Why Are Fossil Fuel Subsidies So Hard To Eliminate?

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There is congratulatory back-patting among some circles as 20 countries, including some big ones, agreed to phase out funding for fossil fuel projects outside of their borders during COP26 in Glasgow. It is good news, but we’ve been here before. In 2009, both the G20 and the G7 agreed to stop subsidizing fossil fuels, including foreign economic development. Every country failed. The US failed completely, with no progress at all per the NRDC. Canada and China did better, but 12 years later, still both subsidize the majority of the fossil fuels that they subsidized in 2009.

Why is it so hard for federal governments to eliminate pork for the industry that’s the primary cause of global warming, the primary cause of air pollution, the primary cause of water pollution, the primary cause of premature deaths globally and the primary cause of habitat destruction? There are a lot of headwinds to this obvious necessity.

What Is A Subsidy?

The first problem is getting everyone to agree with what is meant by the word subsidy. Seriously, this shouldn’t be difficult, but different definitions lead to different outcomes, and often those outcomes hurt or help one particular group of stakeholders more than another, leading to pressure to include or exclude things.

The naive and un-nuanced definition is giving a corporation or an individual money when they use or do something. In thinking through the various examples I’m familiar with — and I’ve looked and and published on this a few times — they don’t align with that.

A second definition is maintaining artificially low prices on something for a group or everyone. There’s more of that one. Petrostates such as Saudi Arabia make gas, diesel, and oil’s other by products incredibly cheap.

A third definition is providing higher prices for something considered of value than what the market price would suggest. Feed-in tariffs have been used extensively around the world in countries in the early days of creating markets for renewable energy, and they still exist in many countries. They have a purchase price scale that would make it profitable for producers of renewable electricity to overcome the lack of strong supply chains and experienced construction organizations. This is mostly what Ontario’s Conservatives eliminated when they tore up — via legislation without compensation or recourse — 758 renewable energy contracts upon taking power in 2018.

A fourth definition is providing tax breaks for the use of something, effectively giving the producer money, but deferred and with the requirement that they actually have sufficient income or profits to consider tax breaks worth having. This one is used a lot.

In the US, the fossil fuel, nuclear, and hydroelectric industries have permanent tax breaks in the tax code. Meanwhile, the Production Tax Credit (PTC) and Investment Tax Credit (ITC) for wind and solar are in the much easier to change temporary tax breaks. Similarly, federal tax rebates for the purchase of electric vehicles are in here.

Colored fuels are used around the world to provide tax-exempt diesel and the like for off-road farming and construction equipment. These are tax subsidies for farming and resource extraction that happen to be for fossil fuels, and clearly aren’t provided for electric equipment, providing an inappropriately unlevel playing field.

A fifth definition is to give low-interest or guaranteed loans to certain groups or companies for specific purposes. The GI Bill provided cheap, easy to get mortgages to returning white veterans of WWII, which combined with the massive number of cheap cars manufactured by repurposed war time factories, led to massive urban sprawl in the US. While GM and Chrysler were effectively bought outright by the US government under TARP to keep them afloat, Ford received a $6 billion federal loan which is still hanging over its head. Tesla received a much smaller one, just under $500 million, and paid it back early, incidentally.

A lot of foreign economic development comes in the form of financing like this. A bunch of Canada’s fossil fuel subsidies are in this form for overseas development of power plants. Of these thirteen identified items, only this one is on the COP26 chopping block.

A sixth definition is for a jurisdiction to give land it owns outright to an industry it wants to attract. This is very popular in sub-national governments and municipalities, which frequently have lots of land holdings and few other strings that they can pull. Eliminating the cost of real estate makes a big difference to business cases. Innumerable plants are attracted to specific places by being handed land. If memory serves, one Australian state basically gave a coal plant hundreds of millions in land.

A seventh definition is waiving taxes entirely on an industry for a period of time or forever. The obvious example is religion, where spirituality businesses don’t pay taxes, and often have obscenely ostentatious wealth and privilege as a result. But in Alberta a couple of years ago, the provincial government waived all municipal taxes on oil and gas infrastructure for firms operating within its borders. It made the money the first year for the municipalities, but not the second year, and many oil and gas firms just refused to pay municipal taxes after that.

An eighth definition is for a government to buy outright companies or infrastructure that would fail otherwise, nationalizing them temporarily or permanently. Under TARP, Obama bought a couple of car companies, and a bunch of other companies as well. The Trudeau Liberals bought the Trans Mountain oil and gas pipeline, of all the stupid things, despite it saddling the government with billions more in commitments to twin it, and that it is clearly heading toward being a stranded asset.

A ninth definition is a government building infrastructure for an industry or firm which is necessary for its existence, but which is not costed to the industry or firm. The vast majority of the 160 GW of pumped hydro grid storage currently operating, for example, was mostly built to give nuclear and coal plants something to do at night, and not considered part of their cost. Bridges, roads, highways, railways, ports, and airports have been built with federal, sub-national or municipal money to benefit specific employers.

A tenth definition is governments giving hundreds of millions or billions to organizations for innovation or remediation technologies. Virtually all carbon capture and sequestration facilities globally were built with federal and sub-national money, or only exist because of generous tax breaks. Virtually all fossil-fuel sourced hydrogen plans at present rest on a lake of federal and sub-national money. Test sites for unconventional oil and gas extraction in the US since the OPEC Oil Crisis had a lot of federal money in the mix for decades.

An eleventh definition is the use of hard power, the military and intelligence organizations of a country, to protect supply chains for specific industries considered both strategic and at risk. The US spends a rather absurd amount of money annually on security for the nuclear industry and that money is not paid for out of nuclear revenues. Similarly, the US and many other countries have spent hundreds of billions and a depressing number of lives in the Middle East trying to keep the oil flowing. When a bunch of Saudi Arabian hijackers master-minded by a Saudi prince flew planes into the World Trade towers, the US proceeded to invade first Afghanistan and then Iraq, rather than the source of the problem, Saudi Arabia, because of oil.

A twelfth definition is for governments to assume the costs of cleaning up after industries, either specifically or by lack of holding the firms accountable directly. Every Superfund site in the US is in this category. The massive number of orphaned wells in most oil and gas regions are in this category. Alberta has roughly $200 billion in unfunded remediation that will be paid for out of federal coffers as the Ponzi scheme of asserting that they would pay for remediation out of future revenues collapses.

A thirteenth definition is choosing to accept expensive negative externalities that impact federal, sub-national or municipal tax revenues in order to get the economic value of something. Fossil fuels have been the clear recipient of this for centuries, and still receive this now virtually everywhere. Every coal plant in the US kills about 78 people every year. The World Health Organization estimates that air pollution, mostly from fossil fuels, led to a life-expectancy reduction in northern China of 5.5 years on average. Every one of those deaths came with years of illness and lower productivity. Obviously the fossil fuel addiction of the developed world is causing massive negative externalities around the world with climate change, something not priced into fossil fuels. The IMF includes this definition in its cataloguing of the costs of fossil fuels globally.

Who Benefits Or Loses?

It’s likely I missed something, but thirteen is a nice evil number to stop at. The ways in which governmental monies are used to support different initiatives and especially the fossil fuel industry are many and varied. Looking through that set of things which can reasonably be considered subsidies by the broad definition of distorting markets to favor a specific industry, firm, or group of stakeholders, you can start to see a few things.

Every year, lobbyists are working under whatever the political, fiscal and regulatory constraints exist to get benefits flowing for their industries, preferably for a long time. This has been going on forever under a lot of different political, fiscal, and regulatory constraints at national, sub-national, and municipal levels.

Every year, regulators and industries trade personnel back and forth. Some of this is good, but what it means is that most of the places that hand out these subsidies have had insiders from the industry ensuring that their industry gets a better deal than someone else’s, and figuring out how to give them more. Industry rewards these insiders handsomely over time, often with cushy post-government executive and consulting roles, where they double-dip federal pensions with private sector salaries and bonuses.

In many cases, the relationship between a single industry such as fossil fuels and a specific subsidy is murky. Often subsidies benefit both good things and bad things, so eliminating the subsidy would also hurt the good things. Every attempt to even identify and tease apart a specific set of subsidies, with fossil fuels as the major problem, runs into a serious mess of big and small things intertwined with big and small things for other industries.

Every attempt to eliminate subsidies runs into headwinds from innumerable lobbying groups. Colored fuel for agricultural equipment? Third rail for politicians who want farmers’ votes and to keep major agribusiness donors happy. Tax breaks for fossil fuel exploration and extraction in the US? That’s in the permanent tax code for a reason, and no one is successfully going to open up that code without a supermajority, which is why the fossil fuel industry has bought so much of the Republican Party. Powerful interest groups get different benefits from different portions of the subsidy web. Overlapping circles of defense for nuclear fuel supply chains? Who wants to make it easier for bad actors to get their hands on nuclear fuels? Losing out on a major new employer because you didn’t hand over some land you weren’t using? That’s a good way to be out of your job as mayor or councilor.

Fossil fuel subsidies are a crashed tractor trailer of razor wire, soaked in oil and sewage, rolled in jagged glass, and sprayed with arsenic.

Biden and Obama promised to eliminate fossil fuel subsidies in 2009 as part of the G20 and G7 pledges. They made exactly zero headway according to watchdogs like the NRDC, making Biden’s campaign promise difficult to believe. Canada fared slightly better, especially when Trudeau’s Liberals took power, managing to unwind some clear subsidies, but running into such a morass of baroque and intertwined complexities that they suffered analysis paralysis.

Naturally, the country which is among the best at unwinding subsidies for fossil fuels is China, but it had also been giving big subsidies to coal generation and the like to get industry up and running since 1978. The knotted stinking mess problem is smaller in China, and the power of the government to address it is greater. Even then, it was only in the run-up to COP26 that China agreed to stop building coal plants in its Belt-and-Road Initiative.

Fossil fuel subsidies are a wicked problem decades and even centuries in the making. In a bunch of cases, it would be better to throw the toxic tangle away entirely and start from scratch. But how do you sell that one either?

Some reading:

Featured image courtesy of US DOD

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Michael Barnard

is a climate futurist, strategist and author. He spends his time projecting scenarios for decarbonization 40-80 years into the future. He assists multi-billion dollar investment funds and firms, executives, Boards and startups to pick wisely today. He is founder and Chief Strategist of TFIE Strategy Inc and a member of the Advisory Board of electric aviation startup FLIMAX. He hosts the Redefining Energy - Tech podcast (https://shorturl.at/tuEF5) , a part of the award-winning Redefining Energy team.

Michael Barnard has 688 posts and counting. See all posts by Michael Barnard