Reflections From Below The Fossil Subsidy Iceberg

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As close observers have long suspected, governments historically underestimate the cost subsidies for fossil fuel exploration, development, and production. By far. The International Monetary Fund has just calculated far in a study distributed by its Fiscal Affairs department: How Large Are Global Energy Subsidies? (IMF working paper 15/105).

Here’s IMF’s basic reasoning. If you incorporate what governments have to pay to clean up after companies burn oil, coal, and natural gas for power, you see that this factor has not been counted in the economic equation of using fossil fuels. Humans have to counter emissions of carbon dioxide and other pollutants in order to combat their harmful effects (air pollution, the greenhouse effect, climate change, and related disaster response, normally considered “externalities”). Government is usually pegged as the industry’s housekeeper. Until recently, the costs of remediation have been invisible. It turns out that they are unbelievably high.

The IMF—sometimes a fairly conservative voice, considering its purpose—calls them “shocking.” Figuring in all necessary government actions to counter greenhouse gas emissions, global subsidies amount to not only the numbers usually cited (of around $500 billion a year), but to $5.3 trillion a year. The Guardian puts this government expense, which the public pays for, at $10 million per minute. In 2015, this total exceeds the amount all world governments spend on health. It shows that we price fuel remarkably low, considering its real cost, and that true subsidies are a far cry above the usual calculation.

“The IMF provides five trillion reasons for acting on fossil fuel subsidies,” UN climate chief Christiana Figueres states. Says Nick Stern, well-known climate economist at the London School of Economics:

“This very important analysis shatters the myth that fossil fuels are cheap by showing just how huge their real costs are. There is no justification for these enormous subsidies for fossil fuels, which distort markets and damage economies, particularly in poorer countries…. A more complete estimate of the costs due to climate change would show the implicit subsidies for fossil fuels are much bigger even than this report suggests.”

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Like Stern, the UN’s Intergovernmental Panel on Climate Change calls the IMF cost estimates of comprehensive subsidies “conservative.” (Vox notes the inadquacy of the word “subsidies” in this case but does not provide a substitute. IMF calls the unspoken costs “post-tax energy subsidies.”)

Here’s the big picture: coal, the dirtiest fuel in all levels of the atmosphere, receives the largest share (about 50%) of fuel subsidies. About a third of subsidies go to oil, and the rest to natural gas.

Nations contributing to pre-and post-tax fossil fuel subsidies:

  • China—$2.3 trillion (close to half),
  • US—$700 billion,
  • Russia—$335 billion,
  • European Union—$330 billion,
  • India—$277 billion),
  • Japan—$157 billion).

Eliminating subsidies would have powerful effects, often ignored in traditional estimates:

  1. Global carbon dioxide emissions would fall by 20%.
  2. Renewable energy would no longer need its $120 billion global support (a drop in the bucket) per year.
  3. Renewables would become cost-competitive with fossil fuels.
  4. Energy costs might increase, but since traditional subsidies favor the wealthy by a factor of six, so poverty (and poor public health, social unrest, etc.) would diminish.

The benefits of reducing pollution and its concomitant climate effects clearly show that cutting fossil-fuel subsidies is in the best interests of every country’s economy.

Developing nations may cry foul in the sense that eliminating support for fossils would restrict their development progress, but national elephants like China have already begun to phase out obsolete fuels, to no one’s detriment. Active planning for clean energy and a helping hand from the already wealthy gives the poorer nations a major head start in the post-carbon world. It’s way more sustainable than the example set by “developed” countries that thoughtlessly embraced the fossil fuel quick fix for industrialization two centuries ago.

However, it is sobering that the G-20 nations agreed in principle two years ago to phase out fossil-fuel subsidies, but actions on an international level to date have failed to follow up on that important pledge.

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