Governments and the Energy Market
Governments around the world have a long history of intervening in the energy market. In the United States for example, there are a wide range of energy-related subsidies that have been embedded within the U.S. tax code. These subsidies have been developed to ensure that Americans have access to inexpensive energy provided by fossil fuels. Many of the energy subsidies have existed within the U.S. tax code for many decades. Economists and energy analysts say that over the past century, the U.S. has achieved tremendous economic growth as a result of access to cheap and abundant energy from fossil fuels. However, many of reasons why the subsidies were first established may no longer be relevant today for the fossil fuel industry. Moreover, as energy prices continue to fall and the issue of climate change becomes more relevant to governments around the world, some global policy makers have been moving forward with legislation to end subsidies for the fossil fuel industry.
Fossil Fuel Subsidies
According to the International Monetary Fund, governments around the world spent $5.2 trillion on fossil fuel industry subsidies in 2017 alone. (Ellsmoor, 2019). This is roughly equivalent to 6.5 percent of the global gross domestic product (GDP) being spent on fossil fuel subsidies. So what are energy subsidies? The Organization for Economic Cooperation and Development, which is an intergovernmental economic organization with a goal of stimulating economic development and world trade, defines energy subsidies as economic measures that are implemented to keep energy prices below market levels for consumers. Conversely, for energy producers, energy subsidies ensure that companies are able to produce energy more cost effectively. These subsidies may be issued through a variety of mechanisms. Direct cash payments for energy production, indirect savings through price controls, rebates, and tax exemptions are common ways that governments issue energy subsidies.
In the United States, the government’s main objective with energy subsidies has been to incentivize domestic energy production. Incentives include both direct and indirect benefits for the fossil fuel industry. In 2015, a combination of subsidies for the American fossil fuel industry reached $649 billion in 2015 (Dickinson, 2019). With $649 billion, the federal government spends tej times more on fossil fuel subsidies than the country’s education system (Ellsmoor, 2019). Furthermore, this is also more than is spent on the total annual U.S. defense budget. While these figures may seem large, China provides by far the most subsidies for coal, natural gas, and oil companies, with $1.4 trillion being spent in 2015 (Dickinson, 2019). Given these massive sums of money, energy subsidy reforms continue to be at the top of many international policy agendas.
Arguments in Favor of Subsidies
There are numerous arguments that have been made in favor of keeping fossil fuel subsidies in place. The security of supply is one such argument that continues to highlight how subsidies can ensure for an adequate domestic supply of energy. Providing incentives for domestic energy producers can support energy independence and reduce the need to rely on imported fossil fuels from other parts of the world. Furthermore, some subsidies are used by fossil fuel companies to invest in pollution control mechanisms, emissions reduction projects, or to comply with international environmental agreements, such as the Kyoto Protocol. Other arguments in favor of keeping subsidies stress the overall economic benefit of the financial incentives. Reducing energy prices for consumers allows them to spend money elsewhere, which could potentially boost other sectors of the economy. In terms of direct employment, some fossil fuel companies use government subsidies to maintain high levels of employment and increase employee benefits.
Arguments Against Subsidies
Arguments against fossil fuel subsidies have been ramping up in recent years. At an individual level, studies have shown that U.S. spending on fossil fuel subsidies costs every American $2,028 per year (Dickinson, 2019). A recent report by the International Monetary Fund emphasized how eliminating fossil fuel subsidies in 2015, “would have lowered global carbon emissions by 28 percent and fossil fuel air pollution deaths by 46 percent, and increased government revenue by 3.8 percent of GDP” (Coady et al, 2019). These figures have led some policy makers to label fossil fuel subsidies as against the goal of global sustainable development. The United Nations Environment Program has continuously stressed how these financial incentives for fossil fuel companies place a substantial burden on government budgets, weaken potential systems, and undermine public and private investment in other sectors of the energy industry.
While the benefits of fossil fuel subsidies are said to provide all consumers with energy-related savings, a study conducted by the Overseas Development Institute found that the vast majority of the financial benefits provided by fossil fuel subsidies only apply to the richest 20 percent of households in any given country (Whitley, 2014). Secretary General Antonio Guterres of the United Nations has made the issue of tackling fossil fuel subsidies one of his most pressing policy objectives. Guterres has called for these subsidies to end and instead for fossil fuel companies to pay for pollution and carbon emissions. Guterres now leads the United Nations’ charge against climate change, which has been involved in the fight to reduce global carbon emissions for nearly three decades. With oil prices turning negative for the first time in history, many global policy makers say that 2020 may be the most logical time in history for governments to coordinate together on initiatives to end subsidies for coal, oil, and natural gas.
The Global Debate
Francesco Starace, the CEO of the Italian electric utility ENEL, has uniquely framed the debate about fossil fuel subsidies and the collapse of the global oil market. He says, “The crisis is a confirmation of a stakeholder trend that was already underway. It’s about longer-term sustainable practices. A company needs to address deeper issues than just quarterly results. They need to find the roots that justify their existence” (Heath, 2020). Starace’s statements are representative of an increasing number of global policy makers’ feelings about fossil fuel subsidies. Are they still needed? Are fossil fuel companies able to justify societal benefits from the financial incentives that they are receiving? These are the questions that remain to be answered. While there have been numerous speculations about how the world would be different if fossil fuel subsidies didn’t exist, some policy makers are hoping that scenario models can be used to show the benefits of eliminating subsidies for the industry.
In addition to calls from the United Nations, the International Monetary Fund, and the World Bank to end global fossil fuel subsides, every one of the 2020 U.S. Democratic presidential candidates pledged to eliminate fossil fuel subsidies during their campaigns. Moreover, a number of public surveys have shown that the majority of Americans would be in favor of implementing efforts to phase out these subsidies. As the world continues to move forward with initiatives related to the Paris Climate Agreement, environmental advocates say that fossil fuel subsidies are a barrier to implementing the goals outlined in the Paris Climate Agreement. A 2018 study published in the journal Nature conveyed that subsidy removal would have a significant impact on reducing global carbon emissions. Researchers found that, by 2030, the removal of fossil fuel subsidies could cut back annual carbon dioxide emissions by five hundred million to two billion metric tons (Supran et al, 2020). This study contradicts fossil fuel company claims that subsidies and tax breaks help them allocate more funding towards pollution and emission reduction programs.
One common American fossil fuel subsidy involves a specific federal tax break that permits oil companies to directly deduct the costs associated with drilling and constructing new oil and gas wells from their taxes. Many environmental advocates and some U.S. policy makers have specifically targeted this tax break as one that should be eliminated to reduce emissions and associated environmental impacts. While this tax break allows oil and gas producers to immediately lower their upfront costs of production, it provides an incentive to drill more wells than needed in order to instantly capture tax benefits and reduce the need for additional capital expenditures. Environmentalists say that this model in turn leads to more greenhouse gas emissions and environmental degradation from oil drilling.
Renewable Energy Subsidies
While fossil fuel subsidies were originally intended to help coal, oil, and natural gas producers with the establishment of viable energy businesses, these industries are all now well-established within the American energy sector. Even with substantial government subsidies and consistent policy efforts aimed at reviving the industry, coal producers have been struggling to survive. Rather than continuing to pump federal funding and tax benefits into a dying industry, some energy analysts and economists say the coal subsidies should be removed entirely so that market forces can play out naturally. In addition to removing coal subsidies, renewable energy advocates have been stressing for more assistance in the form of subsidies. Even with government subsidies being allocated in much higher percentages to the fossil fuel industry than the renewable energy industry, renewable energy prices continue to become nearly as competitive as fossil fuel prices.
A white paper published in the Proceedings for the National Academy of Sciences highlighted a need to redirect federal subsidy programs for renewables rather than eliminating them completely. While the U.S. Department of Energy has said that energy subsidies were originally used to prop up the fossil fuel industry, the renewable energy industry has not been met with the same level of government support. In fact, the Trump administration has made it clear that it would like to pursue opportunities to begin to eliminate the currently available renewable energy subsidies because these alternative forms of energy have started to become increasingly competitive with fossil fuels. Conversely, the Trump administration has signaled that it would like to ramp up efforts to support the fossil fuel industry, given the historic drop in oil prices.
Looking to the Future
As countries around the world grapple with increasing levels of debt and declines in economic activity, it is getting increasingly difficult for policy makers to justify the continuation of fossil fuel subsidies. As organizations like the International Energy Agency, the International Monetary Fund, the World Bank, the Organization of Economic Cooperation and Development, and the European Union continue to lobby governments to slash fossil fuel subsidies, it has continued to become harder for policy makers to approve existing subsidies and tax cuts for coal, oil, and natural gas producers. However, even with this pressure from a wide array of multinational organizations, fossil fuel subsidies have actually been increasing in recent years. While the economic argument for eliminating fossil fuel subsidies is becoming progressively more evident, the politics of making subsidy changes has been enormously difficult. With an incredible amount of power and influence over lawmakers, the fossil fuel industry may be able to indefinitely lock in federal subsidies.
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Coady, D., et al. (2017). “How Large Are Global Fossil Fuel Subsidies?” Journal of World Development: (91), pp. 11–27.
Coady, D., et al. (2019). “Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates.” International Monetary Fund.
Dickinson, T. (2019). “Study: U.S. Fossil Fuel Subsidies Exceed Pentagon Spending.” Rolling Stone.
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Supran, G., et al. (2020). “Fossil-Fuel Subsidies Must End.” Scientific American.
Whitley, S. (2014). “Time to change the game: Fossil fuel subsidies and climate”. Overseas Development Institute.