fossil fuel subsidies

With so much focus on the US federal budget deficit, it is easy to forget that the directed legislation, subsidies, and political bias plaguing our national government exist at the state and local levels as well.  While this certainly complicates the process of trying to figure out who is getting what, Pennsyvlania Fossil Fuel Subsidies: An Overview, written by Christine Simeone at PennFuture, highlights that greater transparency is possible everywhere.

The report documents some of the long-lived biases in state tax codes that favor fossil fuel production and consumption.  For example, though nearly all goods and services have to pay a sales tax, fuel purchases don't.  This is clearly a subsidy that encourages more consumption.  Industry sometimes argues that fuels already pay too much relative to other industries.  Too often, however, those comparisons overlook the fact that many of the fuel taxes are not for general revenue purposes, but rather to pay for fuel-related infrastructure (e.g., roads), problems (mine reclamation or fuel tank cleanups), or in some cases even resource rents on the fuel being extracted. 

PennFuture's findings on taxes are generally in line with multi-state work done in the early 1990s by Joe Loper, then with the Alliance to Save Energy.   Loper's analysis is still among the best work I've seen on state-level energy subsidies.  He estimated that reductions or exemptions for energy from state sales taxes alone was worth $18 billion (1992$) per year.  At the time, rate reductions were highest for the residential and industrial sectors, and for gasoline.

There is probably room for dialogue on how to treat various tax exemptions in the subsidy tallies.  For example, if a particular fuel charge is earmarked entirely for roads, I wouldn't view agricultural exemptions as a subsidy so long as the vehicles using the fuel are used only on private roads.  In contrast, agricultural exemptions from fuel charges linked to general revenues or amelioration of fuel-ralated problems such as tanks would be a subsidy.  Another interesting issue involves governments exempting themselves from fuel taxes or charges, something the PennFuture report calls attention to.  The issue of "self-charging" comes in many forms:  not paying rent for space in public buildings or for services provided by other government agencies; getting discounted power from municipal utilities (an issue in my town); or not paying fuel taxes on energy used during government business. 

While at first blush instituting full cost recovery seems like a complicated way simply to have government pay itself, that view misses the core value of price signals.  Because governments compete with others (including other parts of the government) for space, energy, or other resources, charging full price is a necessary part of proper cost accounting and decision-making for government managers and for the taxpayers who fund them.  Full prices ensure governments see the proper incentives to invest in demand-reduction options (be it smaller offices or more efficient appliances), and that they contribute their fair share of public spending on energy-related clean-up or infrastructure.  It's useful to remember that corporations routinely charge different parts of their organization full price on required inputs for quite similar reasons.

What is striking about Simeone's listing of subsidies (see table below) is not just that a single state could potentially have tax subsidies favoring the use of conventional fuels of close to $3 billion per year, but also that PennFuture didn't do much to identify and quantify the many other non-tax subsidy mechanisms that exist in the state.  Pennsyvlania, for example, allows the use of waste coal to qualify under its renewable portfolio standards (albeit at a lower tier, and called "alternative" instead of "renewable").  PA is also an old coal state, and studies of TN, WV, and KY have found subsidies to coal roads and mine cleanup were large and continuing sources of government support to the fossil fuel sector -- spending that in some situations actually resulted in net losses to the state on coal operations.  Looking in more depth at some of these additional forms of support would seem a useful task for subsequent work.

One of the striking findings in the review of subsidy reporting to the G20 that Earth Track and Oil Change International published a few months back was how little subsidy information the countries actually made public.  This information holdback is clearly detrimental to meeting the commitment all of the member nations made to phase out fossil fuel subsidies, understandable though it may be from a geopolitical, strategic perspective.  As noted in the review, early reporters suffer from and early mover disadvantage -- facing potential retribution from "outed" subsidy recipients, litigation by trading partners, but little upside if other countries don't report with equal candor.

A leaked memo from Canada in March 2010 showed this dynamic playing out prior to G20 reporting deadlines.  The memo, prepared for the Canadian Finance Minister, laid out the options for full reporting or for finessing the agreement:

There are two broad possible approaches that Canada could take to this commitment:

1) Use the commitment as an opportunity to undertake selective rationalization of Canadian measures (which we recomment), or

2)  If Canada is not prepared to undertake any substantive reforms, minimize the obligation so that Canada can still position itself as the commitment. 

The country chose the latter.

Turns out Australia did much the same.  This was uncovered following a Freedom of Information Act request put into the Australian Treasury department by Greenpeace.  As summarized by the Australian Financial Review (subscription required):

Bureaucrats last year identified up to 17 federal fossil fuel subsidies – at a cost of more than $8 billion a year – that may have to be cut for Australia to meet a commitment it made as a member of the G20, even though the government told the international forum that no such subsidies existed...

The FOI documents, sought by Greenpeace and obtained by The Australian Financial Review, reveal a long process in which burueaucrats in Treasury, the Department of Resources, Energy and Tourism (DRET) and other departments gradually whittled down the list of subsidies that might fall within the commitment Australia gave to the G20.

The bureaucrats argued that Australila should not go further than other countries in offering up subsidies, or that the subsidies were not relevant because they applied to exploration rather than production, or by disputing whether the subsidies were ‘inefficient’ and encouraged ‘wasteful’ consumption.

But the bureaucrats also show an extreme sensitivity to publicity:  some exchanges between them state that it might be better not to nominate subsidies, lest it be seen as an admission that the subsidies might actually boost fossil fuel consumption.

Overcoming these initial barriers is quite a challenging problem.  Our review of data sources on fossil fuel subsidies in China, for example, indicated widespread supports to many parts of the fuel cycle.  However, there was quite poor transparency, making quantification difficult or impossible.  China reported virtually nothing to the G20 as well. And the list goes on.

The WTO tried to solve the first mover disadvantage problem by forcing everybody to report on all subsidies in on a regular basis as a condition of their WTO membership.  It was a stick to go along the with carrot of market access.  But the Agreement on Subsidies and Countervailing Measures has no enforcement mechanism, and every country provides some subsidies, so there is no reporting and very little challenge by other WTO members.

The likelihood of governments pulling together all of this information initially is low.  Doing the initial rounds of discovery and subsidy reporting is more likely to come through trade cases and non-governmental agencies.  Once a first round of data is made public, then the countries may aquiesce to full reporting.