This is the first in a series of posts on the costs of addressing (or failing to address) global warming, and which policy tools work best: subsidies to other energy sources? tax? cap and trade? Writers frequently refer to fossil fuel subsidies, and I wondered how large they are. I begin with this, because if fossil fuels are not highly subsidized, either through direct subsidies or failure to require polluter to pay, there are no market distortions that need to be addressed.
[Notes: A market distortion is defined to be a situation where the price of the commodity does not make sense—it is higher or lower than it should be, so that decisions people make do not include full knowledge of benefits or damage. This is discussed in more detail below.
[People often leap to defend fossil fuel subsidies without checking whether their particular concern is addressed in policy solutions. These solutions will be discussed in coming posts.]
Largest subsidies: not requiring polluters to pay for air pollution ($1.6+ trillion/year) and climate change ($1.4 trillion+++++/year and growing). These are more commonly called externalities, costs or benefits going to those who did not pay for them.
Much lower are consumption subsidies ($400 billion), which lower consumer prices for gasoline, electricity, etc.
Lower yet are productions subsidies, which reduce costs for energy producers (perhaps $100 billion).
These subsidies average more than $500/year for every person on Earth. Those who use more fossil fuel energy receive more subsidies.
Good statistics on production subsidies, which partially offset industry losses or costs, don’t exist.
To give an idea of their magnitude, Joseph Aldy asserts that almost $5 billion per year in US subsidies to fossil fuel producers, mostly oil and gas, are a waste of money. The Global Subsidies Initiative estimates world production subsidies may total $100 billion/year.
Consumption subsidies reduce consumer prices. In Venezuela, gasoline is sold for 6 cents/gallon. In Saudi Arabia, oil is made available for domestic use, including electricity production, at under $15/barrel. In both Venezuela and Saudi Arabia, more than 3/4 of the price of fossil fuel consumption is subsidized.
International Energy Agency provides an analysis of fossil fuel subsidies, which disproportionately go to the rich and middle class, drain state budgets, increase pollution, distort markets, encourage waste, and discourage investment in methods to reduce energy use. Subsidies increased by $110 billion between 2009 and 2010, to $409 billion, to keep up with rapidly rising energy prices. IEA says consumption subsidies may reach $660 billion in 2020.
Subsidies are especially high in countries which export fossil fuels, more than $325 billion of the 2010 subsidies. Importers see their budgets suffer, and exporters see a valuable resource depleted more rapidly.
An IEA map shows consumption subsidies around the world—they are found in most of Asia, a good portion of Central and South America, and North Africa. These 10 countries subsidize the majority of the price of fossil fuels (percents vary with the price):
• Ecuador (52%)
• Venezuela (82%)
• Algeria (57%)
• Egypt (54%)
• Libya (80%)
• Bangladesh (51%)
• Iran (74%)
• Iraq (62%)
• Saudi Arabia (79%)
• Uzbekistan (61%)
Pollution subsidies for global warming—polluter isn’t paying
Climate risks may be higher than estimated because they are erratic
Another market distortion occurs when we don’t include the costs of global warming, currently estimated at $37/ton carbon dioxide, $41/metric ton, for pollution emitted today. All agree the cost of keeping temperature increase manageable will rise.
This market distortion is called an externality, because the cost is external to the price. It effectively acts as a subsidy, with the purchaser paying far less than the actual cost.
[Notes: there is disagreement about the $41/ton CO2 estimate. A number of prominent economists feel it should be higher because economic models are insufficient:
• History tells us transitions will not be as smooth as economists predict.
• Productivity, productivity growth, and the value of buildings, farms, and infrastructure will decline. Additionally, threats from major conflict and societal and economic collapse are not included in current economic models.
• Ecosystems will collapse, making them a more valuable commodity.
• Economists explicitly discount the future more than scientists, often discounting it at a constant rate, even though we as individuals see more difference between today and a year from now, than between 20 and 21 years from now; scientists point out that this method discounts almost entirely the costs of global warming in a few decades, no matter how high.
[A recent analysis examines only the effect of the slowdown in economic growth and produces an estimate of social cost of carbon dioxide which is several times higher than $41/ton. International Energy Agency suggests a $46/ton CO2 cost in 2020, rising rapidly to $160 in 2050.]
$41/ton CO2 x 0.43 ton CO2/barrel x 33 billion barrels/year = $600 billion/year
$41/ton CO2 x 2 tons CO2/ton coal x 7.8 billion tons coal = $600 billion/year.
$41/ton CO2 x 54.4 million tons CO2/billion cu ft x 120,000 billion cu ft = $250 billion
These total over $1.4 trillion.
Pollution subsidies for air pollution other than those causing global warming—polluter isn’t paying
Air pollution, indoor and outdoor, kills 7 million annually, according to World Health Organization.
A working paper from the International Monetary Fund looks at the top 20 CO2 emitting nations, responsible for 79% of world greenhouse gas emissions. These countries emitted 27.1 billion tons of CO2 in 2012. IMF says in these countries, air pollution other than greenhouse gases, and congestion from incorrectly priced fuels, cause an extra $57.50 in damage per ton of carbon dioxide, although the damage is not from the CO2.
$57.50/ton CO2 x 27.1 billion tons = $1.6 trillion
In 2013, 33 billion tons of CO2 were emitted from fossil fuels and cement, so even assuming lower pollution in other countries, subsidies due to polluters not paying the cost of their air pollution is likely higher.
Pollution subsidies are real market distortions
Poor countries are harmed when energy use is subsidized. The rich use more energy and get more benefit from the subsidies. The result is that in poor countries, other important needs of society, such as education, are shortchanged or even ignored. Once these subsidies are in place, it is hard to convince people to give them up since they look on them as a right.
People I talk to understand that direct consumptions subsidies harm countries, but say they cannot see that pollution subsidies are in any way unfair. They agree that the cost of pollution from fossil fuels has been estimated at $41 a ton, just for climate change. However, they say, too, this is not the real cost since it fails to take into account the benefits of cheap fossil fuel to society.
Unfortunately, failing to make the polluter pay exacts a high cost on society. The damage done by the polluter (without the polluter having to pay) has to be seen as a subsidy because in an undistorted market (where all costs are taken into account), the polluter pays for the cost of the damage along with the other costs of energy. In today’s world, climate change and air pollution affect people’s health and lives, and cost society. The costs can also be seen in increased costs to agriculture because of decreased yields due to floods and drought. There are other definite costs: costs when buildings suffer damage from sea level rise, storm surges and floods; costs when we have to take steps to protect ourselves from rapid climate changes; coats when we have to deal with the results of permafrost melt; costs when land loses value because of climate change. Economists may limit their assessment to the near future, but the damage we do today will continue to cost future societies for many thousands of years.
People use the price of fossil fuels in determining how much to buy, and they are priced too low, so we buy more than makes market sense. I have heard a number of economists call improperly priced fossil fuels “the greatest market failure ever”. Nicolas Stern says this as well,
The problem of climate change involves a fundamental failure of markets: those who damage others by emitting greenhouse gases generally do not pay…Climate change is a result of the greatest market failure the world has seen.
• Fossil Fuel Subsidies
• Can we address climate change fairly cheaply?
• Why add a cost to GHG instead of subsidizing renewables?
• Tax or cap and trade?