fossil fuel subsidies

One of the striking findings in the review of subsidy reporting to the G20 that Earth Track and Oil Change International published a few months back was how little subsidy information the countries actually made public.  This information holdback is clearly detrimental to meeting the commitment all of the member nations made to phase out fossil fuel subsidies, understandable though it may be from a geopolitical, strategic perspective.  As noted in the review, early reporters suffer from and early mover disadvantage -- facing potential retribution from "outed" subsidy recipients, litigation by trading partners, but little upside if other countries don't report with equal candor.

A leaked memo from Canada in March 2010 showed this dynamic playing out prior to G20 reporting deadlines.  The memo, prepared for the Canadian Finance Minister, laid out the options for full reporting or for finessing the agreement:

There are two broad possible approaches that Canada could take to this commitment:

1) Use the commitment as an opportunity to undertake selective rationalization of Canadian measures (which we recomment), or

2)  If Canada is not prepared to undertake any substantive reforms, minimize the obligation so that Canada can still position itself as the commitment. 

The country chose the latter.

Turns out Australia did much the same.  This was uncovered following a Freedom of Information Act request put into the Australian Treasury department by Greenpeace.  As summarized by the Australian Financial Review (subscription required):

Bureaucrats last year identified up to 17 federal fossil fuel subsidies – at a cost of more than $8 billion a year – that may have to be cut for Australia to meet a commitment it made as a member of the G20, even though the government told the international forum that no such subsidies existed...

The FOI documents, sought by Greenpeace and obtained by The Australian Financial Review, reveal a long process in which burueaucrats in Treasury, the Department of Resources, Energy and Tourism (DRET) and other departments gradually whittled down the list of subsidies that might fall within the commitment Australia gave to the G20.

The bureaucrats argued that Australila should not go further than other countries in offering up subsidies, or that the subsidies were not relevant because they applied to exploration rather than production, or by disputing whether the subsidies were ‘inefficient’ and encouraged ‘wasteful’ consumption.

But the bureaucrats also show an extreme sensitivity to publicity:  some exchanges between them state that it might be better not to nominate subsidies, lest it be seen as an admission that the subsidies might actually boost fossil fuel consumption.

Overcoming these initial barriers is quite a challenging problem.  Our review of data sources on fossil fuel subsidies in China, for example, indicated widespread supports to many parts of the fuel cycle.  However, there was quite poor transparency, making quantification difficult or impossible.  China reported virtually nothing to the G20 as well. And the list goes on.

The WTO tried to solve the first mover disadvantage problem by forcing everybody to report on all subsidies in on a regular basis as a condition of their WTO membership.  It was a stick to go along the with carrot of market access.  But the Agreement on Subsidies and Countervailing Measures has no enforcement mechanism, and every country provides some subsidies, so there is no reporting and very little challenge by other WTO members.

The likelihood of governments pulling together all of this information initially is low.  Doing the initial rounds of discovery and subsidy reporting is more likely to come through trade cases and non-governmental agencies.  Once a first round of data is made public, then the countries may aquiesce to full reporting.

Subsidy measurement is a pre-requisite to any effective program of subsidy reform, whether through the WTO, the G20, or domestic policy initiatives.  Too often, policy makers take accurate and comprehensive subsidy measurement as a given.  It isn't.  In fact, making subsidies difficult to measure can be part of a political strategy to slow or block reform.  It is no accident that subsidy mechanisms able to transfer value without easily-tracked government cash flows are popular -- purchase mandates, tax breaks and loan guarantees are examples. 

In light of the growing recognition that fossil fuel subsidy reform needs to occur in tandem with efforts to constrain carbon through taxes or caps, and that information on producer subsidies is often lacking, Earth Track teamed up with the Global Subsidies Initiative in Geneva to evaluate the availability of subsidy data in four case study countries. The FiFo Institute of Public Economics at the University of Cologne, and two independent energy researchers also supported the effort.

While we did identify a number of fossil fuel subsidies, the focus of this research was on data availability, examinining how information varied across subsidy types and countries.  The result of this effort, Mapping the Characteristics of Producer Subsidies: A review of pilot country studies has just been released.   The report provides an overview of data availability for each country, along with a more detailed subsidy data review in template form that includes url links to source materials.

Case studies of subsidy data availability were done for China, Germany, Indonesia, and the United States.  The countries were chosen to model data availability under a variety of conditions:  energy market importance, type of governance, and levels of transparency.  The project team hopes that others will replicate this work in a broader array of countries, and that the data review can be used to produce a detailed analysis of fossil fuels within the case study countries in the near future.

Among the key findings:

• Standardized review highlights data gaps, ensures systematic assessment of policies.  Many prior energy policy reviews have focused on the information that is most available within each country.  While intuitive, this approach may miss some of the most important subsidy policies, often less visible and that may never have been quantified.  To overcome this limitation, it is critical to use a standardized template of subsidy mechanisms, and for researchers to systematically assess each type of policy.  In addition to ensuring no types of subsidies are skipped, the template clearly highlights data gaps.  Some training of researchers so they become comfortable with less familiar transfer mechanisms will be needed. 
• Evaluation team requires mix of skills.  Accessing data proved to be quite difficult in countries with limited transparency.  The research requires a mixture of expertise to carry out successfully.  First, policy-type expertise is needed in order to evaluate complex subsidy mechanisms across countries.  Second, strong local knowledge of language, cultural operating norms, and governance structure is needed within each country in order to effectively navigate domestic data sources and bureaucracies. 
• General transparency aligns with accessibility of subsidy data.  Countries with a variety of mechanisms supporting data disclosure (e.g., private capital markets; audited financial statements even for public institutions; mandatory reporting and publication of detailed budgets, tax expenditures and credit subsidies; and public liability and rights to litigate) had better information in each category of subsidy than those countries without a culture of transparency.  The deficit can be partly addressed in less transparent countries by using more researchers with larger budgets.  Fully addressing the gaps, however, may not occur until the country itself views subsidy transparency as benefitting its own broader interests rather than harming them.  Building this case will be important, and will likely encompass fiscal, trade, environmental, and competiveness elements.
• Complex subsidy mechanisms had relatively worse data in all case study countries.  Though more transparent countries generally had more comprehensive and accessible subsidy data than less transparent countries in all categories, the relative quality of data within countries showed similar patterns.  For example, data on tax expenditures, credit subsidies, purchase mandates, and subsidies through government-owned enterprises were of relatively worse quality than direct expenditures in all countries evaluated.
• Sub-national subsidy data lacking in most cases.  Subsidy policies at the sub-national level (state/province, country, municipality) were poorly characterized and quantified in nearly all cases.
• Producer subsidies are significant even in developing world.  Conventional wisdom notes that the developing world primaily subsidizes fossil fuel consumers while the developed world primarily subsidizes producers.  Our case studies indicate that producer subsidies are also pervasive in the developing world.