(Hidden) fossil-fuel subsidies

Power plant burning tax money

‘Wind turbines run on subsidies’, according to the freshly installed Dutch Prime-Minister Mark Rutte in one of his speeches during the recent election campaign. This view is strongly supported by the Dutch weekly Elsevier. In a recent article the author Syp Wynia comes to the conclusion that subsidizing uneconomic energy production hampers investment into sensible means of energy production. I completely agree with Mr. Wynia that counter-productive subsidies on energy should be cut. Therefore, I kindly asked Mr. Wynia to also write a juicy story on subsidies for fossil-fuels. Until now I haven’t seen any attempt in this direction, so I’ve taken the liberty to do so, based on renown sources as The Economist and OECD.

Fossil-fuel subsidies worldwide

Having one hand tackling climate change and the other supporting the main contributor to the problem: fossil-fuels, is not a sensible approach. This is slowly but surely being recognized by the international community. In late 2009 the leaders of both the Group of Twenty (G-20) countries and the Asia-Pacific Economic Cooperation (APEC) forum committed to phasing out inefficient fossil-fuel subsidies. In order to grasp the size of the problem the G-20 asked the IEA (International Energy Agency), OPEC (Organisation of the Oil Exporting Countries), OECD (Organisation for Economic Co-operation and Development) and Worldbank to jointly carry out a study on this topic. They found out that government support of the production or consumption of energy is widespread an can take many forms, for example: keeping prices artificially low; providing grants or low-interest loans, or guaranteeing loans provided by commercial banks; granting tax exemptions or reductions; providing certain companies with preferential access to mineral resources or land (e.g., for pipelines or transmission lines) at below-market prices; and supporting research and development (OECD et al., 2010) See the OECD study for concrete examples of consumer (p. 19) and producer (p. 20) subsidies on fossil-fuels. 

Quantifying the exact amount of government support to fossil-fuels has proven difficult, because of the various forms these subsidies take. The more visible subsidies are directed at consumers of fossil-fuels. The IEA has estimated these subsidies to be around US$ 557 billion in 2008. This amount comprises subsidies to fossil-fuels used in final consumption and subsidies to fossil-fuel inputs to electric power generation. The IMF estimates that costs relating only to subsidizing gasoline, diesel and kerosene already exceeded US$ 500 billion in 2008 (OECD et al., 2010).

In most developed countries the support for fossil-fuels is more subtle and directed at the production of fossil-fuels. These subsidies may be on the order of US$ 100 billion per year according to research from the Global Subsidy Initiative (GSI, 2010). Together the total worldwide fossil-fuel subsidies amount to around US$ 700 billion annually, which is about 1% of global GDP (OECD et al, 2010). 

If the subsidies on fossil-fuels were phased out by 2020 it would result in a reduction in primary energy demand at the global level of 5.8% and a fall in energy-related carbon-dioxide emissions of 6.9%, compared with a baseline in which subsidy rates remain unchanged. This reduction potential is equivalent to the current emissions of France, Germany, Italy, Spain and the United Kingdom combined (OECD et al., 2010).

Government support for coal mining in Germany

I like to refer to Germany as the country taking the lead in the global energy transition, because of its progressive policies regarding renewable energy. However, German energy policy also has a dark side. The large German electricity companies are obliged to use at least a certain volume of coal from German mines at a price that is above the (world) market price (van Beers et al., 2002). This regulation is estimated to have amounted to €80-100 billion support for the coal industry for the period 1975-2002 and another €16 billion for 2005-2012 (Jacobsson, 2006). The European Union wants Germany to cut these subsidies by 2014. The German government, however, is unwilling to cut its coal subsidies until 2018.

Tax exemptions for large energy users in the Netherlands

In 2002 van Beers c.s. published a report on environmentally distorting subsidies in the Netherlands. One of the regulations they looked at in detail is the Regulatory Energy Tax. Large energy users are (partly) exempted from these energy taxes. This exemption stimulates above all the energy-intensive sectors and greenhouses. These sectors together account for almost half the total final energy consumption in the Netherlands. Van Beers et al. (2002) come to the conclusion that the exemption from Regulatory Energy Tax for large-scale users means a subsidy of between €1.6 and 5.2 billion yearly.

Dutch government buys CO2-emissions certificates for coal fired power plant operators

Two weeks ago the Dutch news show EenVandaag broadcasted a story on government support for the coal fired power plants that are being built in the Netherlands at the moment. The Dutch government agreed to pay for 80% of the CO2-emissions certificates that large energy users have to buy under the European Emission Trading Scheme (ETS) for the next 10 years. This amounts to a support of the new coal fired power plants of €200 millions yearly. Without these perverse subsidies the new coal fired power plants arguably would never have been built.

Liberal principles?

Recently the Dutch Green party has started an initiative to map government subsidies on fossil-fuels. They come to an estimate of €7,5 billion yearly. Liberalism tends to be wary of such perverse market signals, therefore I have high expectations of the VVD, the liberal party currently in power in the Netherlands to do something about these abuses.

Dear Mr. Rutte, if coal fired power plants wouldn’t be burning tax payer’s money, wind turbines could run without state support!

Transition versus Vested Interests

House providing itself with solar power

A transition is a ‘structural societal change resulting from mutually reinforcing developments in economy, culture, technology, institutions and nature’, according to the Dutch transition guru, Rotmans.

A transition towards a sustainable energy system is necessary and inevitable for reasons of cost, (energy) security and climate protection. Even the Dutch government seems to have grasped this necessity and has created a platform EnergieTransitie to guide the energy transition. 

Inflation
However, lately the meaning of a transition has been subject to inflation. A couple of weeks ago, the Platform EnergieTransitie proudly presented the first successes in Carbon Capture & Storage (CCS). This technology is seen by the Platform as the ‘deus ex machina’ towards reaching CO2-reduction targets. CCS, however, has nothing to do with an energy transition because it, instead of spurring societal change, would provide a means of continuing business as usual without critically assessing the energy system.

Recently, the renowned Boston Consulting Group (BCG) published the report ‘Groen licht voor groene stroom’ (Thumbs Up for Green Electricity). This report rightly concludes that the policy of the Dutch government falls short considering long term investor security in the renewable energy sector.

In order to make the energy system sustainable, BCG sees the biggest opportunities for the Netherlands in large scale (offshore) wind and biomass projects because these would be most cost efficient. However, in a real energy transition, decentralization is key.

Decentralization
Decentralized production of renewable energy is by definition more efficient than a centrally organized fossil based energy supply. This is due to the fact that it avoids losses through energy conversion and distribution. Renewable energy potential is distributed randomly across the globe and, similarly, energy use mostly takes place in a decentralized manner. Why bother centralizing production only to distribute it again afterwards?    

Furthermore, decentralized local energy production leads to a democratization of the energy system. Individual households will no longer be dependent upon large centralized energy suppliers, and could thus choose how to provide in their energy needs. Energy dependencies, whether on monopolistic multinationals or instable corrupt countries, would be  confined to history books.

In its report, BCG does mention the possibility of solar energy as a means for a decentralized energy supply that could already be competitive with consumer electricity prices by 2015. Surprisingly however, they conclude from this fact that solar could not contribute significantly to the Dutch energy mix.    

Winners and losers

If the Netherlands really wishes to make its energy system more sustainable, it is necessary to make clear choices. A transition inherently includes conflicts of interests. In the long term outlook of the report mentioned earlier, BCG states: ‘It is essential that the Dutch government actively involves the energy industry in the decision making process towards a common transition towards renewable energies. If there is no intrinsic ambition from the industry towards sustainability, all state initiated action will in the long run fail.’ (translated from Dutch)

Experience, however, shows that organizations that have vested interests in maintaining the status quo will not actively promote change and could even hinder a transition. Therefore, far more potential lies in decentralized, bottom-up initiatives. An example of which is the Windvogel (Wind bird) initiative: a local cooperation of citizens that purchase a wind turbine together and use the produced energy themselves. Also, in Germany, the country taking the lead in the global energy transition, bottom-up initiatives like the ‘Solar Bundesliga’ (a competition between municipalities to produce as much solar energy as possible) and ‘100% renewable energy regions’ (an initiative to make regions selfsufficient regarding energy use) have proven to be very successful.

Government should lead the way

The Dutch government has the difficult task of guiding the upcoming energy transition while ensuring that it comes about as smoothly as possible. The government made a first step in the right direction with the founding of the Platform EnergieTransitie. Followed by a step in the wrong direction, with appointing the general-director of Royal Dutch Shell as the chairman of the platform. Recently followed by a leap in the wrong direction through announcing plans for a new nuclear power plant.

The Dutch government should make sure not to act according to the stakes of the established companies, but in the interests of society as a whole.

(based on my column in Dutch on EnergySquare on 22/06/2010)

German Breakfast

(a couple of weeks ago)

Nuclear power plant in the US

This morning I got out of bed late, too late. I decide to skip the first lecture, to enable me to still have some breakfast. Unlike other mornings, I turn on the TV. To my surprise, I tune into a live debate in the Bundestag (German parliament), which is at that very moment discussing the ‘Energiekonzept’: a comprehensive vision for the German energy system until 2050. This plan, devised under a centre-right wing German government, would be mouth-watering to many Dutch proponents of an energy transition. However, in Germany, the plan has spurred tremendous debate because it proposes a turnaround in policy regarding its nuclear power plants. In 2002, the red-green government decided that Germany would stop its nuclear power production; over a time span of 20 years, all nuclear power plants should be closed down. With the Energiekonzept however, the current government agreed that the nuclear power plants will stay online for an average of 12 years longer. The four energy companies that run the nuclear power plants will make estimated profits of between 60 and 120 billion euro by this decision. The government argues that nuclear power is going to pay for the energy transition by imposing a tax on enriched uranium that is used to produce power. These tax revenues of approx. E2,3 billion yearly will mainly be invested in research for renewable energies.  During the emotionally heated debate, the Green party accused the government of nuclear lobby politics. They argue that a continuation of nuclear power will prove an effective blocking strategy for a growing amount of renewable energy. Nuclear power output is not flexible; therefore, it is not compatible with (the highly variable output that is characteristic of) renewable energies.         

This fierce debate overshadows the other goals agreed upon within the Energiekonzept, which as stated before, I could only dream for a right-wing government in the Netherlands to implement. The goals are binding and include: 80% of electricity from renewables in 2050, 50% of primary energy supply is renewable in that year, CO2-emissions are cut back with 80-95% and energy efficiency improves with 2% each year. In order to meet these goals, a comprehensive set of measures is agreed upon, including funding for renovation of buildings and support for the first offshore wind parks amounting to E5 billion.

While our government discusses building new nuclear power plants, Germany demonstrates that despite agreeing upon a longer life for its nuclear power plants, it is way ahead of us.

All in all, this breakfast was well worth skipping class, not neglecting the fact that I am very lucky to be studying in the country that is the global forerunner in the energy transition. I’ll come back when the Netherlands is ready for it.