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Fossil-Fuel Subsidies Must End

Paul Kando

For the past decade, world leaders concerned about the climate crisis have been reaffirming the need to phase out over $400 billion in annual subsidies to the fossil-fuel industry. All of the 2020 Democratic presidential candidates have committed to eliminating them. International financial institutions, including the World Bank and IMF, as well as over 70% of the American public agree.

Oil barrel spilling Money

photo credit: Earthworks

A new paper in the journal Nature makes the case that these subsidies matter a lot. The study calculates emissions reductions from subsidy removal will reach 500 million to 2 billion metric tons of carbon dioxide per year by 2030 — roughly 25% of the energy-related emission reductions pledged by all the participant countries in the Paris Agreement combined (4 to 8 billion tons). Hundreds of millions of metric tons of CO2 reduction is nothing to sneeze at, especially since it could be achieved by a simple policy change that would also bring strong fiscal, health and environmental benefits.

Previous research has likely underestimated the projected emissions reductions. Commonly used techniques do not accurately capture the investment dynamics of fossil fuels, even though these dynamics can greatly affect what oil and gas companies do. Take, for example, one specific subsidy: a federal tax break that allows US oil producers to immediately deduct from their taxes most of the costs of constructing and drilling new wells. Conventional models assume that subsidies like this are uniformly distributed across all oil fields, even though governments often preferentially target new — rather than existing — capital investments. This subsidy lowers oil producers’ upfront cash-flow requirements, leading them to drill more new wells than they otherwise would — accelerating fossil-fuel production and, in turn, greenhouse gas emissions and pollution. The Nature study estimates that true emissions reductions from eliminating this tax-break subsidy could be more than an order of magnitude greater than is predicted by conventional modeling.

And this tax break is but one subsidy. A separate 2017 peer-reviewed analysis by some of the same researchers concluded that, without a dozen key subsidies, nearly half of future US oil production would be unprofitable at $50-per-barrel oil prices — the level at which prices may hover in a low-carbon future.

In other countries, the forms of subsidies vary. But around the world, fossil-fuel production and consumption are supported in hundreds of ways. Perhaps the worst subsidy is the ‘depletion allowance’. This in effect claims, in contrast to all other mining operations, that petroleum is “exhaustible,” so companies will fail when it’s gone. Therefore, they should be subsidized while the going is good. Isn’t this plainly fraud? By the same logic, governments should subsidize us all, because we’re all going to die someday.

The most troubling legacy of fossil-fuel subsidies may be the political — rather than financial — barriers fossil-fuel producers have erected against decarbonization efforts over the decades. Revenue boosts from subsidies support not only more drilling but also product promotion, lobbying, propaganda and other efforts that ensure the industry’s success. Problematically, subsidies also send false signals that this industry and its activities are beneficial for society as a whole and should, therefore, be encouraged.

In another recently published paper, experts studying the social tipping points for climate stabilization concluded that “redirecting national subsidy programs to renewables ... or removing the subsidies for fossil-fuel technologies are the tipping interventions needed for the take-off and diffusion of fossil-fuel–free energy systems.”

Economic models provide useful guidance to policy-makers, but most fail to capture key ways in which subsidies send false signals to markets and people, creating a false sense of certainty that misses the big picture: Subsidies prop up the fossil fuel industry. That’s why they were introduced in the first place and why the industry and its allies continue to defend them. As the Department of Energy concluded 40 years ago, federal subsidies have had a “large effect” on capital formation and oil production in the US. But the more oil infrastructure and production, the more greenhouse gas emissions, and the more particulate pollution and related health problems.

The basic realities at stake are clear. Before-and-after Covid-19 photographs in recent press accounts — clear skies over Paris, Mumbai, Wuhan, Beijing, no permanent haze over Los Angeles — tell this story better than words: Holding back catastrophic health problems and global warming requires dramatically reducing fossil-fuel use. However temporarily, the pandemic is showing us what that might look like. Once upon a time, it may have made sense for countries to support their fossil fuel industries. Now that energy efficiency, solar and wind power — and respiratory health — are all more economical than fossil fuel burning, that time is over.