Government handouts are a thorny issue – the fate of tax dollars too. It becomes even more problematic when the entitlements are bestowed on a several trillion-dollar global industry reaping enormous profits and causing perhaps irreparable damage to the Earth’s climate. Of course, we’re talking about fossil fuels, and we’re talking about a lot of help.
According to a study by the Overseas Development Institute (ODI) in conjunction with Oil Change International, such fossil fuels subsidies – direct government spending, tax breaks, and low cost loans – from G20 governments amount to approximately $452 billion a year. For some context, global subsidies to renewables in 2013 were roughly four times less.
Investments by majority state-owned enterprises account for the lion’s share of the measured subsidies at $286 billion; Brazil, China, Mexico, Russia, and Saudi Arabia account for some 84 percent of that total.
Looking at only national subsidies – those delivered through direct spending and tax breaks – the United States accounts for 26 percent of the $78 billion documented in the study. More specifically, US federal and state governments annually provide $20.5 billion in subsidies for oil, coal, and gas production, oil and gas pipelines, and coal-fired power.
The vast majority of the subsidies seen in the US are of the tax expenditure variety – an off-budget government expense, viewed more as a free benefit than a giveaway. Since 2009, such federal benefits to fossil fuel producers have risen 35 percent. Of course, US oil and gas production has exploded in the same period; though, to be sure, there’s little evidence to suggest subsidies played a meaningful role or conveyed any meaningful benefits to consumers. In fact, the estimated reduction in oil production minus subsidies amounts to just 26,000 barrels per day.
The ODI study comes at a critical time; G20 leaders met in Turkey on November 15, though they were unable to achieve a notable climate consensus. Past efforts – both international and domestic, and especially those targeting subsidies – cast further doubt on the efficacy of any expected agreement in Paris later this month.
Still, obvious difficulties aside, existing market and climate realities reinforce the elimination of fossil fuel subsidies. Amplified by the current price depression – though apparent prior to oil’s collapse – oil majors’ capital productivity, or profitability, has declined sharply since 2011. With regard to the climate – and illustrating the future risk of stranded assets – a third of oil reserves, half of gas reserves, and over 80 percent of coal reserves should remain unused to 2050 if 2 degrees Celsius warming is to be abated. To do so will require a low-carbon economy, and it’s actually quite affordable.
The total investment needed between 2015 and 2040 for the development of a global low-carbon energy system is estimated at approximately $190 trillion. It carries a greater upfront cost – around 0.1 percent of global GDP for a period of ten years – but eventual savings in fuel and capital costs, as well as reduced energy use render the transition more cost-effective than the business-as-usual, high-carbon energy investment scenario. G20 Fossil fuel subsidies currently amount to roughly 0.6 percent of the bloc’s GDP. Factor in externalities and the IMF estimates that global subsidies total 6.5 percent of world GDP.
Leaders among the pack are few, and progress is hardly straightforward: Japan and Korea remain major backers of fossil fuels production outside their borders; Canada is trying to kick start its LNG industry through tax relief; the UK is increasing support for oil and gas extraction; Turkey is planning a massive coal build-out; and the US Congress is unlikely to support major subsidy reform anytime soon.
Conversely, France and the United States are working to restrict international public finance to coal and coal-fired power, with some redirection to renewables; Germany is tackling its hard coal subsidies; Canada has eliminated tar sands tax exemptions; China is championing renewable energy production and energy efficiency research; and renewable energy accounted for nearly half of all new power plants in 2014.
Taken on the whole, it’s a lot of moving in place.
First published at Oilprice.com