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Ahmed writes: "Government subsidies for fossil fuels over the last three decades have been far larger than anyone previously thought, according to a new study published by the University of Calgary's School of Public Policy in March."

Oil refinery in Fort McMurray, Alberta. (photo: EPA)
Oil refinery in Fort McMurray, Alberta. (photo: EPA)


Governments Wasted Trillions on Fossil Fuels Without Even Noticing Because of Bad Math

By Nafeez Ahmed, Motherboard

10 March 17

 

overnment subsidies for fossil fuels over the last three decades have been far larger than anyone previously thought, according to a new study published by the University of Calgary's School of Public Policy in March.

A fossil fuel subsidy is any government policy that lowers the cost of fossil fuel production, raises prices received by producers, or lowers prices paid by consumers: they can consist of tax breaks and direct funding for fossil fuel companies. But subsidies can also consist of loans, price controls, or giveaways in the form of land or water at below market-rates, and many other actions.

They have been so high across the world, finds Dr. Radek Stefanski—an economist at the University of St. Andrews in Scotland— that they are nearly four and a half times higher than previously believed.

So what's the damage? It's pretty colossal. For the last year in his model, 2010, Stefanski found that the total global direct and indirect financial costs of all fossil fuel subsidies was $1.82 trillion, or 3.8 percent of global GDP. He also found that the subsidies meant much higher carbon emissions released into our atmosphere.

Compare that to the International Energy Agency (IEA) figure for the same year. In its 2011 World Energy Outlook, the IEA calculated total worldwide fossil fuel subsidies for 2010 to be $409 billion, less than a quarter of Stefanski's figure of nearly two trillion dollars.

Bad Math

Stefanski is not the first to have suggested that older methods of calculating global fossil fuel subsidies were missing the mark by millions, if not billions. But he's the first to have applied a more advanced methodology to go back and see how much we've actually been spending in the past to shore-up the oil, gas and coal industries.

His findings suggest that government spending to keep the fossil fuel industries pumping has been orders of magnitude higher than we ever thought for several decades, not just years.

He argues that the IEA's measures to calculate fossil fuel subsidies are inadequate. Those measures use a "price-gap" approach which infers subsidies by comparing local energy prices with an international benchmark price. The problem is that this approach relies on scarce data and misses a whole lot of smaller, but still important, subsidies that don't directly impact prices. These could be, for instance, payouts to oil and gas producers that keep them in business despite older technology, or help them drill in areas that would otherwise be unprofitable.

To address the problem, Stefanski built a unique model covering 170 countries for 30 years between 1980 and 2010. The model infers the size of subsidies by looking closely at the relationship between a country's "emissions intensities"—its carbon emissions, relative to the quantity of energy it produces—and its GDP. By examining the patterns in these relationships over time, he found that deviations in the patterns were indicators of net fossil fuel subsidies.

The Number's Up

Overall, it's clear that fossil fuel subsidies have increased over the last few decades, not decreased—such is the self-defeating economics of fossil fuels.

In 2015, the International Monetary Fund (IMF) calculated that global fossil fuel subsidies amounted to a monumental $5.3 trillion, which is 6.5% of global GDP—up from $4.9 trillion in 2013. The IMF even had to revise its old figure for 2011, which originally estimated the global subsidies at 2 trillion dollars. The real figure for 2011, the fund concluded, was $4.2 trillion.

Over the same period that fossil fuel spending worldwide has steadily increased, though, the net value of energy being extracted from the fossil fuel resource base has declined by more than half.

Stefanski is critical of the IMF's methodology, which he says could be too wide—attempting to account for the estimated costs of "externalities" like pollution. He prefers not to include such estimates in his calculation because they relies largely on assumptions. His approach also excludes heavy subsidies to major carbon emitting non-fuel industries which are, however, heavily dependent on fossil fuels―like agriculture.

As a result his general estimates tend to be lower for most countries than other available estimates. But, he told me, his estimates are "substantially higher for three crucial countries: China, Russia and the US. Due to the size of those countries—this is a very big deal."

An Obvious Solution

Either way, this has clear-cut implications for economic policy. In 2010, Stefanski finds, carbon emissions would have been 36 percent lower without subsidies than they actually were.

He concludes that fossil fuel subsidies have caused a "major misallocation of resources, which has resulted in sizably lower levels of GDP" while contributing to "enormous additional emissions of carbon." The answer is simple, he said: "Ideally governments should remove all fossil-fuel subsidies as this would help lower emissions, lower government deficits and increase GDP."

That doesn't necessarily mean replacing fossil fuel subsidies with renewable subsidies. Stefanski advocates carbon tax and cap-and-trade schemes―government taxes on users of fossil fuels and mechanisms to cap firms' pollution while allowing them purchase and trade permits to pollute. By putting a price on carbon pollution while simultaneously eliminating state support for fossil fuels, this allows market dynamics to speed a clean energy transition.

According to Professor Felix Fitzroy, a colleague of Stefanski's at St. Andrews School of Economics and Finance, eliminating fossil fuel subsidies would be a major economic boon. "Abolishing these subsidies, together with health cost savings would thus more than cover costs of transition [to renewable forms of energy]. Multiplier effects of green fiscal policy would generate further financial benefits by reducing unemployment", he said.

Unlike Stefanski, though, Fitzroy calls for exorbitant fossil fuel subsidies to be replaced by government investment in renewables: "A carbon tax is also needed, as well switching subsidies from fossil fuels to renewable subsidies."

Dropping carbon emissions by a third? Closing a multi-trillion dollar blackhole in global GDP? Speeding the transition to a clean energy future? It looks like a win-win-win scenario – except, of course, for the dying oil, gas and coal industries.

Policymakers looking for a quick fix for environmental, energy and economic problems would do well to heed Stefanski's final words of advice:

"Any government looking to ease strained budgets and make a significant (and cheap) contribution to the fight against climate change must consider slashing fossil fuel subsidies."

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+11 # futhark 2017-03-11 04:31
How many of the self-styled "conservatives" inhabiting the Republican Party would endorse a personal finance system of living off inheritance money rather than earning one's way through gainful employment. Yet, in an ecological sense, that is what they are promoting in the continuing and widening use of fossil fuel energy. This is energy that was stored over millions of years of geologic time and is not in any practical way replaceable.

One doesn't have to be endowed with great genius to understand the dangers of trying to live off a limited resource. As Forrest Gump's mama wisely said, "Stupid is as stupid does!" Now we have a group of well qualified professional scientists united in their warnings about the dangers of unrestricted use of fossil fuels having their informed opinions challenged by the self-interested and dangerously ignorant but politically empowered Trump cadre. I say, call them out on their "conservatism". In truth, it is downright fake.
 
 
+9 # Texas Aggie 2017-03-11 06:06
And the usual suspects weep and wail about how renewable energy is getting "unfair" subsidies. If solar and wind energy along with battery research were getting anything approaching what the fossil fuel industry gets, we would have been well on our way to reducing atmospheric CO2. There are reasons that Tillerson, imhofe, Barton, King, Pruit and all the rest of the deniers are atheists. If they actually believed in an eternal reward, they'd be mentally incapacitated.
 
 
-8 # newell 2017-03-11 07:49
This piece is supposted to make us angry and sell soap? The 99% know these political "deals" are common---they no longer surprise us. We are now much more interested in how to change the status quo. Maybe the media could get past "shock" news and move on to discussions for change.
 
 
+3 # chrisconnolly 2017-03-11 09:12
'spending in the past to shore-up the oil, gas and coal industries.'

To shore up the struggling industries? The most lucrative industries on the planet and we need to shore them up. I have never understood how these subsidies could be justified all the while the republicans whine about subsidies to renewable sources of energy as making an un-level playing field. Talk about welfare kings. The oil industry seems to think they are entitled to any and all forms of government giveaways, including contaminating drinking water supplies, while talking out the other sides of their mouths about lazy leach single mothers and their hungry kids not deserving even subsidized school lunches much less health care. How do the republicans sell these incongruities so easily.
 
 
-7 # lnason@umassd.edu 2017-03-11 11:01
The Oxford English Dictionary defines the word subsidy as follows:

subsidy noun
1A sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low.
1.1 A sum of money granted to support an undertaking held to be in the public interest.
1.2 A grant or contribution of money.

The definition used in this article is thus inaccurate. Allowing a business to keep more of the money it has earned is not a subsidy and should not be counted as one. This and similar efforts to expand the concept of a subsidy to include tax exemptions is designed to mask the actual subsidies paid to wind and solar and make those subsidies appear more reasonable.

No taxpayer money is given to fossil fuel businesses except for wind and solar projects. In fact, fossil fuel businesses are a major source of federal and state governmental revenues, not a drain on taxpayers' purses.

A level playing field between fossil fuels and renewable energy sources would eliminate the subsidies for renewables and lower the tax burden on fossil fuels to the level of renewables, that is, lower the taxes to virtually zero. Alternatively, fossil fuel taxes could remain high and renewable taxes could be increased to the same high rate.

Lee Nason
New Bedford, Massachusetts
 
 
+3 # Elroys 2017-03-11 13:43
We are starting to get to the root and scale of the political corruption in the U.S. and around the world. The Republican health "care"/ diseased proposal is a symptom; the fossil fuel subsidies outlined here, is a symptom of Repub (especially) and Dem corruption. There are massive hidden subsidies to major corp. interests and the Ameerican people and global citizens are being ripped off beyond their imagination. The bank bailouts from 2008-2010 are just another major symptom. Our government is a wholly owned subsidiary of global corporations. As they invest a few pennies to the politicians for their re-election campaigns, the subsidies to all major industries is truly massive. Their lobbyists are paid handsomely to live in the offices of every member of Congress. Big Pharma alone has 3 lobbyists for every member of congress. Minor investment.

What can we do? DEMAND sunshine laws that shines the light of disinfectant on every $ that is, in some way, a subsidy for a special interest..
Some subsidies are certainly justified - ex: energy efficiency, renewable energy R&D for those innovations with promise. Every penny currently given to fossil fuel interested should be eliminated immediately and transferred to cleen, safe, renewable energy, to innovations that reduce greenhouse gas emissions. Fossils fuel subsidies have been in place for 100 years. Subsidizing the destruction of our natural world our enemies in the middle east is insane - terrorists love your SUVs.
 

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