IEA

Here's hoping that 21 will be the magic number, and there will be real progress on a global agreement to constrain greenhouse gas emissions at COP21 meetings now underway in Paris. 

Removing subsidies to fossil fuels are now well recognized as a central element to getting energy prices right, and the topic is evident in the COP21 agenda and side events.  For people interested in getting up to speed on what subsidies are and recent assessments of their magnitude, I've assembled a list of resources on in this posting.  As a testament to the growing recognition of the important role of subsidy reform, it is notable that many of these analysis have been produced during 2015.

1)  Fossil Fuel Subsidy Events at CoP21 

Thanks to Laura Merrill at the Global Subsidies Initiative (GSI) for pulling together a listing of the many events at the Paris meetings focused on fossil fuel subsidy reform. 

2)  What are subsidies, how are they measured, and why do they matter?

These resources are helpful for people looking to gain a general understanding of how energy subsidies work and why they are a problem.

  • Subsidies to Energy Industries (2015).  This is one of my papers, recently updated for Elsevier and re-released.  It provides an overview of generic subsidies to energy fuel cycles, along with some background information on the different ways that people have measured subsidies over time. 
  • An animated introduction to fossil fuel subsidies done by the GSI in 2014.  It's an entertaining and understandable way to learn about this complicated topic.
  • If you want to dig in to more details, I'd also highly recommend this comprehensive Subsidy Primer written for GSI by Ron Steenblik.  
  • Why do subidy estimates vary across studies?  Fossil Fuel Subsidies: Approaches and Valuation is an (admittedly technical) overview that I wrote with Masami Kojima of the World Bank.  For detail on what the commonly-used price gap approach captures and does not capture, this paper prepared for the GSI may also be helpful.

3)  How big are fossil fuel subsidies globally?

  • Fossil Fuel Subsidy Reform: From Rhetoric to Reality (2015).  Working paper by Shelagh Whitley and Laurie van der Burg for the New Climate Economy (itself a very interesting initiative).  Summarizes global data on fossil fuel subsidies, their detrimental impacts on economies, and strategies for reform.  See also their review of fossil fuel subsidy reform in sub-Saharan Africa.
  • OECD Inventory of Support Measures for Fossil Fuels, 2015.  The latest installment of OECD's detailed policy-level review of subsidies to fossil fuels within the OECD and BRIIC countries.  Jehan Sauvage, project manager; Franck Jésus and Ronald Steenblik, project supervisors.  See also my blog post on the analysis.
  • Empty promises: G20 subsidies to oil, gas and coal production (2015).  Detailed review of production subsidies to fossil fuels in the context of carbon lock-in jointly released by Oil Change International and the Overseas Development Institute.  Presents country-specific data that includes distortionary patterns of support through export credit agencies and state-owned enterprises (SOEs).  Although only gross flows through credit and SOEs could be quantified, the analysis demonstrates the importance of these interventions, underscoring the need for much greater visibility on the terms of credit and state support to SOEs going forward.   Elizabeth Bast, Alex Doukas, Sam Pickard, Laurie van der Burg and Shelagh Whitley. 
  • See also OCI's joint report with WWF on the role of OECD financing of coal infrastructure on human health.  Hidden Costs: Pollution from Coal Power Financed by OECD Countries (2015).  Written by Michael Westphal, Sebastien Godinot, and Alex Doukas
  • IEA's updated data on price gap subsidies (2015).  IEA's most recent World Energy Outlook (unfortunately not accessible for free) again contains comprehensive updates to their multi-year effort to track price gap subsidies to fossil fuels in the world's major fossil fuel producing and consuming nations.  As in past years, this section was overseen by Amos Bromhead of IEA.  Subsidy data from WEO 2014 is accessible here; and there is some discussion of more recent data starting on page 90 of this IEA special report.  However, the full dataset used in WEO 2015 does not appear to have been posted yet.
  • The International Monetary Fund also has a variety of assessments of fossil fuel subsidies released in 2014 and 2015.  Their assessments incorporate imputed taxes and externalities in addition to other forms of government support, and as a result report significantly larger global tallies.  In addition to their publications, the Fund is providing access to some of their core data so other researchers can build upon the work. 

4)  How big are energy subsidies in the United States?

The good news is that multiple parts of the US federal government have taken up the issue of subsidies to energy.  The less-good news is that the "official" analyses tend to use a fairly narrow definition of subsidies, often primarily driven by a sub-set of the available tax breaks.  Credit support, subsidized insurance, embedded subsidies within state-owned enterprises (yes, these exist even within the United States), market price support, and other more opaque subsidy transfer mechanisms are generally included only in part or not at all.  Like the parable of the blind men and the elephant, if you examine only part of the beast, you can come up with an inaccurate assessment of what the full animal really looks like.

  • Federal Support for the Development, Production, and Use of Fuels and Energy Technologies (2015).  U.S. Congressional Budget Office.  Good coverage of common tax expenditures and federal energy R&D.  Analysis includes renewables and nuclear as well as fossil fuels, though valuation challenges on credit subsidies and missing subsidy types make the nuclear figures unrepresentative of actual government support to the sector.  Interesting metrics of subsidy cost-effectiveness (see page 11), a topic that should get much more attention.  Philip Webre and Terry Dinan prepared this report in collaboration with Mark Booth.
  • Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2013 (2015).  US Energy Information Administration.  One of EIA's periodic reviews of domestic energy subsidies to all fuels (their first one was in the early 1990s).  Good detail in many areas, but also with some systemic gaps that tend to dramatically understate federal support to the nuclear fuel cycle and also understate subsidies to fossil fuels.  For more details on core EIA assumptions and omissions and how they affect EIA's estimates, see this review I did a few years ago.  EIA's 2015 report is the first time the Administration has even acknowledged this criticism publicly, which is at least a step in the right direction.
  • Assessments outside of government have tended to come up with larger subsidy values.  Cashing in on All of the Above: U.S. Fossil Fuel Production Subsidies under Obama, produced by Oil Change International in 2014 is a good example.  This analysis includes a broader array of support instruments, though focuses only on the production side of the oil and gas fuel cycle. 

Do you have a favorite study or resource on the subsidy issue that I've missed?  Email it to me.

Fossil Fuel Subsidies: Approaches and Valuation

Numbers ranging from half a trillion to two trillion dollars have been cited in recent years for global subsidies for fossil fuels. How are these figures calculated and why are they so different? The most commonly used methods for measuring subsidies are the price-gap approach-quantifying the gap between free-market reference prices and the prices charged to consumers-and the inventory approach, which constructs an inventory of government actions benefiting production and consumption of fossil fuels.

I'm happy to announce the release of Fossil Fuel Subsidies:  Approaches and Valuation, a paper I wrote with Masami Kojima at the Bank.  Masami has written about fossil fuels for many years, often focusing on the functioning of the price mechanism in oil markets.

The working paper takes a deep dive into the main subsidy measurement approaches used to estimate global subsidies to fossil fuels -- including estimates produced by the IEA, IMF, OECD, and the World Bank.  We look at the many challenges regarding data acquisition and valuation, how these challenges are likely to affect reported estimates, and important factors that contribute to large differences between global estimates. 

Recognizing that available budgets to track and value fossil fuel subsidies are always limited, we also identify some promising options for increased institutional cooperation going forward.  These initiatives would broaden the informational base on fossil fuel subsidies overall, and help to standardize subsidy measurement and key data inputs.

Cross-institutional collaboration is already growing, and key staff from all of the institutions we looked at graciously provided their time to review drafts of our paper and to contribute their ideas for future improvements.  It is my hope that this trend that will continue to accelerate in the years ahead.

Global Energy Subsidies: Scale, Opportunity Costs, and Barriers to Reform

Government subsidies to energy producers, transporters, and consumers are widespread throughout the world and represent a large public investment in the energy sector. In theory, this investment could be funding a variety of social goals such as providing the poor with access to basic energy services and addressing common environmental problems linked to energy extraction and consumption.

Although some subsidies do address these types of concerns, most either do not, or do not do so effectively.

Subsidies to Energy: A Review of Current Estimates and Estimation Challenges

Presentation at a meeting sponsored by the Energy Research Institute of China's National Development and Reform Commission and the World Bank in Beijing, China.  The presentation reviews existing estimates of global subsidies to energy, including their magnitude, differences in estimation methods and assumptions, reporting trends, and emerging issues. 

We are grateful to the World Bank for making a Mandarin version of this presentation available as well.

The IEA is producing two detailed assessments on nuclear energy in the coming months.  The first, a chapter in their vaunted World Energy Outlook, will examine in detail the prospects and challenges to nuclear energy going forward.  The second, produced jointly with NEA, will update their Technology Roadmap series, examining options and impediments to scaling nuclear around the world.

I participated in two days of expert meetings on the documents in April, and have summarized my thoughts and suggestions to IEA in this memo

The discussions were interesting in many ways.  The participants, largely composed of government officials involved with country nuclear power issues, and industry trade associations and vendors, continue to have an unwavering faith in the ability of their technologies to serve low carbon power to the world.  This part was not a surprise:  these are the folks who should believe in their product. 

More surprising was how quickly they dismissed some of the significant challenges the industry has faced over the past few years (the Fukishima accident, large cost overruns at all plants being constructed in the West, pricing pressure from natural gas plants, and challenges obtaining private finance) as being unimportant or somebody else's fault.  There continued to be a strong belief as well that learning curves would quickly bring reactor and construction costs down; and that new technologies (including small modular reactors and a variety of alternative fuel cycles) would increase the sector's market share going forward while making nuclear energy cheaper and safer.

When participants discussed subsidies, they were focused solely on subsidies to renewables.  Without irony, some of the participants stated in one comment that nuclear itself was not subsidized and in another talked of the importance of government guarantees to nuclear construction on a massive scale. The belief that nuclear was the only viable mechanism to provide large scale, low-carbon power was also widespread. 

This perspective was particularly striking to me given the long time horizon being discussed.  The scenarios included new plant starts through 2050, which, with operating lives of at least 40 years means the solutions being proposed will span three quarters of a century.  The technical change that will occur during this period will be stunningly large -- think how much has changed since 1939, 75 years ago.  It is hard to believe that nuclear's main competitive advantage over other low-carbon resources (i.e., it is not intermittent) won't be solved during the next few decades; and if it is solved, I'd hate to have national governments guaranteeing trillions of dollars of nuclear debt.  Whereas the nuclear buildout scenarios involve roughly 1,000 new reactors, the pressure for improved power storage will be coming from many different sectors (primarily consumer electronics and phones, electric vehicles, and power storage) with unit counts in the billions.  The range for innovation, incremental technical change and improvement, and cost reductions will be vastly larger than in the nuclear sector.

I'm all in favor of a core group of dedicated believers in nuclear trying to remake the industry, making it safer, cheaper, and more convenient.  But this blindness to their own subsidies, and to the fact that multiple pathways that exist to reduce carbon in the economy, is both puzzling and unhelpful.  My view on this has been quite consistent:  if nuclear energy is to be a carbon panacea as it claims, it must prove it in the competitive marketplace, without the massive government support around the world that the industry seems to view as its birthright.

Comments and suggestions for WEO nuclear chapter and updated Nuclear Roadmap

The IEA is producing two detailed assessments on nuclear energy in the coming months.  The first, a chapter in their vaunted World Energy Outlook, will examine in detail the prospects and challenges to nuclear energy going forward.  The second, produced jointly with NEA, will update their Technology Roadmap series, examining options and impediments to scaling nuclear around the world.

The Inter-American Development Bank (IDB) is embarking on a major work program to identify and assess fossil  fuel subsidies throughout Latin America and the Carribean.  I had the privilege of presenting a number of ideas on how to leverage their effort during an expert meeting on the topic a few weeks back.  The slides from my presentation can be viewed here.

Growing consensus that fossil fuel subsidies need to go

IDB joins a growing array of global institutions that have recognized the importance of finally addressing large and pervasive subsidies to oil, coal, and natural gas.  The list includes the World Bank, OECD, IMF, IEA, UN, G-20, and many national governments, including even a growing number of OPEC members. The degree of attention, including at the top levels of many governments, was unimaginable 25 years ago when I started working on the issue. 

Even recognizing that political attention is but first step of a much more difficult process of reform, this is still an exremely positive trend.  It is progress that data series (such as IEA's price gap figures) are being developed annually rather than intermittently, and for a growing number of countries.  It is progress that the types of market interventions being measured and tracked are slowly expanding to include policy instruments on the producer side (work undertaken most broadly by OECD).  And it is progress that these organizations are starting to talk to each other on a regular basis to more effectively leverage the limited funding available to track the subsidy programs.

Why now?  Partly it's about the money:  well over half a trillion dollars per year goes to subsidize fossil fuels around the world, and with at least as much in associated damage to environmental quality and human health.  The expenditures are stressing many governments, and even though some of the subsidies aim to help the poor obtain access to energy services, it is well recognized that there are more efficient pathways to do so. Partly it's about the environmental impacts:  subsidy elimination is a no-brainer if one wants to deal with bringing down greenhouse gas emissions.  It hardly makes sense to institute a carbon tax while you are subsidizing the exact same fuels a the same time.  And partly there is an internal momentum that builds once enough organizations have put an issue on their agenda and other groups pick up the discussion as well.

Recommendations to leverage IADB's work

The areas covered in my presentation included:

  • Understanding why global subsidy estimates reported by OECD, IMF, and IEA differ from each other (see Slide 1 below), and what subsidy types nobody is tracking.
  • Taking steps to ensure that work is coordinated across the international organizations, such that methodologies are consistent (so results can be more easily combined) and key unanswered questions are divided up amongst them to avoid duplication.
  • Separating environmental externalities from fiscal subsidies in the presentation of data on government support.  The wide variance in externality estimates (see Slide 2 below), along with some methodological issues in what specific external costs are being attributed to fossil fuels (as opposed to vehicles, or roads, or congestion), both contribute to this recommendation.
  • Supplementing price gap data with critical case studies of energy market distortions in the Latin America and Carribean region (LAC).  Expanding price gap coverage is useful, but it is not sufficient to properly map subsidies in the LAC region or the political impediments to reform.  Recommended case studies include examining subsidies to bulk energy transport and how those policies can undermine market entry points for distributed energy; and evaluating in detail the multi-layered subsidies to government-owned energy enterprises (such as in Mexico and Brazil), even if the fuels they produce are sold at world prices (and therefore would not show up as subsidized using the price gap approach). 

Slide 1

 


Slide 2

Fossil Fuel Subsidies: Building a Framework to Support Global Reform

Keynote presentation at the Expert Workshop on Subsidies to Fossil Fuels and Climate Mitigation Policies in Latin America and the Caribbean (LAC), held at the Inter-American Development Bank in Washington, DC on January 14, 2014.  Slides review recent global estimates of fossil fuel subsidies, highlighting both the tallies and the reasons the estimates differ widely from one another. 

Earth Track Blog Post

There has never been a systematic review of global subsidies to energy that capture all fuels, all countries, and both the consumer and producer sides of the market.  However, a recent article on cybercrime (quite an interesting read) by Michael Riley at Bloomberg allows some interesting comparisons, albeit using partial data, on the massive scale of energy subsidies relative to some other global "industries."

$43,000,000  - Total value of all US bank robberies in 2010 according to the US Federal Bureau of Investigation

$85,000,000,000 - Global market for cocaine per year, according to United Nations data

$114,000,000,000 - Value of data stolen each year, according to security firm Symantec

$409,000,000,000 - 2010 subsidies to fossil fuel consumers as estimated by the International Energy Agency


Okay; the comparison may be somewhat unfair.  The global cocaine market, after all, spurs all sorts of violence and injustice in its wake, while at least some fossil fuel subsidies go to the poor and help keep them afloat.  Point taken -- but only partially. 

The massive scale of energy subsidies in relation to these other activities ought to give us pause.  In terms of misdirection of societal resources, the problem is immense -- all the more so once one remembers how partial the IEA subsidy figure is.  It captures only fossil fuels, not all energy; and focuses only on subsidies to consumers, not to the producer side as well.  And, while some of the fossil fuel subsidies do help the poor, the subsidy analysis in IEA's 2011 World Energy Outlook (the source of the $409 billion subsidy figure), also shows that the vast majority of subsidies flow to wealthier parts of society, not the poorest.  As a result, the energy subsidies have the effect of diverting an enormous pool of fiscal resources away from better policies to create opportunity and alleviate poverty for the poorest segments of society.