IN DEPTH: $1.9tn fossil subsidy bill

At a time when carbon emissions are destroying the planet and government budgets are under severe pressure, it is perverse that the world’s taxpayers are providing the fossil-fuel industry with almost $2trn of subsidies every year — more than 20 times as much as renewables.

Phasing out these hand-outs would reduce CO2 emissions significantly and enable renewables to compete on a level playing field, while the money saved could be used to subsidise the transition to clean energy or help the world deal with a warmer planet. Currently, the richest countries are spending six times more on supporting fossil fuels than on helping poorer nations adapt to climate change, according to a London think-tank, the Overseas Development Institute (ODI).

"Think about it,” says Christine Lagarde, managing director of the International Monetary Fund (IMF). “We are subsidising the very behaviour that is destroying our planet, and on an enormous scale.”

While there is a worldwide consensus that this situation has to change, virtually nothing is actually being done about it.

Almost five years ago, the G20 countries committed to “phase out and rationalise over the medium term inefficient fossil-fuel subsidies while providing targeted support for the poorest”. But as Doug Koplow, from US environment group Earth Track, tells Recharge: “The problem is that the G20 leaders seem to get a discussion going on this subject at every summit meeting, but then they just seem to do nothing.”

One major problem seems to be that no-one can agree what constitutes a fossil-fuel subsidy, let alone an “inefficient” one.

New analysis by Washington-based think-tank Worldwatch Institute shows that global subsidy estimates range from $544bn to $1.9trn a year, depending on how a subsidy is defined and calculated — whether it includes tax breaks on production, direct subsidies to consumers, or harder-to-quantify “externalities".

Many governments simply do not know how much they are spending on subsidising dirty fuels, as many forms of support have never been quantified, according to the International Institute for Sustainable Development’s Global Subsidies Initiative. Where information does exist, it is scattered across different ministries, as well as across regional and local governments, and is rarely made publicly available.

These problems are exacerbated in developing countries by poor budget transparency and limited resources for data gathering and estimating subsidies. “The resulting gaps in the data collected on fossil-fuel subsidies make it difficult, if not impossible, to assess or rationalise them,” says ODI research fellow Shelagh Whitley.

But the biggest stumbling block to ending the subsidies is undoubtedly the unwillingness of politicians to act — and that is largely due to the power and influence of Big Oil and Big Coal.

“The fossil-fuels industry is the most powerful vested interest in the history of the world,” says Steve Sawyer, secretary general of the Global Wind Energy Council. “It runs and/or owns many governments; and exerts a huge influence on many more.”

Politicians around the world rely on donations from fossil-fuel corporations. In the US, where election campaign costs can be eye-wateringly high, politicians of both main parties routinely accept thousands of dollars from these companies. In the current Congress, $8m has so far been accepted by House representatives, with 84% going to Republicans, while more than $3m has gone to Senators — 67% of which went to Republicans, according to US advocacy group Oil Change International.

To remove production subsidies, Congress would have to pass legislation to eliminate 12 preferential tax provisions related to coal, oil and gas. Efforts to remove even small portions of these subsidies have been resoundingly defeated in Congress, with lawmakers’ arguments echoing those of the lobby groups — that removal of tax breaks and other indirect subsidies would harm the economy.

“Punishing energy companies by raising taxes is not sound policy and could lead to less energy, less government revenue and fewer jobs,” says Jack Gerard, head of lobby group the American Petroleum Institute.

“The oil and gas industry in the US contributes $85m a day to the federal government — a larger contributor of government revenue than any other industry in the US.”

So although President Barack Obama has repeatedly called for an end to fossil-fuel subsidies — as he did in his State of the Union speech in January — he can’t actually get such a move through Congress.

As former US vice-president Al Gore says: “American democracy has been hacked. The US Congress... is now incapable of passing laws without permission from the corporate lobbies and other special interests that control their campaign finances.”

The fear at what might happen if subsidies are removed is palpable. Rising oil and energy prices may raise bills for voters and businesses that are already struggling. The same arguments are being used against carbon taxes.

But according to the Treasury Department, removing subsidies would reduce US oil production by less than 0.5%, and increase exploration and production costs by less than 2%. As it is the global market that determines oil prices, the impact should be negligible.

David Lipton, first deputy managing director at the IMF, says: “Subsidy reform can lead to a more efficient allocation of resources, which will help spur higher economic growth over the longer term.” Removing energy subsidies can also strengthen incentives for R&D in energy-saving and alternative technologies, he adds.

Fatih Birol, chief economist at the International Energy Agency (IEA), says fossil-fuel subsidies are “public enemy number one to sustainable energy development”.

“One of the main arguments put forward for keeping fossil-fuel subsidies is that they protect the poor, but studies show that 80% of such subsidies go to middle- and high-income households,” he adds. “The IEA is doing its best to persuade the G20 group of countries to act on this issue.”

Sawyer believes a “level playing field” created by removing all fossil-fuel subsidies globally would offer major advantages for renewables, as it would better reflect the true cost of energy generation. “As the price of fossil fuels rises, it would give low-cost renewables an ever-greater market advantage,” he says.

Thomas Becker, chief executive of the European Wind Energy Association, adds: “We in the wind industry can live without subsidies, as long as other energy sources don’t get subsidies as well.”

Fossil-fuel companies are quick to claim that renewables are only economically viable due to government subsidies, but the cost of green energy is dropping rapidly. According to Deutsche Bank, solar power is cheaper than grid electricity in ten major markets, including Italy and India, while wind energy is less expensive than other sources in countries such as Brazil and Australia.

Despite the political impasses, there are some chinks of light on the horizon, with important global bodies such as the UN, IMF, OECD and IEA all making increasingly strident calls for change.

The G20 leaders have asked their finance ministers to provide reports on the issue by the next G20 meeting in Brisbane, Australia, in November, and a European Commission report on the subsidies is expected in September.

UN secretary-general Ban Ki-moon’s climate change summit, also in September, is seen as a key opportunity for world leaders to make specific pledges as to how they will replace fossil-fuel subsidies.

“Previous meetings identified a range of barriers to sustainable investment,” says Ban. “These include what we call ‘perverse subsidies’ [and] uncertainty about the predictability of electricity tariffs or government energy policies. We have to break down these barriers.”

Any deal to remove fossil-fuel subsidies would require agreement from the three biggest fossil-fuel supporters — the US, Russia and China, which rarely agree on anything.

Precise data is hard to extract from China, where producer subsidies can be found at the state, provincial and local levels. However, China is slowly trying to address its pollution problems by gradually reducing preferential tax treatment for fossil-fuel companies.

Russia, however, is offering ever more generous tax breaks to the oil and gas industry as it attempts to exploit its Arctic resources. President Vladimir Putin uses energy as a tool of international power — the threat of switching off Russia’s gas supply to Europe seems to be one of the key reasons for the EU’s feeble response to the Crimea crisis. Anything that weakens Russia’s fossil-fuel supply will weaken its power, at least in Putin’s mind.

But with the West and Russia at loggerheads over Crimea, the chances of a G20 or global deal look slimmer than ever. Some leaders have already indicated Putin might not be welcome at the Brisbane meeting. The issue may be kicked into the long grass.

“If there’s anyone around to write the history of the 21st century,” says Sawyer, “some of the key questions that will be asked are, ‘why did it take so long to address the climate change threat?’; and ‘why weren’t the deliberate misinformation campaigns from the fossil-fuels industry — about climate, renewables and economics — exposed much sooner?’.

“I believe one day they will be seen as the greatest crimes against humanity in human history. I hope I live long enough to see the trials begin; and I hope I live long enough to see politicians with the courage to take them on.”

Click here for the full list of the world's biggest fossil-fuel subsidisers