Fossil Energy Subsidies and What They Mean for Maine
On May 18 the International Monetary Fund (IMF) released a Working Paper
titled How Large Are Global Energy Subsidies?
It turns out fossil fuel
companies benefit from global subsidies of $5.3 trillion a year, or $10
million per minute, day after day. That is roughly 6.5% of global GDP, the
amount the world’s governments spend on the
externalities of burning coal,
oil and gas, i.e. the damage polluters are not paying for. The harm caused
to local populations by air pollution, floods, droughts and storms driven
by climate change are examples.
The largest annual subsidies are paid by the taxpayers of China ($2.3 trillion), followed by the United States ($700 billion), Russia ($335 billion), India ($277 billion) and Japan ($157 billion), and the 27 country European Union ($330 billion). About 25% of the total ($1.27 trillion a year), based on a US government estimate of $42 a ton of CO2, is attributed to CO2 emissions driven climate change. This is likely an underestimate, according to the UN’s Intergovernmental Panel on Climate Change. Direct subsidies to consumers by discounts on gasoline, diesel and other fuels, account for only 6% of the IMF’s total.
These huge, unjustified subsidies distort markets and damage economies, according
to London School of Economics expert Lord Nicholas Stern. They
shatter the myth that
fossil fuels are cheap. A more targeted study of climate change related costs would
show the implicit subsidies for fossil fuels to be even larger.
In Climate Shock: The Economic Consequences of a Hotter Planet,
authors Wagner and Weitzman discuss how nations may
free-ride on the decisions of
others to curb emissions, since the benefits from lower emissions are spread widely
around the world while countries making the costly investments they require receive
only a tiny fraction of them. Few are going to do what is in the common interest,
when they can
free-ride. Not so, counters Vitor Gaspar, head of fiscal affairs
at IMF and former finance minister of Portugal.
The benefits from subsidy reform
– for example reduced pollution – accrue mostly to local populations. Each nation,
acting in its own best interest, directly benefits from tackling its own fossil fuel
Ending fossil fuel subsidies would cut global carbon emissions by 20%. It would also cut in half the number of premature deaths from outdoor air pollution – about 1.6 million lives a year. The resources freed up will be an economic boom, driving economic growth and reduce poverty through greater investment in infrastructure, health and education. The need for subsidies for renewable energy – a relatively paltry $120 billion a year – will also disappear once fossil fuels are priced to reflect the full cost of their impacts.
Short term, subsidies-reform will increase energy costs. However fossil fuel subsidies benefit mostly the wealthiest 20% -- six times as much as the poorest 20%. Reforms have already begun in dozens of countries, including Egypt, Indonesia, Mexico, Morocco and Thailand. India ended its subsidies for diesel last October.
What does all this have to do with Maine? The US consumes 291.9 billion gallons of petroleum products and subsidizes fossil fuels to the tune of $700 billion annually. The subsidy works out to $2.40 per gallon of petroleum. Maine burns about 190 million gallons of heating oil and 604 million gallons of gasoline per year. So, Maine taxpayers spend an extra $456 million subsidizing heating oil and $1.45 billion subsidizing gasoline -- a total of $1.906 billion per year. This raises the real price of a gallon of $2.65 regular gasoline to $5.05 and that of a $2.19 gallon of heating oil to $4.59.
Last week a legislative committee spent hours on whether to eliminate net-metering
(compensation for solar power contributed to the grid) and the Renewable Portfolio
Standard (requiring a percentage of power to come from renewable sources). It debated
cutting energy efficiency incentives and requiring ratepayers to pick up a corporation’s
the tab when it falls short of its sales goal of a given volume of natural gas. These
debates intended to
focus energy laws on energy costs. It costs the average Maine
rate payer about 66 cents per month to cover the cost of some energy efficiency incentives.
That’s $7.92 per year, the equivalent of 3.3 gallons worth of oil subsidies. There
is also talk in Augusta about penalizing drivers of fuel-efficient cars, to make up
for Maine’s $109 million per year highway fund shortfall. That’s 5.7% of what we Maine
taxpayers annually waste needlessly subsidizing fossil fuel companies. Something
seems badly out of whack here. It is a worthy policy goal to
focus energy laws
on energy costs. But, as the new IMF report makes clear, it is high time to
focus on the real problems and to connect some real dots.