IMF

The Unequal Benefits of Fuel Subsidies Revisited: Evidence for Developing Countries

Understanding who benefits from fuel price subsidies and the welfare impact of increasing fuel prices is key to designing, and gaining public support for, subsidy reform. This paper updates evidence for developing countries on the magnitude of the welfare impact of subsidy reform and its distribution across income groups, incorporating more recent studies and expanding the number of countries. These studies confirm that a very large share of benefits from price subsidies goes to high-income households, further reinforcing existing income inequalities.

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.

Earth Track Blog Post

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.

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 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. 

Bjorn Lomborg ran an op-ed in the Wall Street Journal a few days ago in which he concluded the real problem with energy markets is that there are too many subsidies to green energy.  Lomborg argues that people who complain about subsidies to fossil fuels are in part misguided by the considerable "misinformation" on the subject, and he aims to "debunk" key "myths" around the numbers.   While he agrees that fossil fuels shouldn't be subsidized either, his main focus is on government largesse to renewables.

As I've been working on this subject for quite a long time, I've added some commentary to his commentary ("Green energy is the real subsidy hog",WSJ, Nov. 11, 2013).  His op ed is reprinted verbatim below.  My commentary is interspersed, with the text indented and italicized.

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Green energy is the real subsidy hog

For 20 years the world has tried subsidizing green technology instead of focusing on making it more efficient. Today Spain spends about 1% of GDP throwing money at green energy such as solar and wind power. The $11 billion a year is more than Spain spends on higher education.

Perhaps a quibble, but the duration of subsidies, even to renewables, is a good bit longer than 20 years.  The longevity matters, as it is a rough proxy for how entrenched the related interests are, and of the political challenges that any reform effort faces.  Corn ethanol, if one is bold enough to call it "renewable," has been subsidized for 35 years in the US.  A handful of renewable subsidies go back even further, to the period immediately following the first energy crisis of 1973, as the US floundered around trying to address its suddenly-revealed overdependence on imported oil from hostile nations. 

But the dollars to renewables were quite small until the early 1990s, and become mere rounding errors for that time period once one removes (as I believe they should) support to corn ethanol and large scale hydro plants.  In contrast, and since Lomborg is focused on expensive support for energy globally, subsidies to oil and gas date back at least a century.  Further, since oil is a complex global market, subsidies in one country often spilled over to oil operations in multiple countries.  Multinational oil companies, for example, established complex (and quite impressive in a tax-wonk sort of way) mechanisms to use tanker subsidiaries and transfer prices to avoid much of their worldwide corporate tax burden.  Glenn Jenkins of Harvard wrote a fascinating paper reviewing tax subsidies to international oil operations in the 1960s and 1970s, including the tanker subsidiary scheme that moved profits out from high-tax end-market countries to tax havens such as Panama and Liberia.1 

This was not the only such scheme, and paring them back (they are still not gone entirely) took many years of effort by taxing authorities.  But the example provides an important reminder that the clock on subsidy-related distortions in energy markets has been running for a good deal longer than Bjorn Lomborg has been paying attention to it.  Subsidies to nuclear fission around the world highlight this as well.  From R&D to construction, accident liability, decommissioning, and long-term radioactive waste management, large government subsidies have propped up the industry since the earliest days of the civilian program in the 1950s.  Without these subsidies, it is doubtful that more than a handful of reactors would ever have been built.  Dollars (and all sorts of other currencies as well) have been thrown at these technologies for decades, often in big gobs. 

Lomborg is correct that energy efficiency has normally been short-changed in energy policies the world over (my own figures for that late 1980s found $35 in supply side subsidies for each $1 in end-use efficiency support; the numbers are hopefully a bit better now).  Perhaps this is an unfortunate side-effect of the dynamics of political economy:  supply-side resources tend to have large infrastructure, concentrated cash flows, and executives who can promise jobs for the district and funding for the re-election coffers.  In contrast, efficiency more often comes in small, dispersed batches without the political fanfare of a ribbon cutting. 

But there is another very important reason that efficiency has not been front-and-center around the world:  existing policies have consistently underpriced conventional energy resources - through subsidies to be sure; but also through large negative externalities that have long been ingnored.  This Harvard Medical School study, for example, pegged environmental and health costs of US coal alone at hundreds of billions per year.  And ignored externalities mean artificially low delivered prices for fossil fuels, and systematic underinvestment into improved efficiency and conservation.   Lomborg may disagree on the figures used by the IMF, but he should certainly agree that negative externalities are quite large and have not been properly internalized into many fuel markets.

At the end of the century, with current commitments, these Spanish efforts will have delayed the impact of global warming by roughly 61 hours, according to the estimates of Yale University's well-regarded Dynamic Integrated Climate-Economy model. Hundreds of billions of dollars for 61 additional hours? That's a bad deal.

Wow, 61 hours does seem a bad deal. For the billions of dollars being spent, I would think we ought to be able to stave off destruction for at least a couple of weeks, maybe even a month or two.  But would it be out of line to suggest that these figures seem so extraordinarily precise given the forces at play that perhaps this type of conclusion might not be playing to the core strengths of what the Yale model was set up to evaluate?  We've got time horizons that are decades long, interacting policies not only among many global players in the solar space, but across fuels and competing economic drivers of energy policy such as energy security and jobs.  And we've got newer technologies that quite often have discontinuous (i.e., involve tough-to-model non-linearities) and hard-to-predict development and technology dissemination paths.  In light of these factors, I'm hard-pressed to ascribe serious weighting to the 61 hour prediction.  What is likely going on is that the impact of a tiny policy is being evaluated in isolation against the inertia of a massive global system.  Not surprisingly, it doesn't move the needle much. No single policy would. 

This issue arose in the mid-1990s when the US Environmental Protection Agency ran two macro models (Decision Focus and Jorgenson/Wilcoxen) to see how removing a handful of individual subsidies to oil would affect national emissions of greenhouse gases.  The answer, for the same reason, was not much.  Though when they redid the model runs looking at a bigger list of fossil fuel subsidies (i.e., beyond the scoping problems of the EIA reports and removing a group of subsidies together rather than one or two at a time), emissions shifts from reform became more material.  Unfortunately, this exact same error was repeated in a recent assessment by the National Academy of Sciences of the US tax code and ghg emissions.  In contrast, the OECD has been assessing the impact of fossil fuel subsidy reform on emissions for well on a decade using its general equilbrium model, and has found material benefits.

Are some renewable energy policies inefficient?  Of course -- just like most of the other subsidies given.  With a feed-in tariff, the subsidy can be set too high, applied to too many kWh, or set to last for too many years.  But at least there's no payment unless power is delivered.  Goofy ideas like Senator Lindsey Graham's push to guarantee $100 billion in loans to build new nuclear reactors cost money even if the projects balloon in price, get cancelled, and never generate a single kWh.  He and others pretend that loan guarantees, no matter how big, are free;  financial economists know better. 

If Spain's renewable subsidies have been inefficient they should fix them.  If they are too expensive for their economy, they should pare them back, redirect, or eliminate.  That's part of running a competent government.  But let's not imply (as Lomborg's juxtaposition in the first paragraph of his oped does) that somehow the PV subsidies are a material reason Spain is not spending enough on higher education.  Clearly, there are many things about the Spanish economy that seem sub-optimal in attaining better lives for its citizens.  I'd put its long-standing underemployment of the country's young people (youth unemployment recently topped 56%)  far higher on the list of things having detrimental effects on the development of the country than whether they've optimized their subsidies to photovoltaic installations. 

Stepping outside the Spanish example for the moment:  the costs of solar panels have continued to decline sharply, and quite interesting financial models for deploying them have evolved as well.  They are increasingly being integrated into basic building materials, which should bring the marginal cost of the power component down still further.  If these panels are one day competitive even according to Lomborg calculations, would the Yale model somehow parse out 61 hours worth of credit for this shift to the Spanish subsidies?  I don't know whether these economic gains will actually occur any more than Lomborg does.  Yet, with production lot sizes in the many thousands for PV panels, spillover from related industries, and frequent reinvestment in production lines, I am far more hopeful that incremental innovation in the PV sector will generate significant cost and value improvements than I am about similar claims by the nuclear industry, where even in France reactor lot sizes have been too small to generate the type of learning, innovation, and economies of scale needed to bring unit costs in line.

Yet when such inefficient green subsidies are criticized, their defenders can be relied on to point out that the world subsidizes fossil fuels even more heavily. We shouldn't subsidize either. But the misinformation surrounding energy subsidies is considerable, and it helps keep the world from enacting sensible policy.

I've done my best to call out subsidy silliness whatever fuel it supports, and have never favored cutting any energy resource slack on the negative impacts of its production chain.  That said, I speak to many people representing all sorts of views on the best energy path, and there are notable distinctions in the messaging used by the different groups.  When I speak to people in the wind or solar industries ("defenders" of green subsidies from Lomborg's vantage), they are actually quite candid that what they are getting from the government are subsidies.  Not surprisingly, they believe those subsidies are justified and socially beneficial, but there is no mincing the "S" word. 

This is in sharp contrast with the oil and nuclear industries and their apologists.  Percentage depletion becomes just another way to write off investments - no matter that you are writing off more than you actually invested.  Government loan guarantees of tens or hundreds of billions of dollars for new reactors (Lindsey Graham again) are not subsidies because there is not an initial cash payment from the government.  No matter that credit enhancements are a separate product (for which one must pay) in financial markets; that they provide particularly large benefits for the most capital intensive technologies with poor construction track records such as nuclear; and that favored technologies of particular political gatekeepers are given disproportionate access to Uncle Sam's low cost credit line.  Master limited partnerships, another example, are almost entirely used by the oil and gas industry to enable publicly-traded firms to escape billions in corporate income taxes each year.  Yet they are brushed away as though it's not really a subsidy, just another way to organize a company. 

At least give all of us working on energy market transparency and subsidy reforms the courtesy of acknowledging your industry is at the trough.  Make the case on why you deserve taxpayer support, but don't pretend we're too stupid even to see it. 

So yes, Lomborg and I agree that the misinformation is considerable.  We differ on the source.  Political dynamics would suggest that the more established industries with larger cash flows (fossil, nuclear, and the farm lobby) will be the ones most engaged in lobbying activity, political donations, and cranking out information supportive of their subsidy positions.  That is the pattern I have seen.   

The Wall Street Journal's editorial page, where Lomborg has published his take on subsidies, is perhaps a case in point.  The paper has run numerous editorial pieces on subsidies to wind and ethanol.  It has run pretty much nothing on subsidies to nuclear or to fossil fuels -- the only exceptions being postings by people claiming, as Lomberg has, that the fossil fuel subsidies are small and mostly pretend figments of crazed greenie imaginations.  

Three myths about fossil-fuel subsidies are worth debunking.The first is the claim, put forth by organizations such as the Environmental Law Institute, that the U.S. subsidizes fossil fuels more heavily than green energy. Not so.

The U.S. Energy Information Administration estimated in 2010 that fossil-fuel subsidies amounted to $4 billion a year. These include $240 million in credit for investment in Clean Coal Facilities; a tax deferral worth $980 million called excess of percentage over cost depletion; and an expense deduction on amortization of pollution-control equipment. Renewable sources received more than triple that figure, roughly $14 billion. That doesn't include $2.5 billion for nuclear energy.

Lomborg is a savvy-enough economist to know exactly what he is doing with his data framing, and it is hardly helpful to the real policy issues for him to cherry pick as he does.  Energy subsidies are a global problem that diverts massive financial flows from more useful endeavors, slows energy innovation, and contributes to environmental damage.  The policies become de facto entitlements that are increasingly difficult to remove as recipient industries and sectors of the population become more dependent on the prevailing set of transfers or special benefits, reducing the political latitude for reform.  These forces may be one explanation why in the US subsidies to wind expire every couple of years, while subsidies to oil and gas are an integrated part of the tax code that is infrequently debated and virtually never at risk of removal. 

To support his assertion that this is all about wind, solar, and biofuels, Lomborg picks a point estimate, and one in a year mid-recession and just after the big cash dollops of the American Recovery and Reinvestment Act (passed in 2009) put federal spending on renewables at peak or near-peak levels.  Even today, renewable numbers would likely be materially lower.  The eighty-five years of industrial development between 1910 and 1995, during which renewable subsidies (other than the mega hydro dams, a topic for a different day) were barely a blip, are silently forgotten.   

The economic distortions that matter in terms of overall energy market structure and societal responses to climate change are not the result of a funding surge in 2010, but of much longer term trends of support. In the late 1980s, for example, my own detailed analysis identified more than $8 of federal support to conventional fuels (fossil, nuclear, and large scale hydro) for each $1 going to renewables and efficiency, an indication of the skewness of these earlier eras.  Using a longer-term trend line provides a more accurate framing of government subsidies and also mitigates some of the lumpiness that accrues to one fuel or another at different periods of time. 

It is also important to note that Lomborg is relying entirely on subsidy estimates produced by the EIA, though EIA's subsidy reviews unfortunately have an array of scoping and estimation problems.  This is an issue I have tracked in a fair bit of detail over the years (see a full discussion in this paper);  and that EIA at least partly acknowledged in its most recent subsidy review (though not all of their explanations ring true).  It is notable that not only do EIA's figures for total subsidies rise sharply when the topic is evaluated more systematically, but the relative support across fuels shifts dramatically as well.

Actual spending skews even more toward green energy than it seems. Since wind turbines and other renewable sources produce much less energy than fossil fuels, the U.S. is paying more for less. Coal-powered electricity is subsidized at about 5% of one cent for every kilowatt-hour produced, while wind power gets about a nickel per kwh. For solar power, it costs the taxpayer 77 cents per kwh.

Just as one can't properly measure a company's strength and prospects based on a single financial metric, the efficacy of energy subsidy policies - indeed of most government policies - must be evaluated with a mix of metrics as well. Thus, it is useful to supplement gross dollars of subsidy for a particular fuel with other metrics, as Lomborg has done.  This includes not only subsidy intensity (subsidy/unit energy produced), but other potential metrics of interest such as subsidy per mt of CO2-equivalent avoided or the subsidy per job-year created (raw jobs rather than job-years are a far less accurate measure of longer-term benefits).  The most relevant metrics will depend on the structure of the market being evaluated and the political justifications on which a subsidy program is being proposed.    

In his article, Lomborg chooses to emphasize primarily subsidy per kWh of energy produced.  It is a useful rubric, but only within the proper context.  Applying it to subsidies supporting basic energy R&D would not be useful, for example, since commercial production from that research would not be expected until many, many years later.  Time period issues can remain even for resources further along into commercial production, though still in the earlier period of infrastructure scale up.  In these situations, the base over which early subsidies are being spread may still be small, generating very large subsidy intensity metrics.  Further, distributed power resources may displace some power transport or distribution investments; where this occurs it is important that subsidies be compared across fuels on a similar basis that takes this savings into account.  The point at which a resource moves from one category to another is not a precise one, but the issue is relevant for how much weight to put on the reported subsidy intensity figures when assessing whether spending has been productive or not.  That said, even with emerging technologies far from commercialization, the subsidy metrics can help identify more cost-efficient mechanisms to achieve the same endpoints.  This is particularly true where expensive energy resources are being touted as the best or only solution to a problem for which there are actually many potential solutions -- reducing greenhouse gases for example.  If reductions in carbon are available at a few dollars per mt abated, the government shouldn't be earmarking subsidies to favored industries that cost a few hundred dollars per mt.

The subsidy intensity figures in Lomborg's op-ed suffer most from his use of a peak-year point estimate, which exacerbates the bias from using the peak year in his gross subsidy figures.  This is because both parts of the intensity fraction are distorted:  the denominator (kWh generated) remains small due to the scale-up period of the technology while the numerator ($ of subsidy) surges through selection of peak-year support. 

Finally, if the subsidy input data is inaccurate, incomplete, or otherwise biased (as the EIA figures are), not only will the absolute subsidy intensity values be wrong, but their relative values will also be skewed. 

Critics of fossil-fuel subsidies, such as climate scientist Jim Hansen, also suggest that the immense size of global subsidies is evidence of the power over governments wielded by fossil-fuel companies and climate-change skeptics. Global fossil-fuel subsidies do exceed those for renewables in raw dollars-$523 billion to $88 billion, according to the International Energy Agency. But the disparity is reversed when proportion is taken into account. Fossil fuels make up more than 80% of global energy, while modern green energy accounts for about 5%. This means that renewables still receive three times as much money per energy unit.

But much more important, the critics ignore that these fossil-fuel subsidies are almost exclusive to non-Western countries.

There are some subsidy estimation methodology issues here that are relevant to addressing Lomborg's conclusions.   IEA measures subsidies in many countries at once using the "price gap" method.  The approach evaluates variation between transport-adjusted domestic prices and a world reference price for the same fuel, an efficient mechanism and a necessary simplification given the scope of geography to be evaluated by the IEA's relatively small staff.  The metric primarily captures subsidies to consumers, as subsidies to producers are often absorbed in other ways (higher economic rents to resource owners, higher returns to producers, or simply allowing an inefficient producer to continue producing at particular prevailing world price levels rather than shutting down).  This "leakage" on the producer side means that the many fiscal supports don't show up as price disparities.  For more than you probably ever wanted to know about the price gap approach, see this paper. 

To be clear:  consumer subsidies are certainly more common in non-Western countries as Lomborg notes.  However, these countries also provide a slew of subsidies to fuel producers that don't get captured by IEA's data either.  Further, Lomborg's conclusion that subsidies by Western countries don't matter is simply wrong.  In fact, although Western countries are not trying to systematically hold domestic fuel prices below world reference prices as those topping the IEA fossil fuel subsidy tally do, they nonetheless have thousands of subsidies to fossil fuel producers that flow not only through their federal system, but through state, provincial, and municipal administrations as well.  And there are also consumer subsidies in the West, though of a different form than what one sees in Iran or Saudi Arabia.  Most often, these come via generous exemptions for fuels from standard sales and use taxes.  These exemptions depress the economic return on investments in efficiency and conservation while stripping state Treasuries of hundreds of millions of dollars in revenues each.   

There has never been anything close to a full inventory of energy subsidies around the world.  The OECD has begun building an inventory of producer subsidies within its member countries, though much remains to be done.  Sub-national coverage barely exists, and coverage of producer subsidies in developing countries is also quite weak.  Major gaps in the identification of credit supports to energy extraction and infrastructure are also common globally.  Having looked in detail at many of the data sources on which Lomberg relies, I would suggest that his conclusions on the relative levels of support across fuels are premature, and become even more so were one to include negative externalities of energy rather than just fiscal subsidies. 

Twelve such nations account for 75% of the world's fossil-fuel subsidies. Iran tops the list with $82 billion a year, followed by Saudi Arabia at $61 billion. Russia, India and China spend between $30 billion and $40 billion, and Venezuela, Egypt, Iran, U.A.E., Indonesia, Mexico and Algeria make up the rest.

These subsidies have nothing to do with cozying up to oil companies or indulging global-warming skeptics. The spending is a way for governments to buy political stability: In Venezuela, gas sells at 5.8 cents a gallon, costing the government $22 billion a year, more than twice what is spent on health care.

Lomborg oversimplies here, though clearly fuel pricing in Venezuela makes no rational sense.  The consumer subsidies are certainly partly about buying stability - a modern day form of bread and circuses.  But it is also true that big national oil companies can be strong advocates for entrenched leaders and their parties; and that the patronage associated with the firms and their cash flows is a powerful drug that generates all sorts of perverse outcomes in the politics and economics of the affected countries.  The subsidies can also get intertwined with sometimes misguided development dreams.  Using inexpensive power inputs to finance (over) expansion of irrigation in India, or to build "higher value" petrochemicals production, perhaps without making sure the infrastructure was globally competitive even were it to pay world prices on the fossil fuel feedstocks.  Real estate infrastructure can also suffer, as underpricing of heating, cooling, and lighting services lead developers to put up long-lived structures without appropriate investments into the energy efficiency of the building systems and envelope.   

Subsidies on the producer side in many of these countries are also endemic, though often much more difficult to track:  favorable terms on extraction, tax breaks, inexpensive government-provided capital or insurance.  And who gets them and how much absolutely does involve some degree of cozying up to the power brokers.

A third myth is propagated by a recent International Monetary Fund report, "Energy Subsidy Reform-Lessons and Implications." The organization announced in March that it had discovered an extra $1.4 trillion in fossil-fuel subsidies that everyone else overlooked. Of that figure, the report claims, $700 billion comes from the developed world.

U.S. gasoline and diesel alone make up about half of the IMF's $700 billion in alleged subsidies. Gasoline and diesel deserve more taxation, the report says, so the IMF counts taxes that were not levied as "subsidies." Thus air pollution merits a 34-cents-per-gallon tax, according to the IMF models, while traffic accidents and congestion should add about $1 per gallon.

There are a few issues here.  First, I hope that Lomborg is upset with the IMF methodology or values, and is not viewing any recognition of energy-related external costs as a "myth" that needs "debunking".  The valuation of externalities is often contentious though, and addressing the fiscal subsidies alone is often sufficient to alter the direction of energy markets in useful ways.  Thus, it is helpful to segregate the two values, and to assess reform impacts both on fiscal subsidies alone, and fiscal plus externalities as a separate model run.

That said, the basic idea that exemptions for energy fuels and services from basic levels of taxation applied to other good and services are unwarranted and should be viewed as subsidies is a sound one.  This is a significant subsidy both in countries with VAT (as energy often receives lower rates) and at the state level here in the US (where exemptions from sales and use taxes are common for fuel). 

According to the IMF, the U.S. also should have a 17% value-added tax like other countries, at about 80 cents per gallon. The combined $350 billion such taxes allegedly would raise gets spun as a subsidy.

Let's ignore the question of whether or not the US should have some national VAT imputed, as even within our existing tax framework there are subsidies of import that should be fixed.  For example, federal motor fuel taxes are used almost exclusively to fund highway construction and maintenance.  And exemptions or reductions from those taxes for particular classes of users results in literal free riders.  Favored classes have included vehicles using ethanol (until the excise tax exemption was replaced with a tax credit), and to a lesser degree electric or hybrid vehicles that have decoupled the connection between conventional fuel consumption and highway usage.  There are also large cross-subsidies to heavy trucks from other classes of users, as the heavier vehicles cause a disproportionate share of road damage.  And, all users underpay highway costs by close to $100 billion per year.  The vast majority of this undercharge (less the tiny fraction of vehicle miles not propelled by petrol) benefits oil.

While the US doesn't have a VAT, as already noted we do have sales and use taxes on consumption in most states.  And it is certainly true that if fuel excise taxes are earmarked at the state level to (mostly) pay for roads, and all sorts of other goods and services pay the sales tax, the absence of a sales tax on gasoline or diesel is properly viewed as a subsidy.  So too for commercial and residential consumption of fuels that are mostly exempt from state sales tax across the country - a policy that is both enormously costly in the states I've looked at, and certainly marginalizes activities that make the economy more energy-efficient.

The assumptions behind the IMF's math have some problems. The organization assumes a social price of carbon dioxide at five times what Europe currently charges. The air-pollution damages are upward of 10 times higher than the European Union estimates. And what do traffic accidents have to do with gasoline subsidies?

I agree with Lomborg on the issue of traffic accidents.  But his critique of the value assumptions for the social cost of carbon is a bit dicier, given the malfunctioning European carbon market.  Further, just as market impacts are better evaluated with a multi-year subsidy average than a point estimate, integration of external costs should also be done with longer-term estimates, rather than using only the spot price at a particular point in time.

Finally, the IMF effectively ignores the 49.5 cents per gallon in gasoline taxes the U.S. consumer actually pays. The models cancel out this tax, inexplicably, with an "international shipping cost." But even if you accept the IMF's estimated pollution costs and the European-style VAT, the total tax the IMF says goes uncollected comes to only about 44 cents per gallon-or less than the actual U.S. tax of 49.5 cents per gallon. The real under-taxation is zero. The $350 billion is a figment of the IMF's balance sheet.

The baseline taxation of energy should (1) compensate public sector owners for the sale (severance) of valuable energy resources; (2) recover public sector costs associated with the public provision of energy-related services (such as regulatory oversight, site cleanup, excess road repairs); (3) equal the baseline tax on other commodities (so fuel taxes actually contribute to general revenues rather than just paying for the excess costs they put on the system); and (4) charge an appropriate levy for negative externalities associated with production and use of the resource. This is in addition to removing obvious subsidies to production or consumption for a particular fuel.  Many assessments of energy taxation, including Lomborg's, fail to incorporate appropriate measures for baseline levels.  As noted above, for example, we know that the US federal tax on motor fuels doesn't even cover the related infrastructure.  At the state level, tax exemptions for fuels are rife; and excise and severance taxes often earmarked to fund the special problems or costs that extractive operations create for the state (resulting in little or no net contributions to general state spending).  Lomborg may be correct in some of his criticisms of IMF assumptions, but he is clearly wrong in his conclusion that "the real under-taxation is zero." 

Inaccurate information of this sort is needlessly misinforming public policy. I'm in favor of ending global fossil-fuel subsidies-and green-energy subsidies. Subsidizing first-generation, inefficient green energy might make well-off people feel good about themselves, but it won't transform the energy market.

Lomborg has a large megaphone, and cachet with many fiscal conservatives and green energy skeptics.  If he really is in favor of ending global fossil-fuel subsidies, I would love to see him actually work in that direction.  Too often when people say they are in favor of ending subsidies to both fossil fuels and green energy, what they really mean is that they want to define away the baseline subsidies to fossil as not really being subsidies; and then strip the subsidies to renewables and call the playing field level. 

Green-energy initiatives must focus on innovations, making new generations of technology work better and cost less. This will eventually power the world in a cleaner and cheaper way than fossil fuels. That effort isn't aided by the perpetuation of myths.

Dr. Lomborg, director of the Copenhagen Consensus Center, is the author of "How Much Have Global Problems Cost the World? A Scoreboard from 1900 to 2050" (Cambridge, 2013).

 

 

  • 1. "By 1971 tankers represented the third largest type of asset held by American companies having investments in the petroleum industry abroad. Tankers are a logical investment from the point of view of an integrated petroleum company desirous to control, through ownership, the chief international means of transport for its products. But American companies own oil tankers for two additional reasons. First, through the internal pricing of freight rates, income from either the producing of consuming country can be transferred to their tanker affiliates. Secondly, the United States does not for taxation purposes, require income gained by Controlled Foreign Corporations that are tanker subsidiaries to be included in taxable income of the year in which it was earned. This provision differs from the normal treatment of Controlled Foreign Corporations whose income is gained from services performed for a related corporation outside its country of origin. These tanker subsidiaries can reside in a foreign country with a very low tax rate ('tax havens') without having their earnings included in U.S. taxable income, whereas the normal tax treatment of a subsidiary of this type would include a pro rata share in taxable income. Thus, tanker subsidiaries retain the advantage of deferral. Liberia and Panama are the corporate locations of a considerable number of the tanker subsidiaries. In 1968 Liberia had an effective income tax rate of approximately 3 percent of income, while Panama’s income tax rate was 0.4 percent. From these locations the tanker subsidiaries of petroleum companies can choose whether to repatriate dividends to their corporate parents, using the excess tax credits from the producing countries to offset U.S. taxes due, or to use these funds to make loans to other foreign affiliates of the parent corporation. Through the freight and interest charges a significant portion of the total income of the international operations of a petroleum corporation can be transferred to the tanker subsidiaries incorporated in tax haven countries. This provides a method of transferring income from the high tax consuming areas to areas of low marginal effective tax rates, similar in effect to the transfer achieve by the internal pricing of crude oil (mentioned above)." See Glenn Jenkins, "United States Taxation and the Incentive to Develop Foreign Primary Energy Sources," in Gerard Brannon, ed., Studies in Energy Tax Policy. Cambridge, MA: Ballinger Publishing Co., 1975, pp. 203-245.