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Fossil Energy Subsidies and What They Mean for Maine

Paul Kando

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.

Oil dripping off a dollar bill

photo credit: EcoWatch.com

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 subsidies.

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.