LAST time it met, in 2009, the G20 took a stand against a little discussed problem that unites environmentalists and economists: fossil-fuel subsidies. Over the course of the subsequent year, the nations contributed to a list of the “inefficient” subsidies they supported and the things they planned to do about it. So far, this list is unimpressive.
In its September 2009 Communiqué from Pittsburgh, the G20 nations (“Group of Twenty” nations that include the largest economies in the world) committed to “rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption.”
This joint report to the G20 Finance Ministers and Leaders was issued by the IEA, OPEC, OECD and World Bank in response to a request by G20 Leaders when they met in Pittsburgh in September 2009. At that time, leaders agreed to “rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption” and asked the study authors to jointly provide "an analysis of the scope of energy subsidies and suggestions for the implementation of this G20 country initiative”.
Ben Sills of BusinessWeek reports today that the International Energy Agency (IEA) estimates global fossil fuel subsidies in 2008 at $557 billion. The figure is based on an interview the magazine did with Fatih Birol, Chief Economist of the International Energy Agency.
More than half a trillion dollars per year in subsidies to fossil fuels is, indeed, a large number. However, based on other sources and other work I am doing, I believe it is too low. This conclusion is not based on any detailed information I've seen from IEA. While I attended an expert meeting in February on G20 fossil fuel subsidy reform and provided detailed comments on their draft joint report and estimation methodology, I have not been involved with the G20 subsidy reform process since that time. My rationale for concluding the numbers are too low include:
IMF numbers for oil alone were nearly as high. In February, the International Monetary Fund released its own analysis (blog post on report; link to report) of global subsidies to petroleum. They pegged oil subsidies for 2008 at at least $519 billion, much higher than the $312 billion IEA says went to oil during that same year.
IEA value is similar to past "price gap" estimates that form lower-bound for subsidy value. The figures for both IMF and IEA appear to be primarily "price gap" calculations that examine the difference between world prices and domestic prices for fuels. Price gap values tend to set the floor for subsidy levels, but miss many other policies that generate subsidies to various energy sources.
Earth Track case studies have found substantial data gaps in fossil fuel subsidy information. For the past year or so, I've been working with the Global Subsidies Initiative on a series of case studies that examine data availability on fossil fuel subsidies in four countries: the US, Germany, China, and Indonesia. Our review has turned up systematic weaknesses in data reporting and transparency in a number of key subsidy areas. These include tax subsidies; credit support especially for state-owned energy infrastructure and power plants; and insurance and indemnification subsidies. It is unlikely that IEA, even with its strong global relationships, was able to solve these substantial data gaps in the few months it has had to prepare its data set. As a result, it is likely that they have systematically undercounted certain types of subsidies in most of the countries evaluated. (If you would like to be notified when our case studies are publicly available, you can add your e-mail to our distribution list here).
Even ignoring the political challenges of reaching consensus, it would be unrealistic to think that IEA or any of the other parties involved with obtaining data for the G20 fossil fuel subsidy reform process (World Bank, OECD, and OPEC; along with many member countries and other organizations such as the IMF that also have input) could assemble a comprehensive data set on global subsidies in such a short time frame.
What will be important, however, is that IEA be clear about where it has not been able to measure subsidies; and that the Agency state how filling in those gaps would have influenced its reported numbers. If values from multiple sources exist but conflict, IEA should provide a range if the estimates are plausible.
Finally, where IEA's review on fossil fuel subsidies found that survey countries are simply not collecting needed data at all, the Agency needs to flag the areas for future attention and improvement. G20 subsidy reform needs to be viewed as a process, not as an event. However, it will not be a successful process unless rules for full disclosure are put in place and properly enforced.
UPDATE:
Some additional information on the IEA figures can be found in the Financial Times; and on the subsidy reform work program at the OECD web site. The FT notes that the current numbers are higher than IEA's prior estimates. (This would be consistent with the sharp increases in energy prices between 2007 and 2008; whether portions are also due to broader coverage of producer subsidies can't be discerned without more detailed information).
A reader also points out that part of the reason IEA's values are lower than IMF is that IEA's pick up a full year average for 2008, so include the subsequent declines later in the year. IMF's are based on subsidy rates at mid-year before the sharp price declines. Price gap subsidies tend to rise when energy prices rise quickly, as policy adjustments to raise prices in countries with consumer subsidies tend to lag.
Two final points. First, while IEA is the cited party on these estimates in both the FT and BusinessWeek articles, the work is being conducted by four international agencies (IEA, OECD, World Bank, and OPEC), not just one. And second, while it is not possible to tell at this stage for sure whether any types of subsidies have been systematically excluded, the current plan is to make the detailed basis for the estimates available in the fall. This would be quite helpful in building more systematic data coverage over time.
This report summarizes the Climate Policy Initiative Workshop, hosted at DIW Berlin, that took place in November 2009.
At their meeting in Pittsburgh in September 2009, G20 Leaders called for an additional evidence base to support efforts by the member nations to reform and remove fossil fuel subsidies. At a workshop in Berlin in November 2009 we discussed the definition and quantification of energy subsidies, the evaluation of their impact, and the political economy of their reform.
When people look for official information on US energy policy and trends, the Energy Information Administration (EIA), part of the US Department of Energy, is one of the first places they look. I look there too: EIA staff do great work in many areas; they are willing to talk about their work and assumptions; and they have developed a model of data sharing that I wish many more government departments would adopt.
But EIA's numbers on energy subsidies have always irked me, widely cited though they may be. The subsidy totals have been very low. The patterns across fuels have been extremely sensitive to estimate shifts in even a single program. The inclusion rules have often seemed arbitrary. For example, EIA has sometimes excluded programs based on arguments that applied equally to subsidies the Administration did include. Other times (e.g., with public power), EIA's reports have carefully developed a theoretical framework on how to evaluate the subsidies, quantified how big they are, and then failed to include the results of all this work in its subsidy tallies.
The point here is not to cast stones. There are resource constraints, narrow research mandates from Congressional requestors (with a bit of a political angle, I'm told), and a variety of other factors that have led to the outcomes we see. But as the role of energy subsidy reform is increasingly recognized as a central tenet in a rational and cost-efficient response to climate change; and as fossil fuel subsidy phaseouts hit the realm of the G20, incomplete or inaccurate subsidy data becomes a big problem.
Today, I've am happy to release a detailed review of EIA's subsidy numbers. EIA Energy Subsidy Estimates: A Review of Assumptions and Omissions explores EIA's numbers and a variety of the reasons they are so low (see table below). I have no doubt EIA will continue to be tasked with tracking government energy subsidies; my hope is that this analysis will help them do it better in the future.
I see this Review as a companion piece to a paper I did last summer for the International Institute for Sustainable Development on the strengths and weakness of the "price gap" metric, the most common approach used to measure energy subsidies globally.
There are some important cross-cutting themes:
First, accurate subsidy measurement is important, but it is also hard. Political pressure makes that measurement even more difficult. Fixing this problem will require a signficant commitment by governments, and likely by many other parties as well.
Second, as was the case with corporate financial reporting, improvements to subsidy data need to be viewed as a process rather than an event. We will not have comprehensive data on fossil fuel subsidies by the G20 deadline; and likely not two or even five years from now either. But it also took a very long time to figure out a reasonable way to account for environmental or pension liabilities in corporate financial reports.
Even with the data challenges, and perhaps partly because of them, countries that are serious about reforming subsidies to environmentally harmful activities need to focus much more on building a system and process for doing so. They need to tackle the problem in a structured way, but in phases.
What I've seen in international efforts over the past 20 years has mostly been trying to re-task existing institutions to deal with the challenge of subsidy measurement and data collection. This approach has not be very successful. Often there is historical baggage, competing demands, or operating rules that impede the task at hand. There may be an existing skill base that addresses some -- but not all -- of the needs for the new task; but limited will, budget, or expertise to build out the needed areas. While using existing capacity makes sense in the short-term, I believe over the longer term a specialized and independent structure will need to be set up.
I think we can gain many insights on what this independent structure should look like by studying relevant institutional structures that have worked in other areas. Some of the ones I think would offer valuable lessons include:
The initiation of systematic collection of macroeconomic statistics throughout the world after the global Depression in the 1930s.
The accounting standards boards (FASB, GASB, IASB) that iteratively, and substantially independently of government, have evolved standardized rules for corporate reporting.
The International Standards Organisation that has developed many challenging standards, such as production quality, that have been compelling enough for private firms to go to great lengths to meet iteratively over time.
Finding a handful of failures would also be quite useful in charting the path forward and what might go wrong.
It is inevitable that member governments of the G20 will waste innumerable hours fighting over how to define a "subsidy" and work to extend the number of years they can keep an existing subsidy and still meet the "medium term" phaseout pledge. But if this is all that happens, we will come up empty. Less political entities should begin thinking about institutional structure now. Just as accurate and verifiable information on corporations was a pre-requisite for the development of mature capital markets, the benefits of accurate and verifiable information on subsidies will also be enormous -- not only from fiscal savings, but also through less expensive and large scale gains in environmental quality and poverty reduction.
Related documents on EIA subsidy values and subsidy reform:
