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Carbon: The Biggest Overlooked Fossil Fuel Subsidy

By Climate Guest Contributor

"Carbon: The Biggest Overlooked Fossil Fuel Subsidy"

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Figure 1: Global fossil fuel subsidies in billions of dollars per country from National Geographic.

by Dana Nuccitelli, via Skeptical Science

The International Energy Agency (IEA) made headlines recently by concluding that fossil fuels received far more global subsidies than renewable energy in 2010. However, it appears that the IEA survey only included data from the countries with the largest fossil fuel subsidies, which are mainly developing countries whose economies largely depend on fossil fuel production.  National Geographic’s The Great Energy Challenge also includes fossil fuel subsidy data from developed countries (Figure 1), bringing the total global value close to $500 billion for 2010.

Bear in mind that exactly what is defined as a “subsidy” can be rather subjective, so these are just rough estimates.

It’s worth noting that this trend is changing.  For example, in the USA in 2011, fossil fuel subisidies in the form of tax breaks were down to $2.5 billion while renewable energy and energy efficiency programs received $16 billion in subsidies.  Even many developing countries like Iran (with the largest orange circle in Figure 1 at over $80 billion in 2010 fossil fuel subsidies) dramatically reducing their subsidizing of fossil fuels (in 2011 Iran’s subsidies were down to $20 to $30 billion).

Nevertheless, despite the movement in the right direction, global fossil fuel subsidies are still much higher than renewable energy subsidies, despite the fact that fossil fuels and associated technologies have been established for decades to centuries.  Fossil fuels also receive another massive subsidy which is rarely taken into account in these types of calculations – carbon emissions.

Social Cost of Carbon

As we know, carbon emissions impact people and our economies through their contribution to climate change through the increased greenhouse effect.  The climate change associated with these emissions has a myriad of effects (i.e. rising temperatures, changing precipitation patterns, more frequent extreme weather events, etc.), many of which result in bad effects on people.

It’s very challenging to quantify the total dollar impact of these changes, but economists try to estimate the economic damage done by a each ton of carbon (or carbon dioxide) emissions, which they have termed the “social cost of carbon” (SCC).  SCC is effectively an estimate of the direct effects of carbon emissions on the economy, and takes into consideration such factors as net agricultural productivity loss, human health effects, property damages from sea level rise, and changes in ecosystem services.

SCC estimates generally range from $5 to $68 per ton of CO2 emitted, though a few more conservative ecoomists put the figure lower, and some economists argue it could potentially be much higher in the near future.

The Huge, Overlooked Fossil Fuel Subsidy

Global CO2 emissions from fossil fuels in 2011 totalled 31.6 billion tons.  Given the SCC range of $5 to $68 per ton of CO2, those emissions correspond to a cost of $158 billion to $2.1 trillion per year, globally – roughly $23 to $300 per person.  Note that the IEA and National Geographic listed global fossil fuel subisides at $400 to $500 billion.  The central estimate of the social cost of carbon emissions is roughly twice that total.

These carbon emissions may reasonably be considered a subsidy because they impose various costs on society (on agricultural productivity, property damage, human health, etc.), but since most countries don’t yet put a price on carbon emissions, these costs are not reflected in the fossil fuel market price.  Rather than fossil fuel producers and consumers paying these costs, society as a whole picks up the tab.  Therefore, fossil fuel prices are kept artificially low (Figure 2), which is generally the purpose of subsidies.

Figure 2: Average US coal electricity price vs. Muller, Mendelsohn, and Nordhaus (2011) and Epstein (2011) best estimate coal external costs.

Fossil Fuel Industries Benefit, You Pick Up the Tab

However, with all subsidies, somebody has to pick up the tab.  Usually it’s taxpayers who provide the funds to implement the subsidy, but in this case it’s everyone who is adversely impacted by climate change, which is basically everybody in one form or another.  For example, you pay higher food prices as climate change impacts agriculture (i.e. wheat prices rose as a direct consequence of the 2010 record Moscow drought, heat wave, and wildfires).

Worse yet, as Samson et al. (2011) showed, the countries with the lowest CO2 emissions will generally experience the largest associated climate impacts (Figure 3).

Figure 3: Top Frame - National average per capita CO2 emissions based on OECD/IEA 2006 national CO2 emissions (OECD/IEA, 2008) and UNPD 2006 national population size (UNPD, 2007). Bottom Frame: Global Climate Demography Vulnerability Index. Red corresponds to more vulnerable regions, blue to less vulnerable regions. White areas corresponds to regions with little or no population (Samson et al 2011).

Carbon – the Forgotten Fossil Fuel Subsidy

It’s rather rermarkable that everyone tends to overlook this immense fossil fuel subsidy, which amounts to somewhere in the ballpark of $1 trillion per year at present, globally.  It’s certainly a difficult figure to quantify with a large possible range of values, but it’s also a huge cost which fossil fuel producers and consumers do not directly pay.  While the market price of fossil fuels remains artificially low, we all pick up the tab to the tune of approximately $150 per person per year, on average, though those costs are unevenly distributed.  However, Economics 101 says that the people who benefit from those emissions (fossil fuel consumers) should be the ones paying their cost through a price on carbon emissions.

Climate contrarians in particular tend to neglect this huge fossil fuel subsidy in two main ways.  First, they claim that developing nations need “cheap” energy (a favorite argument of John Christy, for example), when fossil fuel energy is not actually cheap, and in fact poorer nations tend to pay the lion’s share of the associated climate costs (Figure 3).  Second, they claim that it will be cheaper to adapt to climate change than to mitigate carbon emissions (i.e. Monckton, Michaels and Cato, and the CEO of ExxonMobil have recently made this argument).  In this context, “adaptation” means continuing the economic drain of these hundreds of billions to trillions of dollars of fossil fuel subsidies every year, which is several times higher than the cost of climate mitigation.

Most importantly, until we put a price on carbon emissions (and to their credit, a few countries and regions have), fossil fuels will remain extremely heavily subsidized at a time when we need to be quickly phasing out our reliance on them.

This piece was originally published at Skeptical Science and was reprinted with permission.

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11 Responses to Carbon: The Biggest Overlooked Fossil Fuel Subsidy

  1. Clearly the magnitude of this situation is comparable with the program to go to the moon, when Kennedy announced the moon race.

    “I believe that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the Moon and returning him safely to the Earth. No single space project…will be more exciting, or more impressive to mankind, or more important…and none will be so difficult or expensive to accomplish….” President John F. Kennedy, 1961

    And today China announces it affords to further take hold of the next big thing, when it comes to economic motor – the car industry. And this after they already started with pace on the clean tech front.

    China has set a target of producing and selling 500,000 energy-efficient and alternative-energy vehicles a year by 2015, and five million vehicles by 2020.

    The blueprint, announced by the State Council on Monday, has outlined generous subsidies to consumers and producers of the new generation of greener vehicles, as it aims to ease the country’s heavy dependence on imported oil, cut emissions, and speed up the restructuring of its automobile sector into a more environmentally sustainable model. http://ecarvolution.com/item/report-chinese-government-to-pump-investments-and-subsidies-to-boost-the-country-s-green-cars-industry.html

    So what are we waiting for? How retarded ( manipulated by out of date motives ) can you be?

  2. wili says:

    My impression is that the general public perception is that renewables are getting almost all the subsidies and ff and nukes nothing or next to nothing.

    At least, after this heat wave, the idea that there are costs connected to ff use that aren’t reflected at the pump or the meter will start to sink in.

    • dana1981 says:

      At least Democrats have been hammering away at trying to end fossil fuel subsidies. Surely those efforts have brought the issue to some peoples’ attention. Not those watching Fox News of course, but they’re a lost cause anyway.

  3. Paul Klinkman says:

    No one can calculate the cost to all future generations of making most of the earth’s species extinct. Extinct is forever. We must not sell our generation’s inheritance for a mess of pottage.

  4. Mulga Mumblebrain says:

    Fossil fuels receive infinite subsidies by being allowed to write off the effects of their greenhouse pollution as ‘externalities’. As these emissions will shortly end our civilization, the subsidy from humanity, living and unborn, is literally incalculable.

  5. johne says:

    Correct me if I am wrong, but arn’t the majority of renewable subsidies related to ethanol production?
    I also wonder how the National Geographic reconciles it’s relationship with Fox News re National Geographic Channel?

    • dana1981 says:

      I’m not sure if it’s a majority, but ethanol subsidies certainly make up a big chunk of renewables subsidies in the USA at least.

  6. Tami Kennedy says:

    The fossil fuel industry will recoup costs on any they receive from carbon’s impact. Will the $10.00 gasoline resulting help us slow down the production of carbon? The air conditioners have been running a bit more these last few years. We are subsidizing profits while protecting the producer from actual costs. The population will definitely react more vocally to the $10.00 gasoline than they currently do to subsidies. Our elected officials will definitely get an ‘ear’ full with the corn crop melting.

  7. Byron Smith says:

    Thanks for this piece Dana.

    One FF subsidy I haven’t seen much discussion of is in the form of military expenditure to support global oil infrastructure. I am not sure what proportion of global military spending would be primarily associated with this (or the secondary effect of arms races that result from it), but I imagine we’re talking tens, if not hundreds of billions of dollars annually.

    • dana1981 says:

      That’s another good point Byron. It’s hard to speculate how much of our defense budget could fairly be attributed to our addiction to fossil fuels, but it has to be a pretty large number.

  8. Solar Jim says:

    Thank you for this article. Much more needs to be said about the economic fraud of fuels.

    However, given the melting planetary ice sheets and numerous other unfolding disasters from carbonic acid gas contamination, the assertion that the social cost of carbon is 5 to 68 dollars per ton seems akin to estimating the cost of a gunshot to a child as the price of the bullet.

    A case could be made that we are discovering it is orders of magnitude higher. Perhaps it approachs infinity, i.e., that it is lethal in sufficient quantities.