A Warming Earth
The Case to End Fossil Fuel Subsidies
The continued existence of fossil fuel subsidies in a time of their almost universal condemnation reveals something about the governments that rule us, something pernicious, but also something all-too-predictable. Like no other area, they expose a gulf between rhetoric and action, a disconnect so stark that, if the risks it posed were less catastrophic, would almost be comical. Back in reality, though, the cognitive dissonance, cynicism, or whatever its cause, serves only to warm our planet and threaten all life.
The empty promises began in 1997 when the Kyoto Protocol demanded governments stop subsidizing all ‘greenhouse-gas-emitting sectors’. Posturing world leaders dutifully queued up to pay lip service, establishing a now familiar tradition. While attending various climate summits, each would (re)commit to the eradication of fossil fuel subsidies, implore others to follow suit, and then, as if nice sounding words were all it took to cleanse the world of greenhouse gases, return home and do nothing. President Obama claimed in 2012 that a hundred years of subsidies to the oil companies was over - he lied. In 2020, annual global subsidies to the fossil fuel industry were estimated at $500 billion, and following a blip between 2013-16, are on the rise again. But why? How did governments, whose raison d'être is to keep their citizens safe, come to prop up an industry that puts lives at risk? And how great a threat does it pose?
It began so well...
Once upon a time it actually made sense. Indeed, when fossil fuel subsidies were first implemented they were endorsed by progressives for their equalising influence. Whether direct financial transfer, preferential tax treatment, or government infrastructure spending, it didn’t matter, they did what all subsidies do: reduced prices, in this case, the price of energy. By doing so, they gave those mired in poverty access to electricity, heating, and ultimately the components needed for a dignified life. There was also the added benefit of securing national energy supplies, as supporting indigenous production reduces dependency on foreign imports, which cannot always be guaranteed. Securing the energy supply was securing the country’s future - another easy sell.
Noble-sounding as these justifications may be, the refining of green technologies mean they hold diminishing credibility, especially in the developed world where 80% of all historical carbon emissions have been emitted. A recent report by the International Renewable Energy Agency (IRENA) has shown that ‘onshore wind and solar PV power are now, frequently, less expensive than any fossil-fuel option’, and ‘the costs of new solar and wind installations’ - previously the greatest obstacle to its widespread adoption - ‘will increasingly undercut even the operating-only costs of existing coal-fired plants’. Besides some relatively isolated instances, the claim that subsidies expand energy accessibility by reducing costs, although still made by its advocates, is no longer true.
Just last year, UN secretary general, António Guterres, declared, unequivocally, that fossil fuel subsidies only serve ‘to boost hurricanes, spread droughts, melt glaciers, (and) bleach corals’, and instead of using taxpayers’ money to ‘destroy the world’, the same finances should be redirected towards renewables. A 2019 report from the International Institute for Sustainable Development (IISD) substantiated these demands, claiming that it would only take 10-30% of current fossil fuel subsidies to be swapped for the balance to be tipped, decisively and irrecoverably, in favour of green energy, triggering its ‘rapid global rollout’. Speed is crucial, too, for although the transition is already underway, progress has been slow relative to what’s required. This swap could be the shot in the arm renewables need to take them from ‘viable and competitive’ to the only choice.
Even without transference, the elimination of fossil fuel subsidies would significantly reduce emissions, such is the industry's reliance on them. Indeed, in some areas, certain subsidies are allowing for its entrenchment and even expansion. Consider, for example, the federal tax break that allows oil producers in the US to deduct almost all the costs of constructing and drilling new wells from their taxes, by far the most costly part of the process. By lowering the amount of upfront cash-flow required by producers, (the buy-in, so to speak), new and expanding enterprises are incentivised to drill more wells than would otherwise have been financially feasible. And once established, each well can then produce oil for up to 40 years. Through this process, known as ‘carbon lock-in’, fossil fuel production accelerates and greenhouse gas emissions increases. Meanwhile, the distorted market makes it harder for new, green energy to compete.
A paper published in the journal, Nature, in 2018 offers statistical support for why subsidies should be eliminated, suggesting that it would reduce emissions by ‘five hundred million to two billion metric tons of carbon dioxide per year by 2030’. For context, that amounts to roughly a quarter of the energy-related emission reductions pledged by the Paris Agreement signatories, which few are on the path to meeting.
The real cost
Alarmingly, the amount of subsidies are far higher when the negative externalities caused by burning fossil fuels are also considered. Using a somewhat loosened definition of what constitutes a subsidy, a study by the International Monetary Fund (IMF) found that $5.2 trillion was spent globally on subsidies in 2017. That is $10 million per minute and 6.5% of global GDP. In addition to conventional subsidies, the financial or tax support aimed at lowering the cost of fuel, the report included the indirect, often hidden costs of burning fossil fuels, primarily the spiralling healthcare costs and constant need for climate change adaptation. By including these numbers, the true damage inflicted on society is shown, allowing better informed future decisions. For instance, the IMF estimates that if subsidies were scrapped the number of early deaths from fossil fuel air pollution would be halved. Alternatively, if left ignored, the Universal Ecological Fund predicts that in America, economic losses from extreme weather combined with the health costs of air pollution will reach at least $360 billion annually over the next ten years and cripple economic growth.
Which leads to the obvious question: why not simply just stop them? The answer, in short, is lobbying. To borrow the words of Catherine Howarth, chief executive of ShareAction, ‘these companies have mastered the art of corporate doublespeak - by boasting about their climate credentials while quietly using their lobbying firepower to sabotage the implementation of sensible climate policy and pouring millions into groups that engage in dirty lobbying on their behalf’. During the 113th Congress (the 5th and 6th years in Obama’s Presidency), the oil, gas, and coal companies spent a combined $350,587,282 on lobbying and campaign contributions, the efforts of which, according to the research group, InfluenceMap, were ‘overwhelmingly in conflict with the goals of the Paris agreement and designed to maintain the social and legal license to operate and expand fossil fuel operations’. Between 2016-2019, Shell, ExxonMobil, Chevron and Total spent over $1 billion on lobbying ‘designed to control, delay, or block binding climate-motivated policy’. To gauge its success one need only look at the inclinations of the current US administration.
But things must change. Politics must better insulate itself from dirty money - the consequences of not phasing out subsidies are too dire. As Chief Economist at the International Energy Agency, Fatih Birol, has said, failing to do so will mean countries fail to reach their climate targets - and down that path lies certain catastrophe. Once upon a time, it made sense for countries to support these industries, it was progressive, humane. That time, however, has now passed.
- Economists & Prizes
2022 Nobel Prize in Economics - The Winners
This article gives an overview of the work that won these economists the Prize, and a brief bio for each economist. You can read more about the reasoning behind the awarding of the Prize from the Royal Swedish Academy of Sciences’ press release page.