export credit agencies

Adding Fuel to the Fire: Export Credit Agencies and Fossil Fuel Finance

Export credit agencies are little-known government-backed financial institutions that provide loans, guarantees, and insurance with the aim of supporting exports of goods or services from their country to outside markets. This report from Oil Change International and Friends of the Earth U.S. shows that since the Paris Agreement was made, G20 countries have used their export credit agencies to provide nearly 12 times more finance to fossil fuels than to clean energy. 

1)  Solar parity and my cousin Jeff.  Congrats to Jeff Koplow, an energy researcher at Sandia National Labs, for being named the inaugural recipient of the Innovator in Residence Fellowship awarded by DOE's SunShot Initiative.  He'll lead a multi-disciplinary team in attacking key limits in current PV systems.  

 

Jeff's been working on energy innovation for a very long time, and some of his earlier inventions offer large benefits to the US energy sector.  These include the Sandia Cooler, a much more efficient way to cool heat exchangers and CPUs; and Twistact (winner of an Outstanding Technology Development Award), a new way to connect turbines to the gear box without a sliding contact, electrical arcing, or the need for rare earth metals.  

sandia cooler

 

2)  Fossil fuel subsidy reform update from COP21 (and nukes too). "The Beginning of the End of Fossil Fuel Subsidies," a blog update from Paris by staff of the Global Subsidies Initiate, summarizes some of the interesting and promising developments on fossil fuel subsidies at COP21.  Read their take here; there is real progress.

Here's one of the (albeit non-scientific) benchmarks I use to gauge progress on subsidy reform:

  • 25 years ago, almost nobody outside of NGOs would talk about energy subsidies.  (I once had a potential faculty advisor for my update on US energy subsidies ask why I didn't want to work on something "useful").
  • 15 years ago, heads of environmental and public health ministries would willingly talk about energy subsidies.
  • As of about 7 years ago, heads of financial ministries would willingly talk about energy subsidies.
  • Today, even many heads of state willingly talk about energy subsidies -- at least fossil fuel subsidies.  Conversations about subsidies to the nuclear fuel cycle will have to wait another few years, I suppose.

For a report on the push for massive new subsidies to nuclear at COP21, here's a summary from Michael Mariotte of NIRs.

3)  Addressing tax exemptions to fuel used in international shipping.  Subsidies that almost nobody sees or thinks about can be particularly distortionary.  In darkness, the biggest mushrooms grow -- or something like that.  Wholesale exemptions of fuels used in international ship, air, and rail transport from taxation is one example of issue (the subsidy even made my top 10 most distortionary energy subsidies list).

Particularly for activities that cut across multiple countries, the options available to correct the problem can be heavily constrained by pre-existing international agreements.  Those agreements were often developed to with trade or sovereignty issues in mind; transparent pricing of natural resources was generally not a factor.

One possible solution to this conundrum is put forth in a recent working paper ("Drying up tax havens-A mechanism to unilaterally tax maritime emissions while satisfying extraterritoriality, tax competition and political constraints") by Dirk Heine, Susanne Gäde, Goran Dominioni, Beatriz Martínez Romera, and Arne Pieters.  As the title implies, there are a fair number of hurdles any solution needs to meet.  The authors focus on using cargo as the tax base rather than the fuel itself; and structuring the tax levy formula such that higher efficiency vessels end up with a lower tax.  To avoid distorting port-use decisions, transhipped cargo would not incur the tax.  There is contact information for the authors in case any of you have additional suggestions or ideas.  There is also a summary description of their plan here, which provides a quick overview of the approach.

4)  Limiting export credit support for coal plants.  Export credit subsidies have been an area much talked about, but too often ignored when subsidy reform plans are put forth.  The subsidies are often tough to value, but can be quite large and tip high risk projects in environmentally-sensitive regions of the world from "no-go" to actionable.  The subsidies generally work by offering direct loans or guarantees at below the market rates that firm or industry would normally be able to receive.  The Kusile power stationsupport may also generate an incremental subsidy by enabling high risk enterprises to utilize higher debt-to-equity ratios than would otherwise be possible, reducing the project's weighted average cost of capital.

Against this backdrop, an agreement among OECD nations to significantly reduce their ability to finance the export of low-efficiency coal-fired power plants and equipment is a very positive step.  Read the agreement here.

5)  Charles Koch, one of the Koch brothers, argues for subsidy elimination.  It's hard to imagine the whipsawing that must have been ripping through Charles Koch as, year-after-year, his push for small government, free market libertarianism ran smack into his affinity for the array of special government subsidies that have benefited his oil, gas, and now paper operations for generations.  Maybe his latest book, Good Profit: How Creating Value for Others Built One of the World's Most Successful Companies, is his effort to finally reach an internal cease fire.

To his credit, Koch does acknowledge he's been a subsidy beneficiary.  And, I do agree with a core premise of his criticism:  that our convoluted and complex system of subsidies tends to favor the well-connected and the wealthy, replacing economic viability with political connections in the selection of markplace winners.  Lower income quintiles clearly need the support more than the rich.  Similarly, on the corporate site, the new companies that will create the jobs and industries of our future are generally too small to have lobbying arms.

How big are subsidies to Koch-related firms?  This article pegs the figure at about $200 million since 1990, based on data from DC NGO Good Jobs First.  I consider this a low estimate, probably really low.  The Good Jobs First data sources don't always pick up subsidies through credit or insurance markets.  Non-standard ones, such as the "black liquor" tax break that many of the paper companies tapped into by stretching a pre-existing rule targeted as new fuels, are also often missing.  Data on privately-owned Koch subsidiary Georgia Pacific are hard to come by, but given its scale, this tax break alone could have exceeded $200m.  In fact, this analysis estimated black liquor subsidies to Georgia Pacific just in 2009 at $1 billion.  Finally, the private nature of Koch means commonly-available tax breaks to oil and gas may not show up in the $200m figure either.

The point here isn't to attack Koch for saying corporate welfare should be eliminated.  The subsidy trough is a crowded one, so the limiting the push for reform only to those who are "pure" enough not to have been subsidized would be foolhardy.  If Charles is serious about finally reforming subsidies, this is a good thing.  Properly done, the changes would improve the economic vitality of the country going forward. 

But one should not take the input of Koch or other current beneficiaries blindly.  It is vital for anybody working on subsidy reform to read the small print on any proposal to be sure there are no surprise gaps.  Varying definitions (or more perjoratively, a definitional sleight-of-hand) can coincidently eliminate the subsidies to competitors while keeping their own.

Earth Track Blog Post

1)  Biofuels:  More problems with renewable fuel compliance credits.  Remember back in July when it was discovered that investment banks were manipulating aluminum prices through an arcane and somewhat bizarre dance of trucks moving inventory to and fro among bank warehouses in Detroit?  Well, they've been at it again -- this time with Renewable Fuel Standards credits, which are traded as RINs, or "Renewable Indentification Numbers." Speculating on the credits, triggering a supply squeeze and price jump, seems to have been a central factor in price spikes of 20x over a six month period.   

This isn't the first problem to crop up in the subsidy-ridden biofuels markets.  There have been scams to run fuels across border to do a bit of blending ("splash and dash") in order to tap into large tax credits; and even counterfeiting of RINs themselves.  As I've noted earlier, if something acts like money, one needs to assume all of the bad things people try to do to enrich themselves and defraud others will come into play.  This type of gaming has happened in enough markets over enough time that ensuring market transparency and fraud-prevention rules are in place from the outset of new programs should be a top item on government policy maker's "must do before promulgation" check list.  That said, Valero Energy, quoted by the NYT as losing as much as $800 million from the RIN-squeeze, is a large and sophisticated company.  It ought to have been running a hedging program similar to what airlines do with aviation fuel.

2)  Biofuels:  More taxpayer losses in USDA's second sugar-to-fuel auction.  More fun with the nutty program that forces surplus sugar to be sold at a loss to biofuels producers to "avoid" taxpayer losses on sugar loan defaults, the subject of a blog post two weeks ago.  Front Range Energy, the winner of the first sugar auction, noted that they had only a week to respond to the solicitation and that this likely was a factor in having so few bidders.   They paid 6 cents per pound of sugar.  USDA promised to do better next time:

“Transportation, volume of sugar feedstock and other concerns appear to have limited bioenergy company participation,” the Agriculture Department said in its statement. “The USDA expects greater participation in FFP [Feedstock Flexibility Program] as these concerns are addressed.”

They must have meant the next, next time: Pacific Ethanol won the second action with a bid of only 4.1 cents per pound of surplus sugar, nearly a third lower than the price paid to USDA on its first auction.  Management noted that they expected "this purchase of sugar to significanly lower raw material costs..."

3)  Nuclear:  The US Export Import Bank offers more nuclear subsidies.  Export Credit Agencies such as Eximbank prop up exports by subsidizing the financing costs of risky projects or sales of large assets to risky countries.  In July, the Bank offered to provide subsidized loans for the $10 billion Temelin nuclear power project in the Czech Republic.  Terms:  25 years and a fixed interest rate of 3.5% -- pretty good for a nuclear reactor project.  The Prague Post notes that the guarantee could cover 40-50% of the project cost.  This would equate to about $4-5 billion. 

The financing is contingent on Westinghouse winning the bid -- Eximbank is about subsidies that help the US after all.  But the irony is that Westinghouse is no longer a US company, really.  Though still headquarted in Pennsylvania, and therefore generating some US jobs, the firm is 87% owned by Japan's Toshiba Corporation, 3% by Japan's IHI Corporation, and the remaining 10% by Kazatomprom, the national uranium company for the Republic of Kazakhstan.

4)  Nuclear:  National Journal (NJ) hypes small modular reactors.  Once it was clear that big nuclear reactor projects were not getting any banker love, the nuclear industry began scrambling for backup plans.  Small modular reactors (SMRs) have been one of them -- with proponents arguing that they are simpler, cheaper, easier, able to fit anywhere, and an all around good thing for the government to help them develop. 

The National Journal has unfortunately picked up the meme in its article "Small Reactors May be Nuclear Power's Future."  Ernest Moniz, the current Secretary of Energy in the US, hails from MIT, an institution long involved with nuclear research of all types and long in favor of government-supported nuclear power.  Nearly a half-billion dollars of federal money has been put into financing SMR construction, according to the NJ.  The National Journal lists economics as a main driver of the shift:  automated production, more standardization, less overhead for utilities.  But this goes against 50 years of engineering assessments that have sought to build ever-larger reactors to achieve economies of scale and lower costs per unit energy produced.  Other arguments put forth:  that new small reactors will be safer than the really old reactors still operating (though of course the older reactors will close on their own, and don't need to be replaced with new nukes); and that the US needs to keep subsidizing nuclear so we remain a big player in the industry and "have a voice in conversations about nuclear technology in the international arena."  On this last point, I would suspect our role as the world's military superpower might give us a similar "voice" regardless of whether we subsidize SMRs.  And, as we've seen time and again with nuclear issues, having a "voice" and having an impact are very different things.

5)  Nuclear:  Discussion on whether nuclear energy should get another layer of subsidies over at OurEnergyPolicy.org.  This website, founded by entrepreneur Yossie Hollander, often has interesting debates on energy-related topics, both common and arcane.  This question asks whether nuclear energy ought to get environmental subsidies because it is low carbon.  My response I'm sure will be a big surprise:  of course not.  Nuclear energy is one way to reduce our carbon footprint, but hardly the most cost-effective.  It may gain market share once carbon is priced, but it should not be assumed the big winner in a carbon-constrained world.

6)  Transitions:  Kerryn Lang and Chris Charles.  Best wishes to both Kerryn Lang and Chris Charles, who are leaving the Global Subsidies Initiative in Geneva after many years and much good work there.  Both are returning to their native New Zealand.  It has been fun working with them on a number of projects during their tenure.  And while I wish we were nearing completion on our project to transition away from environmentally-harmful subsidies around the world, the reality is that there may well be opportunities to work with these two in the future, wherever they happen to be residing.

7)  Solving problems when people cooperate.  Congratulations to Amy Larkin, formally of Greenpeace Solutions, on the publication of her new book, Environmental Debt: The Hidden Costs of a Changing Global Economy. It's a quick read, and full of examples of where cooperative engagement between the environmental community and top management of big firms has resulted in rapid and tangible environmental gains. It is very nice to see the successes every once in awhile.

Nuclear Power: Still Not Viable Without Subsidies

Conspicuously absent from industry press releases and briefing memos touting nuclear power’s potential as a solution to global warming is any mention of the industry’s long and expensive history of taxpayer subsidies and excessive charges to utility ratepayers. These subsidies not only enabled the nation’s existing reactors to be built in the first place, but have also supported their operation for decades.