A new report by the International Monetary Fund (IMF) finds that energy (fossil fuel) subsidies are “big and rising”. At the presentation of the report, Vitor Gaspar, Director Fiscal Affairs Department at the IMF, noted that most subsidies go to coal and said the numbers were “shocking”. He added that “eliminating energy subsidies can generate substantial environmental, fiscal and welfare benefits”. Elias Hinckley, strategic adviser at the US law firm Sullivan and Worcester, argues that the IMF report can “re-write the fundamentals of the discussion about our energy future”.
For more than a decade, fossil fuel supporters have insisted that new clean energy technologies like wind and solar are far “too expensive” to replace our traditional fossil fuel dominated energy industries. A new report published by the International Monetary Fund (IMF) on 18 May has put a price on the direct and indirect subsidies that support fossil fuels as a counter argument to the renewables are “too expensive” message.
The numbers are staggering. The expected subsidy for fossil fuels during 2015 is projected to be $5.3 TRILLION – for one year! This means that approximately 6.5% of global gross domestic product (GDP) will be dedicated in 2015 to just subsidizing our use of fossil fuels. Or as The Guardian pointed out in its summary of the IMF report, taxpayers are paying $10 MILLION per minute globally in subsidies for fossil fuels.
The idea that fossil fuels benefit from both direct and indirect subsidies has been around for years, but analysis has generally been done in pieces (some of it done very well – Nancy Pfund and Ben Healy at DBL Investors published an excellentanalysis of direct subsidies in the U.S. a couple years back) or without complete data robust enough to stand up to critique. The IMF report looks at direct incentives, local pollution and public health effects, climate changes, and a host of other costs to arrive at its projected subsidy number.
IMF’s numbers are already being attacked. UK climate economist Nicholas Stern questioned the report for vastly underpricing the cost of climate change, and Brad Plumer at Vox outlined some of the odd items that arguably shouldn’t have been included in the calculation. Regardless of whether the IMF report gets to exactly the right number, the report provides a very credible starting point to argue over the right value to place on fossil fuel subsidies, and will be a baseline to begin rethinking the right pace for our global transition to clean energy.
According to the report, which, it should be noted is only the latest in a long-term research project by the IMF, the largest subsidy is for coal, largely because of the enormously underpriced effects of emissions and other environmental costs on public health and local resources – although the global climate impact is very significant as well. A real world demonstration of these costs can be seen in China right now with its massive build-out of coal generation rapidly coming to a close and the nation making a hard pivot towards clean energy in the face of deteriorating air quality and spiraling health costs from pollution.
The vast portion of the remaining fossil fuel subsidies will be to support petroleum. More petroleum subsidies will be in the form of direct supports, especially among oil producing countries, but the indirect costs were again significant (and curiously the report seems to leave out military costs dedicated to maintaining regular supply of crude to global markets, which have been long identified as a very significant subsidy).
Governments around the globe are struggling with the practical and economic realities of an accelerating energy transition away from fossil fuels, as well as the incredibly challenging politics surrounding these markets. The presence of a well respected financial institution, like the IMF, measuring the enormously ignored, but very real, costs of fossil fuel use will be important in shaping these discussions.
This report alone won’t end the constant claims that clean energy is “too expensive.” There have been remarkable declines in the cost of wind and solar power over the past decade. Add the breakthroughs in storage, electrification of vehicles, and promises of economically competitive new nuclear technologies (which will accelerate when investors have a clear and accurate price target for these alternatives) and the pace of global change could be revolutionary.
By putting hard data on the real price of the energy status quo (a lesson being lived in real time by Chinese authorities facing massive new costs from its overzealous coal fleet expansion), the report allows us to seriously consider the economic reality of the currently distorted and inaccurate marketplace. A better baseline, even a remotely accurate one, combined with the economic reality that clean energy has become stunningly more economic over the past decade, should re-write the fundamentals of the discussion about our energy future.
Elias Hinckley (@eliashinckley) is a strategic advisor on energy finance and energy policy to investors, energy companies and governments. He is an energy and tax partner with the law firm Sullivan and Worcester. This article was first published by Sullivan and Worcester’s Energy Finance Report and is republished with permission here.