265 – Fossil fuel subsidies

Amidst all the discussions about carbon taxes and emissions trading schemes for mitigating climate change, we hear very little about fossil fuel subsidies. You’d be forgiven for not knowing that they are, in fact, enormous.

This matters for several reasons, including that these subsidies encourage increased use of fossil fuels. From the perspective of climate-change policy, fossil-fuel subsidies make things even worse than they need to be. Climate policies are intended to push us in one direction, but fossil-fuel subsidies are pushing us in the opposite direction. It’s like running a race but starting well behind the start line.

I was surprised to learn that Australia has one of the highest levels of fossil fuel subsidies in the OECD, totalling US$8.5 billion of budgetary support and tax expenditures in 2011.

petrol_pumpWe have a bewildering array of schemes that subsidise fossil fuels. Federal subsidies include exemptions from crude oil excise for condensate, a reduced excise rate on aviation fuel, and the clean coal fund, plus there are numerous schemes at the state level. The biggest subsidy by far is the Fuel Tax Credits program, which provided almost $6 billion dollars of support to businesses for their fuel use in 2011.

Our total level of subsidies is behind the USA ($13 billion) but ahead of some economies that are much bigger than ours: Germany ($7 billion), the UK ($7 billion) and France ($4 billion).

We are told by our national government that our carbon tax is cripplingly expensive and has to go, but in 2012-13 it collected only $4.9 billion, not much more than half the cost of our fossil fuel subsidies. For some reason, the subsidies are not considered too expensive for us to bear. The most cost-effective way to make a start on reducing carbon emissions would probably be to remove these subsidies. At the same time, it would help to reduce our budget deficit.

The problem is even worse outside the OECD, with some staggeringly large subsidy programmes in Egypt ($19 billion), China ($20 billion), Russia ($23 billion), Venezuela ($24 billion), India ($34 billion), Saudi Arabia ($46 billion) and Iran ($65 billion). In Venezuela, fuel at the retail level is almost free – just a few cents per litre.

Fuel subsidies in these countries are often justified as a form of assistance to poor people, but it’s a really dumb way to try to help them. For one thing, most of the benefits go to people who are not poor. Secondly, the greatest needs of poor people might be something other than fuel – food or education, for example. Thirdly, big subsidies hold countries back economically, which ultimately is bad for poor people.

Getting rid of them is really hard, though, because the beneficiaries are used to them and see them as entitlements. Sometimes the subsidies are targeted at special interest groups, like farmers, who would fight really hard against any attempt to remove them.

It’s another illustration of the adage that we shouldn’t put any major policy in place that we might later want to remove, because special interests take hold and use the political system to defeat the public interest.

Further reading

Burniaux, J.M. and Chateau, J. (2011). Mitigation Potential of Removing Fossil Fuel Subsidies: A General Equilibrium Assessment, OECD, Paris, IDEAS page

OECD (2012). Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels 2013, OECD, Paris, here

Whitley, S. (2013). Time to change the game: Fossil fuel subsidies and climate, Overseas Development Institute, here

 

11 Comments

  • Saide Gray
    22 April, 2014 - 7:14 am | link

    Hullo David, What a useful article. Amazing how some simple facts and figures can open up a whole new way of thinking about an issue like fossil fuels and climate change policy, subsidies, policies and the balance between intended and unintended consequences. I really enjoy your articles that prompt discussion! Cheers Saide

  • Anna Roberts
    22 April, 2014 - 9:18 am | link

    Wonderful piece – I had no idea and it is shocking. Thanks for enlightening me!

  • Ron Parkin
    22 April, 2014 - 9:36 am | link

    Enjoyed this one David. If the total fossil fuel subsidy figure looks bad then what about the per capita figure. That must be horrific compared to elsewhere. I know it is significant for primary producers (Anna Plains Cattle Station has an annual fuel bill approaching $100,000). What about the mining industry??
    Cheers
    Ron

  • Steven Schilizzi
    22 April, 2014 - 1:00 pm | link

    Thank you Dave. An honest and a brave article. Many would call it an “eye-opener” and, perhaps, a “mind-opener”…
    One question we can all ask ourselves is: Why is all this so much hushed down, kept silent? How is it that even well educated, informed people, on hearing about these brute facts, exclaim “Oh wow, I had no idea! How shocking.” The issue here is not about (most of) us being manipulated by the media who themselves are manipulated by others, but rather it’s about why most of us are willing to go on being manipulated, lied to, cheated, and so on. Macchiavelli, the famous, or perhaps infamous, political theorist and first political scientist once said: “People have the governments they deserve. And so, if they let it happen, they are willing to let it happen.” It could be because lowering fuel subsidies would increase the price at the pump and the cost of our electricity bills, and no-one wants that, right? At least, that could be considered, if not economically rational, at least economically meaningful. But I suspect it is not even that. We’re all operating under information overload and one of the scarcest commodities these days is people’s attention. And so it is not that hard for vested interests, and the governments that serve them, to hush things down and keep them silent and ignored. Welcome to our Brave New World! But take heart: Big Brother is watching over us.

  • Henry Haszler
    22 April, 2014 - 1:32 pm | link

    Hi David

    I’ve been making the same general point to friends for a while, though without the specific detail about the various subsidies.

    Of course the issue has at least one other dimension on top of those you mention. I’m thinking of the diesel fuel excise rebate that goes to the mining and agricultural industries.

    In both cases, though more interestingly in the Dutch Disease case of mining, this subsidy promoted imports of capital and now promotes mineral exports which push up the exchange rate and squeeze other industries. The diesel rebate means even less of the benefits of the mining boom are shared by the rest of the community even though under the Commonwealth Constitution it is the community which owns the minerals.

  • David White
    22 April, 2014 - 1:52 pm | link

    Spot on David. We desperately need more people like you who know what they are talking about to add relevant facts to the current debate.

  • stephen skillitzi
    22 April, 2014 - 2:47 pm | link

    Steven Schilizzi
    22 April, 2014 – 1:00 pm | link
    Thank you Dave. An honest and a brave article. Many would call it an “eye-opener” and, perhaps, a “mind-opener”…
    Not so fast ‘n furious Mr. Steve Schilizzi…. although who could deny either ‘side’ a chance to bloviate to their respective choir.
    Try asking for a direct response from those alternative gurus who ‘sprinkle such AGW peppery propaganda on their breakfast muesli’.
    Alternatively, for starters, let’s quarantine all aussies into a comparative population density to those countries that boast a low fossil fuel subsidy. Plus throw into the mix efficient nuclear power. Only then do we have a level playing field.
    And for tackling the recalcitrant ‘elephant in the room’, really prove without the usual ad hominem attacks (eg, cynically hiding the truth from a gullible public etc), the net worth of attempting climate mitigation/control (via reducing the arrogantly-assumed ecological poison, CO2) versus attempting (and no doubt achieving) ongoing rational adaptation to global ever-changing climate.

  • Garry McDonald
    22 April, 2014 - 8:57 pm | link

    Hello Dave. Well done; terrific and insightful article.

    Your point “..outside the OECD…. Secondly, the greatest needs of poor people might be something other than fuel – food or education, for example.” jarred a bit initially. A staggering number of people across the developing world are off the grid, ie without electricity and rely on fuels, particularly kerosene for cooking and lighting. With that comes disease/ morbidity as householders constantly breathe in toxic vapours. http://www.niehs.nih.gov/news/newsletter/2013/1/science-kerosene/

    So here is yet another example of where simple, remarkably cheap renewable energy technology (portable solar lamps and cookers), if adequately supported could dramatically reduce subsidised fossil fuels and so much unseen misery from respiratory disease. (but I suppose you wouldn’t favour replacing one set of subsidies for another!)

  • 1 May, 2014 - 6:49 am | link

    By coincidence, there was a bit of an international media blitz on fossil fuel subsidies this week. I heard someone from the United Nations Environment Program on ABC Radio National, and there were various articles published around the world, including this one by the BBC http://www.bbc.com/news/business-27142377

  • Christy Nguyen
    3 May, 2014 - 12:17 pm | link

    Hi David,

    Besides the negative effects of fossil fuel subsidies as you mentioned, I think there is a positive angle of fossil fuel subsidies that is worthy to discuss. A portion of Australian government’s financial subsidies is invested in Research, Development and Demonstration (R,D&D) in innovative technologies of fossil fuel industry (e.g. Carbon Capture and Storage (CCS) technology to capture and store CO2 into underground at coal-based power stations (see details about the break-down of financial subsidies in Australian fossil fuel industry in this article). http://www.sciencedirect.com/science/article/pii/S0301421502000174).
    This is an incentive to generators to produce electricity at lower cost than using renewables while reducing CO2 emissions.

  • Bruce Munday
    25 July, 2014 - 10:00 am | link

    Hi Dave

    Is exemption from a levy really a subsidy? Mining and agriculture are exempt from the levy on diesel only for off-road use. The rationale being that they not imposing a burden on tax-payer funded infrastructure.

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