Home The Washington Diplomat September 2016 The Burning Debate Over Fossil Fuel Subsidies

The Burning Debate Over Fossil Fuel Subsidies

The Burning Debate Over Fossil Fuel Subsidies

For the past seven years, the world’s economic powerhouses have repeatedly promised but failed to deliver a deadline to eliminate the staggering costs of fossil fuel subsidies that increase carbon emissions and the potentially devastating effects of climate change.

Photo: Larry Luxner
Oil derricks rise from Venezuela’s petroleum-rich Lake Maracaibo.

G20 governments have paid $444 billion a year for oil, natural gas and coal subsidies, including $20 billion by the United States, according to a report by the Overseas Development Institute and Oil Change International. Worldwide, fossil fuel subsidies totaled $550 billion in 2013, more than four times the amount of subsidies for renewable energy, the International Energy Agency reported. Despite the enormous expense, the international community is deeply divided over the proposed benefits and environmental consequences of fossil fuel subsidies, with some countries, including the United States and United Kingdom, taking conflicting positions on both sides of the issue.

Critics of fossil fuel subsidies argue that they not only contribute to pollution and climate change — thereby costing governments even more money in the long run — they also drain budgets and divert funds from other spending priorities, such as health care and education.

“Fuel subsidies impose a particularly significant fiscal toll on developing countries,” wrote Isobel Coleman of the Council on Foreign Relations in a 2014 report. “Fuel subsidies are particularly burdensome in the Middle East and North Africa (MENA) region, which accounts for half of all fuel subsidy spending. Yemen, for example, spends 6 percent of its GDP on fuel subsidies, more than its budget for much-needed infrastructure and social spending. Egypt spends over 10 percent of its GDP on fossil fuel subsidies, contributing significantly to the country’s budget problems.”

Yet many of those same MENA governments say reducing subsidies, and thereby hiking energy costs for consumers, could spark a popular revolt, especially in oil-rich nations where cheap gas and electricity are considered part of the social contract. And while wealthier nations such as the U.S. have been weaning themselves off of fossil fuels in favor of cleaner energy, the economies of many developing countries, from Brazil to India, continue to be powered by coal, oil and natural gas. Even developed nations such as Japan have struggled to rein in credits and tax breaks to energy companies that offer cheaper alternatives to renewables.

At their summit this past June in China, the G20 leaders couldn’t agree on a deadline for phasing out fossil fuel subsidies, even though they have pledged to do so since 2009. Those subsidies are opposed by President Barack Obama, the United Nations, European Union and hundreds of nongovernmental organizations and environmental groups. However, there was some progress when the G7 nations (including the United States, United Kingdom, Canada, France, Germany, Italy and Japan, as well as the European Union) met in May and agreed for the first time to end most “inefficient” fossil fuel subsidies by 2025.

But while making that promise, the United Kingdom is the only G7 country that has recently increased its fossil fuel subsidies while also cutting investments in renewable energy. New tax breaks approved last year for North Sea oil and gas production will increase profits for energy companies, including many that are foreign-owned, while costing the British government more than 1 billion pounds over the next five years. The subsidies will encourage the use of fossil fuels despite their impact on climate change, with the British government estimating that oil and gas will continue to meet 70 percent of the United Kingdom’s energy needs until 2030. With approximately 200 companies already operating in the North Sea and oil reserves running low, some environmental groups questioned the need to stimulate production there at a large expense to taxpayers.

Unlike the G20, the G7 doesn’t include Saudi Arabia, Russia and China, which have all opposed the elimination of fossil fuel subsidies for various reasons, said Varun Sivaram, a fellow at the Council on Foreign Relations. The royal Saudi government is inextricably linked with state-owned Saudi Aramco, the world’s largest energy company. Russia, one of the world’s largest oil producers, has been hammered by falling oil prices, with half of its federal budget dependent on oil and gas industry revenue. “It’s difficult to imagine a world where Saudi Arabia will remove its subsidies, as well as Russia,” Sivaram said.

However, Saudi Arabia can’t withstand the financial fallout from plummeting oil prices unscathed. Faced with a rising deficit, Saudi Arabia has slashed domestic spending and scaled back some consumer-based fossil fuel subsidies that artificially lowered the price of fuel for its citizens. Saudi Arabia increased its in-country gasoline prices by 50 percent last year, while Bahrain raised gas prices for its residents by 56 percent and Qatar by 30 percent, although their subsidized rates are still well below market levels. The reforms could reduce wasteful gas use by consumers in the Middle East, where oil consumption has grown almost four times faster than the worldwide average, in part because subsidized gas is so cheap.

Photo: Herry Lawford, London, UK – MongoliaUploaded by Zolo / CC BY 2.0
A coal mine is seen in Hailar, China. The elimination of fossil fuel subsidies in China, which is the world’s largest producer and consumer of coal, raises internal energy security concerns.

China is the world’s largest producer and consumer of coal and the elimination of subsidies there would raise internal energy security concerns, but China’s extreme air pollution is accelerating momentum to reduce fossil fuel subsidies or at least talk about it, Sivaram said.

The groundbreaking climate change accord signed by nearly 200 countries in Paris last year set a goal of limiting increases in global temperatures to “well below” 2 degrees Celsius and committing $100 billion a year by 2020 for climate change initiatives. But the accord didn’t address fossil fuel subsidies because they are a divisive political issue, said Alex Doukas, a senior campaigner with Oil Change International, a nonprofit opposed to reliance on fossil fuels.

The World Bank also has been caught on both sides of the controversy, with President Jim Yong Kim calling for an end to fossil fuel subsidies even though the World Bank has increased its funding of fossil fuel projects in recent years, including $2 billion in financing last fiscal year for oil, gas and coal projects. “Despite all the big words and rhetoric from these big institutions, the real situation is often different,” Doukas said. On the flip side, the World Bank also is a partner in the Climate Investment Funds, which has pledged $780 million in financing to scale up renewable energy in developing countries.

These contradictions also hit closer to home. While the Obama administration has pushed to reduce fossil fuel subsidies, Congress supports those subsidies that profit oil and gas companies and cost taxpayers $20 billion a year. One subsidy allows companies to claim deductions for oil spills. Even though a federal judge found BP grossly negligent for the Deepwater Horizon oil rig explosion — the largest marine oil spill in U.S. history — BP still claimed a $9.9 billion tax deduction in 2010 for its reported $32 billion in clean-up costs after the accident, which killed 11 workers and polluted the Gulf of Mexico with more than 200 million gallons of oil. Through an unrelated tax break, BP may claim more than $15 billion in tax deductions for its $20 billion settlement with the Justice Department for environmental and clean-up damages, resulting in an unusual situation where the federal government may end up paying most of the settlement in a lawsuit that it won.

Oil and gas companies and trade groups have spent millions on lobbying and campaign contributions to mostly Republican legislators in Congress to preserve fossil fuel subsidies. The American Petroleum Institute (API), the largest oil and gas trade association, which merged with the National Gas Alliance, spent almost $8 million last year lobbying Congress. Many Senate Republicans who received API campaign contributions helped block Democratic-led bills to eliminate fossil fuel subsidies. In February, Republicans killed an amendment sponsored by Sen. Brian Schatz (D-Hawaii) that would have phased out some fossil fuel subsidies over a four-year period on the same schedule as the phasing out of tax credits for wind energy that had expired.

Many fossil fuel subsidies are almost a century old and are permanent sections of the tax code, while renewable energy subsidies often are temporary, creating partisan battles when they need to be renewed, said Lukas Ross, a climate and energy campaigner at the environmental nonprofit Friends of the Earth. “We continue to emit carbon into the atmosphere without pricing the cost this is inflicting on present and future generations,” he said. “That’s not just a subsidy. It’s in effect climate change denial that is being embedded in our political and economic system.”

API also has spent vast sums lobbying the public through ads on energy issues, attack ads against Democratic candidates and other public relations efforts. From 2008 to 2012, API paid more than $327 million to one public relations firm, according to an investigation by the Center for Public Integrity. API claims on its website that the elimination of fossil fuel subsidies would amount to harmful tax increases that would “discourage oil and natural gas production, lead to fewer well-paying American jobs, increase our reliance on foreign imports and potentially contribute to higher energy costs for consumers.” An API spokesman didn’t respond to several requests for comment.

However, independent reports have undermined many of those claims. A study by Joseph Aldy, a Harvard University associate professor and former White House energy policy advisor, found the elimination of subsidies would have a negligible impact on U.S. oil and gas production, which is more closely linked to technological advances and the price of oil. Since 2014, U.S. oil and gas companies have eliminated more than 100,000 jobs as the price of oil plummeted, even though they were still receiving subsidies. Despite large oil reserves and low prices, some companies are still ramping up production to generate profits for stockholders, even though that strategy could keep oil prices low. ExxonMobil, the world’s largest publicly traded oil company, reported that fourth-quarter earnings had fallen 58 percent last year to the lowest quarter earnings since 2002. Exxon has shed one-fifth of its workforce over the past five years, yet the company is still boosting oil production by nearly 5 percent.

Another report released last month by the Council on Foreign Relations found that fossil fuel subsidies don’t “directly and materially improve U.S. energy security or mitigate climate change.” The elimination of the three largest oil and gas tax breaks could save the federal government more than $4 billion per year and “could enhance U.S. influence to advocate for international climate action,” the report stated.

Across the world, fossil fuel subsidies may include direct government spending, tax breaks, investments by state-owned enterprises or public financing from government-controlled banks. While most U.S. subsidies boost the profits of private companies through tax breaks, many countries, such as Saudi Arabia, subsidize the price of fuel for their own residents because it’s politically popular, but those subsidies increase fuel consumption because gas is so cheap. “If you don’t follow market signals, then you don’t follow supply and demand,” Sivaram said. “You use more fuel and contribute to more carbon emissions.”

The drastic drop in oil prices has provided an opportunity to curtail some of those subsidies without creating a public backlash, Sivaram said. The price of oil plummeted from more than $110 per barrel in 2014 to a low of $27 per barrel earlier this year before increasing slowly to $45 per barrel last month. Several countries, including India, Indonesia, Egypt and the UAE, have reduced or eliminated some consumer-based subsidies, but that situation could change if oil prices rise and politicians face protests over high fuel costs, Sivaram said. In 2012, Indonesia spent one-fifth of its federal budget on fossil fuel subsidies, more than three times government spending on infrastructure projects or health programs. Since oil prices have dropped, Indonesia has become a leader in reducing fossil fuel subsidies, with an expected savings of $18 billion per year that will help reduce deficits and increase spending on infrastructure and social services.

Despite the enormous cost of fossil fuel subsidies, there hasn’t been a groundswell of opposition by the American public, but that might change if more people are informed about the issue and realize the damaging impact of those subsidies on both government budgets and climate change, Doukas said.

“Even though the price and cost of renewable energy is going down, that progress is being undermined by the huge amount going to fossil fuel subsidies,” Doukas said. “These are handouts that go to the most polluting and most profitable companies on the planet.”

About the Author

Brendan L. Smith (www.brendanlsmith.com) is a freelance writer in Washington, D.C.