Levelling the Playing Field ...

How much do fossil fuel companies benefit from the public purse?
This article appeared in Vol. 12, No. 3 - 2015


Beijing smog. (Source: 螺钉)

In May this year, the IMF announced their revised calculation of global fossil fuel subsidies. The figure is an extraordinary $5.3 trillion – that’s $10m a minute, $14.5bn a day - more than the whole world spends on health. It certainly puts the renewable sector’s $120bn into a very different context. Coal gets over half of the subsidies, oil is approximately a third and gas is the rest. China is far and away the biggest payer, the advanced economies account for approximately a quarter.

  • Contribution to global fossil fuel subsidies by country. (Source: IMF)

And it seems that the European super-majors agree that that the true costs of carbon are not captured in the current price . Within a month, Shell, BP, Statoil, Total, Eni and BG Group responded with a joint proposal on carbon pricing sent to the UN Framework Convention on Climate Change. In a letter published in the Financial Times they stated that their aim was ‘not to ask for special treatment for any resource, including natural gas, or any single route to a low carbon future. It is rather to ensure that the outcome of these talks (Paris, December 2015) leads to a widespread carbon pricing in all countries’.

So, what are these subsidies exactly and is carbon pricing the answer? The US super-majors are clearly not in agreement with their European counterparts.

Consumer Subsidies

Let’s be clear: most of the subsidies are routed via consumers and are not given directly to producers. In developing countries it is common for governments to keep the price of fuel low and stable – the real cost comes out of the public purse. This generally benefits the wealthy most, puts enormous pressure on public finances, squeezes out other government spending and often leads to corruption and smuggling.

But only about 6% of the subsidies come in this form, and now that the oil price is low, many governments are taking the opportunity to bring in big price hikes, while some, like India, are phasing them out altogether.

The majority of subsidies are not so obvious. They are ‘post-tax’, where society and governments pick up the tab for the ‘externalities’, the things that don’t end up on balance sheets. These include pollution and lost income due to poor health and premature deaths. The shock is that this figure was found to be far higher than in 2013. Global warming is, perhaps surprisingly, only the second highest item among the ‘externalities’. One can only assume that this figure will rise over the next few decades as countries are forced to adapt to changing weather and geography.

Carbon Tax

A carbon tax is seen as a straightforward method of accounting for the real costs of fossil fuel usage. Over the last decade or so, 33 countries and 18 cities and states have brought in local and national taxes but many have suffered from ‘first mover disadvantage’ and businesses have complained of an uneven playing field. One of the most ambitious attempts, which turned into a shocking failure, was the 2012 EU bid to impose taxes on airlines using EU airports - the US Congress even passed a law shielding their companies from the tax. In the face of fierce opposition from countries around the world, the EU was forced to abandon its plans. More recently, countries such as Germany and the UK have weakened their carbon taxes and in early 2015, Australia became the first country to completely ditch its carbon tax.

Other methods of pricing carbon have been tried, notably the European cap-and-trade system, the biggest in the world – but it has been ineffective. Although it covers 11,000 heavy energy-using plants across 31 countries, too many allowances were issued in the beginning and the price of carbon has stayed stubbornly low. In April this year, the participants finally agreed a new mechanism to soak up excess allowances, but the jury is out on whether this can provide a realistic price for carbon any time soon.

Proposals for a Chinese cap-and-trade system, however, on account of the country’s size and its having learnt from the EU system, may prove more effective.

  • Per Capita global fossil fuel subsidies relative to GDP. (Source: IMF)

What is the Industry Backing?

So the European oil and gas companies have now put their weight behind an international carbon tax, aligning themselves with global giants such as Nestle, Siemens, and Airbus. This does sound a bit like turkeys voting for Christmas, and it is worth asking why they are in favour.

First, European companies are now facing significant investor pressure and reputational damage. By handing the problem to governments, companies can possibly get shareholders off their backs while making the reasonable calculation that the international community will not be able to agree a taxation regime. Backing a carbon tax may well be an easy commitment for the industry.

But the industry is backing up its position, first by offering to write the actual carbon tax framework. This will give them a huge amount of control over the end result, should it actually happen. Second, they are emphatically putting coal in the firing line and offering themselves as the saviours, providing cleaner-burning gas. Of course, the problem with carbon pricing is that it is just that, with no pricing of methane (weighted at 25 times the danger of CO2) or the other five deadly greenhouse gases. The industry is hoping to pass over the fact that gas is only cleaner than coal at the power plant. A full life-cycle analysis that covers production, distribution and fugitive emissions makes it equal to – and sometimes worse than – coal. Gas producing companies are hoping that desperate governments will not notice…

The Aim of an International Carbon Tax

A universal carbon tax, even if it happens, is not likely to cover all the externalities identified by the IMF and therefore it will not totally level the playing field between clean technologies and fossil fuels. Nor is it expected to clean up past damage: the Chinese alone estimate they will have to find $320bn a year for the next five years to clean up their current pollution. Nor is an international tax expected to pay for climate change adaption. To be internationally acceptable, it is likely that it will be limited to simply altering the playing field between fossil fuels, a calculation based on the emissions at the power plant, not the full life-cycle.

  • Fiscal gains from eliminating energy subsidies, 2013 (percent of GDP). Note: The latest year for which comparable data are available is 2013. (Source: IMF Staff Estimates)

Alternative Strategies

If neither carbon trading nor carbon taxing will truly price the cost of burning carbon, governments need to look for other answers, and quickly. Scientists tell us that we do not have years to waste arguing over who will pay. Two alternative routes have been put forward. The first is that individuals, businesses and governments of OECD countries focus on efficiency measures – in housing, transport, public buildings etc. - and that these will be far more effective than fuel switching. These are within governments’ grasp and have the advantage of being quick to implement while improving countries’ energy security and national current accounts (since most countries are importers of energy). This strategy should be accompanied by transfers to emerging countries that will help them leapfrog fossil fuel technology.

Second, there needs to be far more investment into clean tech research and development, regardless of the price of carbon. One group of scientists claim that vast sums are not needed. Led by the UK’s climate envoy David King, they argue that an annual increase of just 0.02% of OECD GDP over 10 years – the equivalent in today’s money of what it cost to put a man on the moon in the 1960s – will be sufficient to provide the technological breakthroughs that will make renewables cheaper than fossil fuels. The Global Apollo Programme, as it’s called, is currently seeking OECD government backing.

Clearly, practical action is now needed. An international carbon tax will be welcomed, but industry backing for alternative, positive strategies is also called for.

Nikki Jones

Contributing Editor

August 2015.


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