Fossil Fuel Advocates Claim Subsidies Help the Poor, but That's Simply Not True

The following excerpt is from We Do Things Differently by Mark Stevenson. Copyright 2017 by Mark Stevenson. Published in 2018 by The Overlook Press, Peter Mayer Publishers, Inc. All rights reserved.

Energy Trilemma

‘Status quo, you know, is Latin for “the mess we’re in”.’ – Ronald Reagan, actor and US president

‘The Energy Trilemma’ is a term, perhaps even a mantra, coined by the World Energy Council. The trilemma says it is almost impossible to deliver security of supply (the lights stay on), equitable access (everyone has the energy they need at a price they can afford) and environmental sustainability (we don’t destroy the environment seeking to achieve the first two). It’s the energy industry’s job to do the best it can buffeted on the horns of this triple-headed beast. The trilemma is essentially an admission that the system we have cannot deliver the energy infrastructure we need for a prosperous, sustainable world.

Fossil fuel lobbyists are quick to point out, for instance, that you can’t have ‘security of supply’ with renewable energy sources because of the ‘intermittency problem’ I’d investigated in Birmingham with Yulong Ding. A society relying on renewable energy would regularly face blackouts, they argue – and until we have mass adoption of utility grade batteries they’ve got a point. Oil, coal and gas, by contrast, are their own battery. To release their energy we need only set fire to them.

Environmentalists counter that continuing to burn fossil fuels will lead to catastrophic climate change, a disaster for the planet and by extension our future prosperity – no ‘environmental sustainability’. As Gaylord Nelson (former US Senator and founder of Earth Day) said, ‘The economy is a wholly owned subsidiary of the natural environment, not the other way around.’ Both groups therefore bemoan the subsidies given to the other, as governments try to satisfy the third need expressed in the trilemma: affordable and thus equitable access to energy for their citizens.

So how do we solve the trilemma? Green energy activists can’t deny they have benefited from the energy dividend of fossil fuels. Every defender of fossil fuels knows that Gaylord Nelson was right. For those of us not in the energy industry it’s almost impossible to work out the true picture. But, in examining subsidies, the key tool used to try and satisfy the demand of ‘equitable access’, some light begins to shine in the darkness. So, ahead of my meeting with ‘The Master’ tomorrow, I’m in my hotel room boning up on the labyrinthine world of energy subsidies.

You’ve probably witnessed renewables subsidies being debated in the media, the most popular battleground being ‘feed-in tariffs’ (or ‘green taxes’, depending on your viewpoint) – guaranteed, and relatively generous, payments to renewable generators for their energy. Indeed, Güssing’s Biomassekraftwerk qualifies for a generous feed-in tariff for the electricity it generates. Critics argue that this encourages the use of inefficient, intermittent and expensive forms of generation. Environmentalists and the renewables industry counter by pointing out that fossil fuels also benefit from subsidies, which are justified using the same argument – that people need access to energy and it’s too expensive without some form of support. The fossil fuel lobby respond with the argument that, while that’s true, if you want to help the world’s poor it makes more sense to subsidise fuel sources that are generally more available, reliable 24/7 and cheaper (i.e. fossil fuels). Your middle- class and pricey green agenda isn’t much use to those who desperately need access to energy to lift themselves out of poverty.

Both sides quote figures on the outrageous amounts the other is getting but, of course, those figures vary widely. The International Energy Agency (IEA), for instance, estimates that fossil fuel subsidies are about $500 billion worldwide while researchers at the International Monetary Fund think the figure is nearly $5 trillion – ten times bigger. What gives?

Actually, both are right, depending on what you consider constitutes a subsidy – and, by unpicking that, the world energy market, the trilemma which defines it and the arguments for different energy systems become easier to understand. Güssing’s transformation also becomes easier to assess. I need to be sure: has the town broken the trilemma, or is it a heavily subsidised curio?

The simplest (and, some argue, most honest) way to measure subsidies is to look at direct monetary support from government that benefits either consumers or producers of energy. The most extreme example of a ‘consumer’ cash subsidy comes from Venezuela, whose government has a history of subsidising gasoline prices so vigorously that a gallon of petrol can cost as little as two cents. An example of a ‘producer’ cash subsidy might be one of those ‘feed-in tariffs’ which guarantee that producers of certain types of energy (often solar) will be paid over the market rate for their energy.[*] Some people also include government support for energy research and development as ‘direct’ subsidies too. If we take this definition of subsidy, how do the figures stack up for fossil fuels versus renewables?

Let’s take the United States. In 2013, government subsidies for coal, natural gas and oil totalled $3.4 billion, whereas renewables enjoyed support of over four times that at just over $15 billion. If you then take into account that green energy produced a little over 10% of the energy used in the USA that year, then, per unit of energy, renewables enjoyed forty times the subsidy of fossil fuels. The UK has been even more generous. A 2011 report on subsidies commissioned by Parliament’s Environmental Audit Committee estimated that, while ‘direct’ subsidies for renewables totalled about £2.4 billion that year, incentives for producing oil, gas and coal were much smaller, at £284 million. Per unit of energy generated, renewables received over 250 times the direct subsidies fossil fuels did.[†]

Worldwide renewables tend to get favourable subsidies per-unit-of-energy produced, but, almost inevitably, the absolute figures for fossil fuel subsidies are much higher – ‘around six times the level of support to renewable energy’, says the IEA. This, say fossil fuel advocates, is good for the poor – giving cheaper energy access to those that most need it. That argument, however, doesn’t stand up to much scrutiny. The richer you get, the more energy you use, so fossil fuel subsidies disproportionately benefit the wealthier members of a society.

As Maria van der Hoeven, the IEA’s Executive Director, points out:

‘Let us be clear: fossil fuel subsidies are an extremely inefficient means of achieving their stated objective, which is typically to help the poor. IEA analysis indicates that only 8% of the money spent reaches the poorest 20% of the population. Other direct forms of welfare support would cost much less.’

But of course the story doesn’t end there. Next we need to consider ‘indirect’ subsidies, such as tax relief – a well-worn tool for encouraging us to buy things our governments think are important or socially useful. For instance, the standard sales tax in the UK (VAT) is 20%, but many activities are exempt or enjoy a lower rate (from small business sales to incontinence products). When it comes to energy, VAT is levied at a quarter of the standard rate, at 5%. If we include the 15% non-levied tax in the definition of ‘a subsidy’, the picture of who gets what changes considerably. Fossil fuels benefit the most because they’re the dominant part of the energy mix. And again it’s argued that this, rather than benefiting the poor, skews the savings to those who use the most energy (the rich). That said, renewables often still get a good deal. In the UK, for instance, even with the lower VAT rate on energy taken into account, they were still subsidised, per-unit-of-energy, thirteen times more than fossil fuels were in 2011.

Now we come to the most controversial component of subsidy, which if you include it gives you the $5 trillion figure the IMF quotes for fossil fuel support – i.e. the additional costs society has to bear as the result of using any particular fuel. If we include this component, the picture reverses entirely, with the subsidies (if you accept this wider definition) given to fossil fuels dwarfing those enjoyed to renewables.

In the parlance of economists, these extra costs are called ‘negative externalities’ – stuff one person or organisation does which adversely affects another person or organisation without them asking for it. Airports, for instance, visit the nuisance of noise pollution on nearby residents, but airline ticket prices don’t include a contribution to soundproof the neighbourhood. A resident wanting to deal with the unwanted noise will have to find their own solution at their own cost – a ‘negative externality’. Fossil fuels, like many other products, come with negative externalities – and they’re humdingers.[‡]  

[*] Some countries, including the UK, get past the problem of having to pay this money to producers by asking utility companies to pay the tariff for them. Those companies pass the cost on to customers through slightly increased electricity bills. Depending on who you talk to, this is either a sensible way of using an existing energy marketplace to bypass the expense of collecting and redistributing tax, or an unfair and corrupt system which arbitrarily penalises utility companies and/or their customers. It also muddies the waters as to whether a feed-in tariff counts as a ‘direct’ subsidy or not, because in this model the government isn’t paying anyone directly. For my UK analysis I’m putting feed-in tariffs, even if they’re administered via the existing market, in the ‘direct’ category.

[†] It’s also worth bearing in mind that in the UK fossil fuel subsidies were largely funded from taxes imposed on the fossil fuel companies in the first place, notably in the form of the Petroleum Revenue Tax (PRT), which levies extra taxes over and above Corporation Tax on the profits of certain historical oil fields. Is a subsidy really a subsidy when it’s simply giving you back tax you’ve been specially singled out for? This may be one reason the Chancellor effectively axed PRT in his 2016 spring budget.

[‡] Externalities can be positive as well as negative. A good example is vaccination. The person receiving the vaccination gets a clear benefit, i.e. protecting themselves from disease. But the great thing about vaccination is that it can be good for an entire population, even those who aren’t immunised. If enough people get vaccinated, infections find it harder to spread. This is called ‘herd immunity’. So even if you’re not vaccinated you’ve been offered some protection by those who have – a ‘positive externality’. There are economic benefits too, in that a largely vaccinated population keeps people, even the unvaccinated, alive to contribute to society and the economy. So, vaccination’s positive externalities are as much cold and economic as they are compassionate and medical.

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