(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!