Massive fossil fuel subsides must stop.

Returning to one of my favourite subjects – those disgraceful subsidies for fossil fuels. One of the features of having teenage kids is you often hear “whatever”, or more recently “no one asked” as conversation stoppers. In the same way, having reasonable conversations about fuel subsidies is often met with the “concerned citizen” equivalent – one such appeared on a previous blog post that laboriously (I thought) tried to show that it wasn’t a simple case of “Fossil-Fuels Bad (and subsidised), Renewables good (and yes subsidised, but that’s OK)”. Despite this I got the "whatever" style comment of how "we should just stop subsidising fossil fuels".

So here I go again.  The infamous $5.2 Trillion headline has been widely debunked so will be ignored hereafter and whilst there are some places that have direct subsidies for production, in the vast majority these are “implied” subsides whereby the specific and very high petroleum taxes simply generate some rebates, and were discussed at length in the previous post.

However, there clearly are countries who subsidise the cost of (notably) petroleum products to their citizens. The headline number is often mentioned “$426bn” or "$372bn" or some such. A far cry from the debunked $5.2 Trillion, but still a big number, but you have to dig pretty hard to see who these bad actors are. The platitudinous headline is “fossil fuels subsides to consumers must stop” or in more thoughtful works, “should be swapped to subsidies for renewables”. Let’s just ignore that petroleum product molecules and renewable electrons are not always interchangeable, especially around transport.

Globally there are still more subsidies directed toward fossil fuel consumers and producers than toward renewable energy: currently around USD 372 billion is spent on producer and consumer fossil fuel subsidies, overshadowing the USD 100 billion in support to renewable energy (Best et al., 2015; International Energy Agency [IEA], 2018b; Merrill et al., 2017).

Note in the 33 pages of this report there is no definition of these subsidies other than the above - it is just gospel that they exist and must be swapped out. When digging, I found the cited IEA reference has no mention of subsidies at all in it, the Merrill paper is better, and references price-gap analysis.

Spoiler Alert: the countries that subsidise their citizens for say gasoline are clearly globally significant, get them to change and all will be well in the world…

So, we have well-meaning think-tanks in various OECD countries fretting about how these generally poor countries (major oil producing countries excepted) choose to subsidise fossil fuels for their citizens. Note that access to affordable energy is one key element of the Energy Trilemma (as well as UN SDG7) and a key leading-indicator of Human Development Index progression, which includes things such as improved female education and consequent lower birth rates - so maybe its not all bad?

Get a Grip

Firstly, I have estimated the untaxed cost of fuel. In the UK, the tax is big portion, and using data of 2016 pump-prices and the 2016 tax take (and cross-checking with today’s pump-price and tax-take) I estimate that petrol without tax would be about US$0.55/litre in the UK

The above from the unexpectedly humorous Office of National Statistics, who dryly note

Even if fuel were given away for free, someone would still have to foot the cost at the pumps of 70 pence per litre; liable in fuel duty and VAT.

Happily, there are statistics from various sources on petrol (gasoline) prices and consumption for many countries. By splicing together a couple of publicly available datasets, we can apply a form of price-gap analysis and take the hypothesis that those who pay more than $55c are paying taxes and those below the threshold are receiving subsidies. It’s clearly not that simple as there are transportation costs to be considered, but these are pretty small in the overall picture.

Firstly, by this simple threshold analysis, we can see that in the vast majority of countries, citizens pay taxes, and only a relatively few receive subsidies – so on a global scale, is this a problem that needs fixing? (Chart below)

Secondly, if we weight the price paid by the daily volume used, the relative insignificance of these sinner countries is even more stark. In round numbers 95% of all gasoline sold in the world contributes tax revenues and only 5% receives subsidies. Maybe that 5% is too much for some minds, but I suspect those citizens may not want to sacrifice their basic energy needs for such small global impact. (Chart below: and note the USA is the first data point and is off the chart at a value of 6000+, the Y-axis is truncated at 2000)

There is a separate question as to whether such a fuel subsidy is fair – essentially the better-off who need petroleum products get a subsidy and in theory, this cost is socialized across all citizens. Whilst that would appear to be stealing from the poor to give to the rich, it is probably less stark – given that the poorer sections of society are dominantly in the informal sector and won’t be paying taxes in any case.

Pay to Play

At the end of the day – a calculation that needs to be done on a societal level is the level-playing field. To really compare we would need to remove subsides from both sides of the equations. As noted in the above – “fossil fuel” subsidies in consumption are vastly out-weighed by the taxes received. Fully 95% on a volume weighted basis pay tax and only 5% receive subsidies.

Conversely, there is almost no tax on renewables either at production or consumption (charging an EV has no specific fuel tax for example). Not unsurprisingly there are direct subsidies - both in the form of grants as well as in the form or guarantee pricing: by way of example Orsetd received 16% (US$1.2 billion) of its total 2019 revenues in the form of such subsides.

Firstly, is there any scenario in which a 100% (or some number) of low-carbon energy supply to the world (not electricity, but total energy) could be supplied at the same price to consumers AND contribute as much in taxes to producing and consuming states? That would be a start to a discussion on whether there is any EROEI equivalence.

Secondly, the fully level playing field would require that the externalities of pollution be priced into the cost of fossil-fuels (assuming these could be accurately quantified), so two possibilities come to mind

(1)  All the taxes currently levied on production and consumption of fossil fuels be ring-fenced and used for mitigation of the externalites – although the difficulty of this would be obvious if even only looking at the UK – losing ￡28 billion of annual fuel tax revenue and some ￡3bn North Sea production Tax revenue out of the national budget would leave a gaping hole about the size of 25% of the entire NHS budget. What would the UK give up to divert these tax revenues to mitigation efforts?

(2)  Carbon taxes be added on top of the onerous taxes at production and consumption - again ring-fenced for use exclusively for mitigation efforts.

That worked well last time...