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The high cost of fossil fuel subsidies

One challenge in writing about hyper-local issues like transport infrastructure and urban planning policies is that it’s easy to lose sight of the big picture.

Planet-wise, the big picture is climate change. As California Governor Jerry Brown said in a recent interview, our environmental impact increasingly has an “uncompromising gravity”: climate change is a potential extinction event for the human race. This is difficult to comprehend:

The trouble with climate change is that you can pass tipping points, and down the road it is going to be enormously difficult and expensive to change with all the embedded infrastructure. Enormously difficult. Even though today it’s relatively trivial. To de-carbonize the economy, even though it’s massive and would take trillions of dollars, it could be done. But it would take a real mobilization….

And there’s an industry of denial, of manufactured skepticism, all for short-term gain, or because of an ideological fear of more regulation that will curb unfettered market behavior or individual consumption. So people don’t want to believe there’s an absolute out there called the environment, called the climate system. But we know there is. We didn’t make the sun shine today. It was raining for a couple days. We didn’t do that. So what made that? What made that is the whole atmospheric chemistry.

Now, can 7 or 9 billion people, can several billion cars and coal plants affect that? Most of the scientists say yes. And if they can, how are we going to un-affect it? See, that’s the simple-minded thing. Up until 1850 you never had more than a billion people. And what did they do? Run around in their little clothes and with a little bit of gunpowder here and there.

Now we have massive technology. The human impact is multiplied, is unimaginably greater. But the human capacity for wisdom has not improved an iota. So there’s the problem.

The impact of anthropogenic greenhouse gas emissions can readily be observed in the temperature record. For example, climate scientist Ed Hawkins recently made this mesmerising and worrying animated gif of 156 years of temperature deviations:

temperature_deviation_spiral

As Jerry Brown notes, durable investments like transport infrastructure, electricity generation, and the built environment in general lock in future emissions. The things we build today will shape our behaviour and constrain our options in the future.

That’s one of the reasons why it’s so important to build cities that give people the opportunity to live in proximity to jobs and urban amenities, and which offer people abundant and attractive transport choices. The alternative is travelling ever-longer distances by car, and emitting ever-more carbon dioxide.

In the long run, electric vehicles might make this tenable for the climate, but it ain’t going to happen quickly. The NZ government’s current expectation is that EVs will make up at most 2% of the fleet in 2021. (I would love to be proven wrong about this!)

However, sticking with the “big picture” theme of this post, urban form isn’t necessarily the biggest problem we face – or the biggest opportunity to do better. A consistent global approach to carbon pricing would be fantastic. More rapid uptake of carbon pricing at a national level would be almost as fantastic.

Or how about a really radical idea: Stop subsidising fossil fuel extraction and use.

The costs of fossil fuel subsidies are large, and probably outweigh the total value of carbon taxes levied on burning them. New research from UK economist Radek Stefanski suggests that subsidies for fossil fuels cost a total of 3.8% of global GDP, or $1.82 trillion per annum.

Because consistent data on fossil fuel subsidies is hard to come by – many subsidies are buried in obscure expenditure categories, or disguised as distortions in the tax code – Stefanski develops an innovative estimation technique. He observes that emission intensities – carbon emissions per dollar of GDP – follow a predictable “inverted U” shape, as shown in the following chart.

Stefanski emission intensity chart

But some countries deviate from the trend: their emissions are higher than predicted by their development level. Stefanski uses that to identify the degree to which governments must have intervened in order to make fossil fuels artificially cheap.

Interestingly, this results in a lower estimate than previous studies using alternative methods, e.g. focusing on variations in prices for fossil fuels. This suggests that, if anything, Stefanski’s estimate of $1.82 trillion in fossil fuel subsidies is on the low side.

The disturbing thing is that there has been an increasing trend towards subsidising fossil fuels over the last 15 years, in spite of the fact that the evidence on the ill effects of burning them is increasingly clear. That’s illustrated in the following chart, which illustrates variations between countries that “tax” fossil fuels and those that subsidise them. Essentially, the taxes have grown smaller and the subsidies larger.

Stefanski global fossil fuel subsidies chart

The Oceania region has also moved towards offering substantial net subsidies to fossil fuels. As Stefanski doesn’t provide a country-by-country breakdown, it’s not clear whether this trend is driven by Australia’s fetish for coal mines, or whether New Zealand also participates in the madness. But it’s not good.

Lastly, it’s worth considering what the optimal tax on fossil fuels might look like in the aggregate. (It’s almost certainly not a $1.82 trillion subsidy!)

Credible estimates of the social cost of carbon dioxide emissions range from around US$37/tonnne to US$220/tonne. (There is significant uncertainty about exactly how bad climate change will be for human civilisation.) Globally, we emit around 35.7 billion tonnes of CO2 from burning fossil fuels.

That implies that burning fossil fuels imposes a social cost – which will be experienced primarily by young people and future generations – in the range of $1.3 trillion to $7.9 trillion.

Basically, instead of subsidising fossil fuel extraction and use to the tune of 3.8% of global GDP, we should tax it a similar amount. That’s a measure of how bad current global policies on climate change and fossil fuel use are.

Something to keep in mind…

29 comments to The high cost of fossil fuel subsidies

  • Ricardo

    It was an interesting article until the typical ‘tax, tax, tax’ rhetoric surfaced. If you were personally involved in carbon trading you would know what a crock it is. Carbon trading was introduced to make traders wealthier. Just another credit (like futures, shares, etc) that could be moved around to generate wealth in its own right. Not one tree has been saved by carbon taxes, but plenty of wealthy people have lined their pockets further. The only real way to sort pollution (let’s call it what it is) is to target polluting industries etc directly. Otherwise all you are doing is making rich people richer. As for fossil fuel concerns, the promotion of affordable electric vehicles would provide worthwhile credibility.

    • NCD

      Ricardo, aren’t you confusing an emissions trading scheme with a tax? Taxes are exactly like you advocate, in that they “target polluting industries etc directly”

      • John Polkinghorne

        Despite the confusion in the comment, I think Ricardo is actually saying a simple carbon tax is better than an emissions trading scheme. And I think Peter and I agree on that. There have been all kinds of issues with dodgy credits, trading and so on – a straight carbon tax, $50/ tonne or whatever, is probably a better option.
        It’s not the “ideal” option, and in an ideal world we would have a trading scheme that lets emissions find their own price level, in such a way that companies are correctly incentivised to reduce emissions. But that’s not the world we live in, and the experience of the last decade has shown problems with dodgy credits. At least for the time being, a carbon tax would be better. Perhaps in another 10 years a trading scheme could resurface, once the quality control is better.
        Of course, what we currently have is an emissions trading scheme, with plenty of exemptions and other perks, only some of which are being phased out. So my preference is to scrap our current system for a carbon tax.

    • mfwic

      I got a different message from the post. He is saying the first step is to stop subsidising the production of carbon. As for taxes I don’t have any problem with it. Every government needs to raise money to spend on things governments do. At the moment we tax savings (unless you buy a house) even though we want more people to save. We tax income even though we want people to work. We tax higher wages more even though we would all be better off if everyone got higher incomes. Carbon has negative effects not captured by the market so it absolutely makes sense to gather your tax there.

  • TheBigWheel

    Good article that joins the dots from local action to global consequences. Putting all those absurd $ trillions of carbon subsidies in $ / tonne terms is very helpful. Though shocking!

    The IEA reports that EVs is the one sector doing reasonably well (or less badly), in terms of heading towards a position that enable a 2C limit though “sustained deployment and policies required”.. http://www.carbonbrief.org/iea-there-are-now-more-than-one-million-electric-cars-on-the-worlds-roads. But I’m not convinced their sector approach is terribly helpful at the local level: much better to convert a short trip from car to a bicycle than from FF car to EV car, in carbon terms (as well as congestion and wider health benefits).

    • The EV that is current technology and most importantly scaleable is the Electric Bike. Already 100 E-bikes are produced for every E-car, they radically extend the utility of traditional bikes while also addressing all the spatial problems caused by cars in urban places (where most of the world’s population is).

      However autodependent cities like ours need to have its streets re-prioritised to suit this more appropriate scaled vehicle, and Transit systems also need to be radically upgraded as these two existing and electric technologies work sympathetically together to reduce auto-addiction.

      Doing this only leads to better cities, lower transport costs, healthier population, and failing pollution of all kinds. And no need to endlessly overbuild existing motorways. Never too late to do the better thing.

      • Greg N

        Same comments also apply to electric trains.

        And before anyone raises it, it has been demonstrated time and again by reputable organisations that, even if you run your EV [bike car or train] exclusively on “dirty” (e.g. coal powered) electricity, the cradle to grave analysis still shows a superior outcome for the planet over driving Fossil fuel cars, no matter how fuel efficient they say they are.

        • The E-bike can take you right to your destination without parking and gives you some exercise, costs a fraction of the price of a car and is in the reach of most people, the electric car is usually a second car run by the more affluent.

  • John Polkinghorne

    There has been some NZ-specific work on this: WWF did a report in 2013 (http://awsassets.wwfnz.panda.org/downloads/wwf_fossil_fuel_finance_nz_subsidies_report.pdf) which gives figures on the subsidies. They include the “motor spirits excise duty refund” on off-road vehicles, which I really think should be taken out – those funds are used to pay for roads, so it’s quite reasonable for the vehicles not used on the roads (farm vehicles, etc) to be excluded.

    So with that removed, you’re looking at circa $40-$50 million worth of subsidy, almost all of which is tax deductions for mining and exploration. I think that’s a wasteful subsidy, and should be removed (why subsidise that and not some other export industry?), but it doesn’t really have any effect on the prices paid by NZ consumers. Where it does have an impact is that it plays into the general global subsidies for exploration, which down the track means more oil and gas is extracted globally, which is a climate change issue. So it should certainly be removed.

    Another, more recent article here (http://www.radionz.co.nz/news/political/291046/pm-accused-of-fossil-fuel-double-standards) which suggests similar figures.

    Then APEC did a detailed study recently (http://www.mbie.govt.nz/info-services/sectors-industries/energy/international-relationships/pdf-document-library/peer-review-fossil-fuel-subsidy-reforms-nz.pdf) which makes some recommendations, but doesn’t find any major new issues.

    Fossil fuel subsidies are definitely a global issue, but not so much a NZ one. The real issue for NZ is that the government is enthusiastically calling for fossil fuel subsidies to be phased out to help the global response to climate change, in an effort to get some positive media coverage, while its own policies are so lacklustre on climate change. We need to focus on changing that, on getting the government to take real action on climate change here in New Zealand.

    • Sailor Boy

      I’d really like to see the government do something on dairy. Cap the number of cows at whatever it is now and tax carbon on the surplus. ie if there are currently 10m cows and that rises to 11m all farmers would pay tax on 1/11 of their cows. Then after say 5 years operating a sinking lid policy of 2-3% per year so that all cows are taxed eventually.

      • But the current government has three Holy Cows (things they won’t touch)

        1. Cows
        2. Cars
        3. Houses (as in the ever rising value of the existing ones)

        This makes their scope to do anything much about real structural problems almost nonexistent. They can do some good, but only at the edges (cycleways, half a CRL, etc)

        As has been the case for a century we will have to wait for a different government to get any actual change, build a new structure, then vote National back in to manage the new Status Quo. Until the pressure for change builds up again; rinse and repeat….

        • Warren S

          Delightful comment and o so true!

          • The Real Matthew

            Oh so false

            Government has supported the CRL and the cycleway network. However that isn;t good enough for the Ivory Tower socialist brigade because this government also supports roading. i.e. They have a balanced transport budget and the likes of Patrick Reynolds disagree’s with a balanced approach. That’s despite this blog revealing earlier this years that Auckland’s motorway network was underdeveloped when compared against comparable cities.

            The government has also done plenty in the area of housing. But the only way the problem will be fixed is to toss out the Auckland Council. The Council who have put a ring around Auckland and then tried to ram through the Unitary Plan. Do you think it might have been an idea to get the plan adopted first?!!

            Has anyone heard from Len Brown recently? He seems to have disappeared from the face of the Earth.

          • Sailor Boy

            ” supported the CRL ”

            Can I borrow your stash, I also would like to live in a fanciful utopia.

          • mfwic

            Remind me again what is so good about a balanced budget when they can borrow at 2% and could be building things we need for the future at once in a lifetime prices?

          • Nick R

            Your idea of a balanced budget sounds like its about the same as my idea of a balanced diet!

      • Dave B (Wellington)

        The thing about COWS is that they don’t add any more carbon to the eco-system. They ingest carbon from their feed-stock, belch it as Methane (which breaks down to CO2 within 10 years), and that CO2 is reabsorbed by the growth of more feed-stock.

        Why are we so paranoid about this natural bio-cycle and why do we put it on a par with the very different one-way process that is fossil-fuel extraction and burning?

        With fossil-fuels, we remove carbon deposits from deep underground where they have lain safely buried for millenia, and we liberate then into the eco-system. This means MOAR CARBON which was not there before. How can what cows do be as pernicious as this?

        Unless my understanding is wrong, if all cows disappeared overnight, the carbon-difference they have made to the eco-system would self-rectify within 10 years.

        But with fossil fuel extraction and burning, irreversible damage is being done. That carbon is not going to return to a safe repository any time soon, unless we can come up with some effective method of carbon-capture on a massive scale.

        • MFD

          A molecule of methane exhibits around 30 time the greenhouse effect that a molecule of carbone dioxide. Both contain the same amount of carbon.

          • mfwic

            So if I buy a patio heater can I earn credits turning methane into CO2 by burning it? PATENT PENDING , DIBS etc. (if I run it on CNG of course)

        • Greg N

          But in doing that belching of methane, they also piss and shit a lot of nitrogen based compounds [such as ammonia] onto the soil, these overload the water systems that said cows are nearby, this promotes nitrification of these waterways which results in degraded water quality, destroys river ecosystems, and a lot of the animals in them. In short order it turns healthy streams into open sewers.

          A lot of the nitrogen that cows excrete comes [via the grass they eat] from fossil fuel based fertilisers farmers place on the soil to promote grass growth – mainly so that the land can support more cows.
          These increased numbers of cows who will repeat the carbon, methane, nitrification cycles further running down the planet.

          Of course the dairy industry has a [partial] fix for that, and that’s N2 inhibitors, which will reduce the amount of nitrogen released into waterways but its yet another fix to a another fix and doesn’t tackle the root cause of the issue.

          • Nick

            Of course there’s also the inherent cruelty in the system. Killing male calves because they’re not productive units etc. The whole ethical question of whether it’s right to turn animals into a cog in our profit making machine. But let’s just turn a blind eye to that and focus on our cash cow dairy industry. NZ a clean, green country? Ha ha ha

        • MFD

          Lighting your farts would be a whole lot more effective. You could invite your friends round to bask in the glow…

  • The Real Matthew

    When your argument see’s you get all tied up in knots with complicated, convoluted explanation’s it’s a failure.

    Fossil Fuels has tax after tax after tax after levy added to them. There is only one valid comparison and that is to compare the price with how it would look in a truely free market.

    If you did so you will find that fossil fuels are not subsidised but are in fact heavily taxed. Unlike green energy projects which are heavily subsidised.

    • Sailor Boy

      $50m in exploration grants in NZ alone and we have some of the lowest rates of subsidisation on earth.

    • Peter Nunns

      “There is only one valid comparison and that is to compare the price with how it would look in a truely free market.”

      Read the paper that I discussed in this post. A number of people have done that using a variety of methods. Every single one of those approaches has found evidence that fossil fuels receive large government subsidies.

      When your “argument” is impossible to reconcile with facts or evidence, it’s a failure.

  • I agree with the comment that the most scalable EVs are electric bikes. I have used one for 4 years for a 30km round trip commute and nothing comes close for speed, convenience and low, low cost. Initial capital outlay can be as little as a few hundred dollars nowadays to adapt an existing bike. Someone should do the numbers and produce a proper study of a large scale e-bike transport option. Possibly with partially covered and screen cycleways to seriously compete in all weathers. I havent seen one. One thing to bear in mind, they reduce commuting costs to about 20 to 50 cents a day, so outperform PT as well as all other forms of transport.

  • mfwic

    I have been gazing at the global warming graphic wondering what it actually means and what exactly is a mean global temperature? The best answers I have got are these http://www.ncdc.noaa.gov/monitoring-references/faq/anomalies.php and their links explain in detail how they arrive at a mean.
    The important point is they use a rolling average for periods rather than point data as there is probably supposed to be variation. I mean what mean and standard deviation should the globe have? So the best graph I have found is this one http://data.giss.nasa.gov/gistemp/graphs_v3/Fig.A2.gif
    They leave out the early data from 1850 to 1880 as the data is sparse.

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