the International Energy Agency (IEA) estimates global fossil fuel subsidies in 2008 at $557 billion.  The figure is based on an interview the magazine did with Fatih Birol, Chief Economist of the International Energy Agency. 

More than half a trillion dollars per year in subsidies to fossil fuels is, indeed, a large number.  However, based on other sources and other work I am doing, I believe it is too low.  This conclusion is not based on any detailed information I've seen from IEA.  While I attended an expert meeting in February on G20 fossil fuel subsidy reform and provided detailed comments on their draft joint report and estimation methodology, I have not been involved with the G20 subsidy reform process since that time.  My rationale for concluding the numbers are too low include:  

  • IMF numbers for oil alone were nearly as high.  In February, the International Monetary Fund released its own analysis (blog post on report; link to report) of global subsidies to petroleum.  They pegged oil subsidies for 2008 at  at least $519 billion, much higher than the $312 billion IEA says went to oil during that same year. 
  • IEA value is similar to past "price gap" estimates that form lower-bound for subsidy value.  The figures for both IMF and IEA appear to be primarily "price gap" calculations that examine the difference between world prices and domestic prices for fuels.  Price gap values tend to set the floor for subsidy levels, but miss many other policies that generate subsidies to various energy sources. 
  • Earth Track case studies have found substantial data gaps in fossil fuel subsidy information.  For the past year or so, I've been working with the Global Subsidies Initiative on a series of case studies that examine data availability on fossil fuel subsidies in four countries: the US, Germany, China, and Indonesia.  Our review has turned up systematic weaknesses in data reporting and transparency in a number of key subsidy areas.  These include tax subsidies; credit support especially for state-owned energy infrastructure and power plants; and insurance and indemnification subsidies.  It is unlikely that IEA, even with its strong global relationships, was able to solve these substantial data gaps in the few months it has had to prepare its data set.  As a result, it is likely that they have systematically undercounted certain types of subsidies in most of the countries evaluated.  (If you would like to be notified when our case studies are publicly available, you can add your e-mail to our distribution list here). 

Even ignoring the political challenges of reaching consensus, it would be unrealistic to think that IEA or any of the other parties involved with obtaining data for the G20 fossil fuel subsidy reform process (World Bank, OECD, and OPEC; along with many member countries and other organizations such as the IMF that also have input) could assemble a comprehensive data set on global subsidies in such a short time frame. 

What will be important, however, is that IEA be clear about where it has not been able to measure subsidies; and that the Agency state how filling in those gaps would have influenced its reported numbers.   If values from multiple sources exist but conflict, IEA should provide a range if the estimates are plausible.

Finally, where IEA's review on fossil fuel subsidies found that survey countries are simply not collecting needed data at all, the Agency needs to flag the areas for future attention and improvement.  G20 subsidy reform needs to be viewed as a process, not as an event.  However, it will not be a successful process unless rules for full disclosure are put in place and properly enforced.


Some additional information on the IEA figures can be found in the Financial Times; and on the subsidy reform work program at the OECD web site.  The FT notes that the current numbers are higher than IEA's prior estimates.  (This would be consistent with the sharp increases in energy prices between 2007 and 2008; whether portions are also due to broader coverage of producer subsidies can't be discerned without more detailed information). 

A reader also points out that part of the reason IEA's values are lower than IMF is that IEA's pick up a full year average for 2008, so include the subsequent declines later in the year.  IMF's are based on subsidy rates at mid-year before the sharp price declines.  Price gap subsidies tend to rise when energy prices rise quickly, as policy adjustments to raise prices in countries with consumer subsidies tend to lag.

Two final points.  First, while IEA is the cited party on these estimates in both the FT and BusinessWeek articles, the work is being conducted by four international agencies (IEA, OECD, World Bank, and OPEC), not just one.  And second, while it is not possible to tell at this stage for sure whether any types of subsidies have been systematically excluded, the current plan is to make the detailed basis for the estimates available in the fall.  This would be quite helpful in building more systematic data coverage over time.




The Economics, Politics and Future of Energy Subsidies

This report summarizes the Climate Policy Initiative Workshop, hosted at DIW Berlin, that took place in November 2009.

At their meeting in Pittsburgh in September 2009, G20 Leaders called for an additional evidence base to support efforts by the member nations to reform and remove fossil fuel subsidies. At a workshop in Berlin in November 2009 we discussed the definition and quantification of energy subsidies, the evaluation of their impact, and the political economy of their reform.

The Effects of Fossil-Fuel Subsidy Reform: A review of modelling and empirical studies

Reforming subsidies to fossil fuels is a challenging prospect for many governments. To help policy-makers better appreciate the trade-offs between economic, environmental and social impacts, various organizations have analyzed fossil-fuel subsidies and their effects, often with the aid of complex economic models.