Clarifying coal, oil and natural gas subsidies

by Matthew Formby

I often see widely ranging figures on 'energy subsidies' for fossil fuels. These figures, like the 2015 IMF study which reports total energy subsidies at $5.3 trillion worldwide(1), show the fossil fuel industry widely subsidized more than clean energy. But what's important to realize, and often get's forgotten is that this doesn't mean billions of dollars are going directly to big coal and oil companies. To be clear, I've never yet seen a report that wasn't explicit about how these 'subsidies' are calculated-- it's often people citing them that either aren't being clear or don't realize it. A large chunk of these 'subsidies' comes from a so-called lack of appropriate taxes. Once understood it makes sense even in a free market, but it is not a simple subsidy. Whether or not we want to call external, associated costs as a subsidy, we need to be consistent and clear.

From the same IMF report, these subsidies come from "setting energy taxes below levels that fully reflect the environmental damage associated with energy consumption." The definition takes into account all energy, including transportation, and the associated costs on health, pollution, and climate change. The reason for the widely ranging estimates (even from the same source over the years), such as the IMF's revision of 2011 world energy subsides from $2.0 trillion to $4.2 trillion is how health costs are monitored. To remain with the IMF report for consistency, the near doubling in 'subsidies' was in part from adding World Health Organization "estimates on harm to health from pollution exposure."

For a small scale analogy, it's like sewage management for a town before the sanitary movement. Every business and home is in the habit of dumping sewage into the local river, which has obvious health risks to a modern medical understanding. This is (very) roughly what happens with burning coal, oil, and natural gas, as well as our release of car exhaust and similar energy uses. People are dying in the town, and one of three things needs to be done. First, the town can accept this state and wait for a well meaning group to build private sewers to at least give people an option. But there are two problems: first, some residents don't believe this is why many people are getting sick, and second, everyone is affected if anyone continues to dump sewage in the river. The second option is for the town to build its own solution (sewers) and cover the cost in some way--this could be anything like a tax, or required purchase like car insurance. A third possibility is to enforce through law a standard for dumping waste, and if necessary subsidize those who provide options for solutions to the problem.

Because any resolution to the problem, sewage or pollution, requires money and the right infrastructure, externalities have been rolled into the cost of energy as a supposed subsidy. And while we lack an accepted reasonably scalable solution (battery technology necessary for full scale wind and solar is still decades off), no simple scenario solution can be done. An increasing carbon tax isn't a direct solution, it may shift market forces but it doesn't solve the actual externalities that are the cause of the tax. There are good proposals of what to do with the money from this kind of tax, and they may be the best we can do. But what's needed more than anything else is an affordable solution to energy need, the root cause, that can be implemented in whatever way the public or governments choose. The statement that coal is subsidized is true, but only in a partial sense. The subsidy is in the form of health and life, but when not paying this cost is unaffordable to developing nations (especially in the same form of health and life) it's misleading.

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