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Breakthrough Institute

Breakthrough Institute

The Breakthrough Institute is a paradigm-shifting think tank committed to modernizing liberal thought for the 21st Century. Our core values are integrity, imagination and audacity.…

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The Great Fossil Fuel Subsidy Myth

The Great Fossil Fuel Subsidy Myth

Subsidies to Fossil Energy Aren't the Low-Hanging Fruit We Might Wish They Were

FossilFuelRally

Every few months — or constantly, depending on your attention span — we hear another round of passionate recommendations that fossil fuel subsidies be phased out to level the playing field for clean energy. Most recently, World Bank president Jim Yong Kim emphasized that “we need to get rid of fossil fuel subsidies now” in his agenda for promoting clean energy.

Sounds like a sensible goal, but there’s reason to think that eliminating fossil fuel subsidies wouldn’t be nearly as transformative as is often suggested. In this post, I’ll briefly explain why that’s the case.

Energy subsidies are a tricky business. Clean energy advocates insist that fossil fuel subsidies prop up mature technologies and stymie newcomers like renewables and advanced vehicles. Renewables and nuclear tribalists alike condemn subsidies to other camp's favored technologies. These days, there’s at least some piece of published analysis to back up any argument about energy subsidies, whether it be their usefulness, waste, or inequity. Related: Oil Sector May Not Cause Financial Apocalypse After All

Here’s a 2011 report, commissioned by the Nuclear Energy Institute, quantifying energy subsidies over time:

EnergySubsidiesOverTime

It looks like fossil fuels are the big winner, while zero-carbon technologies have the deck stacked against them. Again, though, other reports tell whatever story the authors want. Here’s renewable advocates Nancy Pfund and Ben Healy in 2011, somewhat in contrast to the NEI report:

HistoricalAvgFuelSubsidies

By their telling, renewables have received almost no relative subsidy support, and are dwarfed by fossil and nuclear alike.

Of course, NEI has an interest in making nuclear subsidies look reasonable, as do Pfund and Healy for renewables. So these reports are easy to dismiss by opponents. But all accounts seem to agree that fossil fuels are by far the largest beneficiary of public subsidies. That suggests that fossil fuel subsidies should be phased out, a move that would significantly benefit emerging zero-carbon technologies. Right?

Not so fast. While fossil fuel subsidies do account for the bulk of historical subsidies, the per-unit subsidization of fossil energy today remains much lower than it is for renewable energy technologies. Related: A Spanner In The Works Of The Solar Revolution

The US Energy Information Administration recently released their latest account of federal energy subsidies, and I quickly ran the numbers to calculate the cost per megawatt-hour of generation. The numbers are certainly imprecise, especially on renewables, but they show what orders of magnitude we’re talking about.

Direct subsidies per unit energy to US power generation technologies

 Subsidies (million 2013 dollars)TWh$/MWh
Coal/Refined Coal108515720.69
Natural Gas/Petroleum Liquids234610332.27
Nuclear16607892.10
Biomass6295711.04
Geothermal3451652.09
Hydropower3952661.48
Solar532819280.42
Wind593616835.33


So maybe fossil subsidies aren’t the hulking barrier to the clean energy revolution that they’re made out to be. They should still be eliminated as wasteful and inefficient, right? Again, not so fast.

Many fossil energy subsidies in rich countries are unnecessary — see this 2013 paper by Joseph Aldy. But many subsidy programs in poor countries are fuel subsidies for low-income populations. As this 2012 Nigerian case study by Morgan Bazilian and Ijeoma Onyeji shows, “Justifications for removal [of fuel subsidies] often do not adequately reflect the specific environments of developing country economies.” Often, a choice to end a fuel subsidy is a choice to make energy more expensive for the poorest among us.

Finally, while some fossil fuel subsidies should absolutely be eliminated or phased out, they are simply not the main explanation for fossil fuels’ continued dominance in global energy systems. The International Energy Agency’s recent World Energy Outlook estimates that a “partial” phase-out of fossil fuel subsidies — itself a recommendation that recognizes the value of some fossil fuel subsidies — would mitigate 360 million tons of carbon dioxide annually by 2020. That’s not nothing, but it’s only 1.1 percent of the approximately 32 billion tons of CO2 emitted from fossil fuel production in 2014. Related: Oil Price Recovery May Be Too Much Too Soon

This shouldn’t surprise us. Fossil fuel subsides totaled $548 billion globally in 2013. That sounds like a big number, but in 2013 global GDP was $77.6 trillion. That means that fossil fuel subsidies make up just 0.7 percent of global GDP, despite making up 87 percent of global energy supply (and therefore powering at least 87 percent of economic growth, arguably).

Much like the lack of a carbon tax, the endurance of fossil fuel subsidies is often used by clean energy advocates as a smokescreen for how immature and challenged their favored technologies actually are. “If only we had a carbon tax and/or fossil subsidies were phased out, the playing field would be level and nuclear and/or renewables would take off!” I don’t buy it. As the above numbers show, there must be some reason other than subsidization for fossil fuels’ continued dominance. (I’d argue it’s a combination of abundance, energy density, storability, transportability, variety of applications, and, yes, infrastructure lock-in.)

So yes, we should tax carbon and we should phase out unnecessary fossil fuel subsidies. But neither of those, nor indeed the two together, are panaceas. Pursuit of those policy actions should not let us forget that an energy transition is fundamentally a technological — not a price-based or pollution regulation — challenge. If we want solar panels and nuclear reactors and electric vehicles to replace fossil fuels, they simply have to do a better job at powering the global economy. As Brad Plumer recently summarized, we’re making progress, but we’re just not there yet.

By Alex Trembath

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  • John Scior on May 18 2015 said:
    Here is the dilemma, it takes time to develop and work out all of the bugs associated with any new energy source. No one wants to invest in technologies that cannot produce a return. When the price of oil goes down, there is a hesitancy to even drill or explore for new oil wells, let alone alternative energy sources that would need complete infrastructure changes in distribution and end use sales methods. ( take for instance the electric car being developed by Tesla ) So, after depletion of existing wells oil prices rise and it makes exploring for oil seem more lucrative as well as alternative fuels and different transportation technologies. Just as the new fuels get a foothold and seem that they can compete, the new oil wells become productive and you once again see the part of the cycle where oil prices come down. Instead of taxpayer subsidies which ultimately cause higher government debt, perhaps there should be a world wide tax on each barrel of oil with the funds being specifically directed toward the military which must be funded to secure the oil from point of production, to end user. No one in calculating energy costs factors in the enormous financial commitment needed to secure this resource. It is mainly because this cost is an external cost that cannot be directly factored into production.
  • rusti on May 18 2015 said:
    Interesting article. I'd posit that the immense price tags and human suffering inherent in wars largely driven by oil interests are an additional form of subsidy, albeit one that is impossible to calculate, as is the catastrophic damage to the ecosystems necessary to sustain human civilizations.

    Of course mass manufacturing wind turbines, batteries and solar panels, or splitting atoms have their own associated environmental detriments that aren't easily translated into dollars or euros or rubles.
  • Tim on May 18 2015 said:
    Great article that objectively - what a relief! - outlines the issue of subsidies. It's a good point that fossil fuels appear to get the lion's share of subsidies, but since the chart looked back some 60+ years, of course FF subsidies were much higher then, and there wasn't any discussion of alternative energy until recently. So, if you take all those decades versus the past decade or so, roughly, of intense renewable subsidization, the picture becomes much more balanced. Rusti made good points on both sides...there are benefits and setbacks to all sources, and John Scior outlined why you don't just go full bore into alternative investment. Industries have to prove themselves to be self-sufficient and largely profitable compared to the subsidies that go in. The newer energy sources have not yet done that, so FF's will be an important factor for a long time to come.
  • Lee James on May 18 2015 said:
    If you look at life-cycle costs, as utilities do, renewable energy looks pretty good. Utilities are increasingly building renewable energy themselves, are acquiring new renewable power in long-term power purchase agreements.

    The cost of renewable energy is mostly front-loaded. Somehow, you have to get over the high initial cost. With fossil fuel it is different. Energy remains a substantial cost over time. No wonder fossil fuel looks for tax advantages in the long run, year after year -- in a mature industry.

    Next, the fossil fuel industry will face higher interest rates for borrowing and greater regulatory burden. Yes, industry is worried. Time to spiff up the old image.
  • Chris Golledge on May 20 2015 said:
    So, what the author is saying is we should continue to subsidize fossil fuels because the subsidies are only a small fraction of the enormous profits fossil fuel companies are making. Eh?
  • Jan Steinman on May 26 2015 said:
    Perhaps I missed it, but there seemed to be no mention of the vast "depletion allowance," by which oil companies remove oil from the ground and sell it, and then Uncle Sam pays them for the fact that there's no more oil in the ground.

    In effect, the government buys oil wells when they're empty, at the market value when the wells were new and full of oil.

    Seems like a huge subsidy to me! Some sources peg this at $60,000,000,000 annually.
  • Jim Spriggs on May 28 2015 said:
    Whoever wrote this article states:
    'Much like the lack of a carbon tax, the endurance of fossil fuel subsidies is often used by clean energy advocates as a smokescreen for how immature and challenged their favored technologies actually are. “If only we had a carbon tax and/or fossil subsidies were phased out, the playing field would be level and nuclear and/or renewables would take off!”'

    The author(s) put up a straw man to "prove" their point. We don't say that at all. What we say is: "If only we had a carbon tax and/or fossil subsidies were phased out, and subsidies for renewable were phased in by the same amount that fossil fuels have enjoyed for the past 100 years, the playing field would point us toward the direction of sustainability and renewables would take off!”'

    Carbon industry shills like the Breakthrough Institute are growing increasingly desperate. They're throwing everything they have to slow their departure. But go they will, or else.
  • alan2102 on June 03 2015 said:
    Jim Spriggs: "Carbon industry shills like the Breakthrough Institute are growing increasingly desperate."

    Not just carbon industry shills, nuclear shills. The "Breakthrough" (?) Institute is a Rockefeller-funded outfit dedicated to obstructing renewables development and promoting nuclear power. Very strange, and ugly.

    It will be fun to see what the "Breakthrough" people have to say about the IMF's new estimate of fossil fuel subsidy -- $5.3 TRILLION per year, globally, factoring-in all the unpaid "externalities" and defining them as part of the subsidy (as they should be, by rights):

    http://cleantechnica.com/2015/05/30/reflections-fossil-subsidy-iceberg/
    Reflections From Below The Fossil Subsidy Iceberg
    May 30th, 2015
    "The International Monetary Fund has just calculated...in a study distributed by its Fiscal Affairs department: How Large Are Global Energy Subsidies? (IMF working paper 15/105)..... Figuring in all necessary government actions to counter greenhouse gas emissions, global subsidies amount to not only the numbers usually cited (of around $500 billion a year), but to $5.3 trillion a year."

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