Why is public money propping up fossil fuels?
Fossil-fuel subsidies are in the spotlight again. Unbelievable as it may sound, with climate impacts hitting hard and fast, government support for oil, coal and gas seems to be on the rise.
Yet there is very little consensus on just how much money goes towards subsidizing fossil fuels. While the argument against these subsidies is simple (‘Want to prevent climate breakdown? Then stop giving money away to the industries that cause it’) the details are a bit more complex.
That’s because most fossil fuel subsidies aren’t usually direct government handouts but forms of indirect support that are measured – and defined – in different ways, which require some unpacking.
The first set are known as ‘production’ subsidies. These take the form of direct payments and tax breaks to fossil-fuel companies, including subsidies for specific extraction projects and payments towards decommissioning and clean-up costs. These vary hugely between countries and are often complex and hard to measure, so figures from the International Energy Agency (IEA) of $70 to $100 billion per year are likely to be an underestimate.
The second type are tax breaks or payments that lower the price of fossil fuels to the consumer. Key examples of these ‘consumption’ subsidies – which the IEA estimated at $400 billion in 2018 – include measures such as reduced Value Added Tax (VAT) on heating fuels in the UK, and heavily subsidized vehicle fuel in oil-rich states like Saudi Arabia.
The final set falls into what is often described as the ‘post-tax’ category. It’s not so much a subsidy as the ‘unpaid costs to society’ of climate change, air pollution and other negative impacts caused by fossil-fuel use. A more slippery concept, it is a useful way to highlight the ‘uncounted price’ of all the damage that burning carbon causes – the IMF estimates this at $4,700 billion.
Campaigners tend to focus on production and consumption subsidies, which total $500 billion per year between them. This is far from the full picture – other uncounted forms of government support include military spending to protect oil infrastructure and politicians touring the world to promote the fossil-fuel interests of transnational companies. By comparison, the IEA puts renewable energy subsidies at around $140 billion in total.
At this point in history, most fossil fuel subsidies are indefensible. While those that serve a legitimate purpose – such as making fuel affordable to people on low incomes – would need careful replacement, tax-payer money should not be used, as UN chief António Guterres put it earlier this year, ‘to boost hurricanes, spread droughts and (fuel) heat waves’.
Although the G20 nations pledged to phase them out back in 2009, little progress has been made. The sharp drop in subsidies for coal production in the EU is positive. But while some countries capitalized on low oil prices to cut their fuel consumption subsidies between 2010 and 2016, the IEA reported that 2017 and 2018 saw a rise in consumption subsidies, as oil prices rose again.
Meanwhile, some countries are heading in precisely the wrong direction: over the next five years, the UK’s oil industry is set to receive $6.2 billion more than it pays in taxes, thanks to generous government support. In the US, Republicans’ tax reforms in 2017 handed $25 billion to oil and gas companies, according to the Institute on Taxation and Economic Policy; while Australia is proposing to support new coalmines to the tune of hundreds of millions of dollars.
Much of this has to do with the lobbying power and influence of the fossil-fuel industry. As campaigners raise their voices in opposition, there is real value in picking up on subsidies and adding their elimination to their demands. A recent report showed that stopping fossil-fuel subsidies could prevent over a billion tonnes of greenhouse emissions in the UK alone. The moment has come to end these perverse pay-outs to polluters.