Global Subsidies Initiative

1)  Solar parity and my cousin Jeff.  Congrats to Jeff Koplow, an energy researcher at Sandia National Labs, for being named the inaugural recipient of the Innovator in Residence Fellowship awarded by DOE's SunShot Initiative.  He'll lead a multi-disciplinary team in attacking key limits in current PV systems.  

Jeff's been working on energy innovation for a very long time, and some of his earlier inventions offer large benefits to the US energy sector.  These include the Sandia Cooler, a much more efficient way to cool heat exchangers and CPUs; and Twistact (winner of an Outstanding Technology Development Award), a new way to connect turbines to the gear box without a sliding contact, electrical arcing, or the need for rare earth metals.  

2)  Fossil fuel subsidy reform update from COP21 (and nukes too). "The Beginning of the End of Fossil Fuel Subsidies," a blog update from Paris by staff of the Global Subsidies Initiate, summarizes some of the interesting and promising developments on fossil fuel subsidies at COP21.  Read their take here; there is real progress.

Here's one of the (albeit non-scientific) benchmarks I use to gauge progress on subsidy reform:

• 25 years ago, almost nobody outside of NGOs would talk about energy subsidies.  (I once had a potential faculty advisor for my update on US energy subsidies ask why I didn't want to work on something "useful").
• 15 years ago, heads of environmental and public health ministries would willingly talk about energy subsidies.
• As of about 7 years ago, heads of financial ministries would willingly talk about energy subsidies.
• Today, even many heads of state willingly talk about energy subsidies -- at least fossil fuel subsidies.  Conversations about subsidies to the nuclear fuel cycle will have to wait another few years, I suppose.

For a report on the push for massive new subsidies to nuclear at COP21, here's a summary from Michael Mariotte of NIRs.

3)  Addressing tax exemptions to fuel used in international shipping.  Subsidies that almost nobody sees or thinks about can be particularly distortionary.  In darkness, the biggest mushrooms grow -- or something like that.  Wholesale exemptions of fuels used in international ship, air, and rail transport from taxation is one example of issue (the subsidy even made my top 10 most distortionary energy subsidies list).

Particularly for activities that cut across multiple countries, the options available to correct the problem can be heavily constrained by pre-existing international agreements.  Those agreements were often developed to with trade or sovereignty issues in mind; transparent pricing of natural resources was generally not a factor.

One possible solution to this conundrum is put forth in a recent working paper ("Drying up tax havens-A mechanism to unilaterally tax maritime emissions while satisfying extraterritoriality, tax competition and political constraints") by Dirk Heine, Susanne Gäde, Goran Dominioni, Beatriz Martínez Romera, and Arne Pieters.  As the title implies, there are a fair number of hurdles any solution needs to meet.  The authors focus on using cargo as the tax base rather than the fuel itself; and structuring the tax levy formula such that higher efficiency vessels end up with a lower tax.  To avoid distorting port-use decisions, transhipped cargo would not incur the tax.  There is contact information for the authors in case any of you have additional suggestions or ideas.  There is also a summary description of their plan here, which provides a quick overview of the approach.

4)  Limiting export credit support for coal plants.  Export credit subsidies have been an area much talked about, but too often ignored when subsidy reform plans are put forth.  The subsidies are often tough to value, but can be quite large and tip high risk projects in environmentally-sensitive regions of the world from "no-go" to actionable.  The subsidies generally work by offering direct loans or guarantees at below the market rates that firm or industry would normally be able to receive.  The support may also generate an incremental subsidy by enabling high risk enterprises to utilize higher debt-to-equity ratios than would otherwise be possible, reducing the project's weighted average cost of capital.

Against this backdrop, an agreement among OECD nations to significantly reduce their ability to finance the export of low-efficiency coal-fired power plants and equipment is a very positive step.  Read the agreement here.

5)  Charles Koch, one of the Koch brothers, argues for subsidy elimination.  It's hard to imagine the whipsawing that must have been ripping through Charles Koch as, year-after-year, his push for small government, free market libertarianism ran smack into his affinity for the array of special government subsidies that have benefited his oil, gas, and now paper operations for generations.  Maybe his latest book, Good Profit: How Creating Value for Others Built One of the World's Most Successful Companies, is his effort to finally reach an internal cease fire.

To his credit, Koch does acknowledge he's been a subsidy beneficiary.  And, I do agree with a core premise of his criticism:  that our convoluted and complex system of subsidies tends to favor the well-connected and the wealthy, replacing economic viability with political connections in the selection of markplace winners.  Lower income quintiles clearly need the support more than the rich.  Similarly, on the corporate site, the new companies that will create the jobs and industries of our future are generally too small to have lobbying arms.

How big are subsidies to Koch-related firms?  This article pegs the figure at about $200 million since 1990, based on data from DC NGO Good Jobs First.  I consider this a low estimate, probably really low.  The Good Jobs First data sources don't always pick up subsidies through credit or insurance markets.  Non-standard ones, such as the "black liquor" tax break that many of the paper companies tapped into by stretching a pre-existing rule targeted as new fuels, are also often missing.  Data on privately-owned Koch subsidiary Georgia Pacific are hard to come by, but given its scale, this tax break alone could have exceeded $200m.  In fact, this analysis estimated black liquor subsidies to Georgia Pacific just in 2009 at $1 billion.  Finally, the private nature of Koch means commonly-available tax breaks to oil and gas may not show up in the $200m figure either.

The point here isn't to attack Koch for saying corporate welfare should be eliminated.  The subsidy trough is a crowded one, so the limiting the push for reform only to those who are "pure" enough not to have been subsidized would be foolhardy.  If Charles is serious about finally reforming subsidies, this is a good thing.  Properly done, the changes would improve the economic vitality of the country going forward. 

But one should not take the input of Koch or other current beneficiaries blindly.  It is vital for anybody working on subsidy reform to read the small print on any proposal to be sure there are no surprise gaps.  Varying definitions (or more perjoratively, a definitional sleight-of-hand) can coincidently eliminate the subsidies to competitors while keeping their own.

Another roundup of interesting tidbits from the world of government subsidies.

1)  Nuclear:  A new age of nuclear energy is about to dawn?  Optimism is a good thing, and Michael Brush of the Fiscal Times certainly exudes it.  But optimism probably shouldn't lead you to invest your 401(k) in a bunch of nuclear utility stocks. 

In a recent article ("A new age of nuclear energy is about to dawn"), Brush connects rising prices for uranium to rising fortunes for the nuclear industry overall -- a "move that could signal trouble ahead for the anti-nuke crowd..."  Recent spot prices ar $40 per pound are up sharply from last summer he notes, and

More importantly, it reverses a grinding three-year decline that seemed to signal the end of the nuclear era following the horrible 2011 disaster at Fukushima, Japan.

Is this just a typical bear market rally that will peter out?  Or is the recent strength in uranium a sing of a new nuclear era ahead that will drive uranium prices and mining stocks even higher?

It's probably the latter.

His rationale?  (1) Rising populations and demands for electric power -- not the intermittent type, but "real" power like centralized nuclear.  (2) Large nuclear investments from China, South Korea, India, Russia -- as well as a bunch of smaller countries that "plan to add plants."  (3) Dwindling supply of uranium as companies shuttered mining capacity when uranium prices fell.

I'm willing to concede that uranium prices may spike for awhile as supply readjusts from the recent downturn.  But uranium prices are a very small cost factor in the overall economics of nuclear plants, and nukes are being roundly outcompeted in a host of more important criteria such a cost, flexibility, and build times.

Brush had similar views back in 2010, when he argued that the oil spill in the Gulf opened the door to more nuclear energy (no matter that oil barely competes in power markets).  We'll check back in on the issue in 2020.

2)  Ecosystems:  Subsidies and Biodiversity Loss.  There is a clear connection between subsidies to water, timber, agriculture, energy, construction, and road networks and the inevitable loss of habitat as human industry and homes displace natural landscapes.  Unfortunately, there have been few systematic attempts to document the interactions between all of these areas and loss of critical biodiversity. Ideally, I'd like to see this type of review examining the role of government subsidies on the loss of pristine natural areas (like the Arctic) and biodiversity hotspots around the globe.

Absent the perfect study, a workgroup led by Guillaume Sainteny a few years back did a pretty good one -- examining many relevant pressures, albeit in France instead of in global biodiversity hotspot.  But the detailed look is very helpful for France, and also a good model for what could, and what should, be done elsewhere.  Although the original study (in French only) was released in 2011, an English translation has just come out.  You can access both versions here.

3)  Fossil Fuels:  IMF study finds fossil fuel subsidies even larger than before.  The International Monetary Fund released an update to earlier versions of its work to quantify global subsidies to fossil fuels.  Last time around, they found that the subsidies were really, really big (about $2 trillion per year).  This time, they found they are really, really, really big -- $5.3 trillion per year. 

This IMF paper deserves a more detailed blog posting, as there is a great deal to talk about and their continued focus on this area -- particularly on trying to monetize the externalities, is very important.  I will hopefully have time to do a more detailed discussion of the paper in the near future.  For the time being, however, it is useful to keep in mind that the IMF's numbers are much larger than other estimates (for example, by the OECD, IEA, and World Bank) primarily because of their incorporation of negative externalities (environmental as well as those related to traffic) and their imputation of baseline taxes on fuels if current levels are too low or non-existent (such as a national sales tax on motor fuels in the US). 

Each iteration of their work adds more detail on their externality estimates, and this extra detail should over time help broaden consensus on externality valuation. As of now, however, there is still fairly wide disagreement on some of these values and the IMF's attribution to fuels of some costs more directly linked to patterns of travel, vehicle type, or vehicle weight.  There are also some disagreements between institutions on which costs should be lumped together:  the others focus more on fiscal subsidies, where government actions provide subsidies to particular market players.  Externalities, in contrast, result from government inaction.  I personally feel both elements are important, though mixing them together may not result in a greater impetus or political ability to reform the distortionary policies.

As a practical matter, I'm not sure that whether annual subsidies are $1 trillion or $5 trillion makes that much difference in terms of accelerating the transition away from fossil fuels.  Subsidy reform even at the lower levels would create a very substantial tailwind on fossil-fuel substitutes and conservation; and trying to modify the policies at the upper end of the range may instead trigger widespread political gridlock or riots (since the prices of core commodities would rise so much). 

For more discussion on some of the methodological differences between global subsidy estimates, have a look at this recent World Bank working paper  I co-wrote with Masami Kojima.  There's also an introduction we did on the World Bank's Let Talk Development blog.

4)  Fossil Fuels:  GSI modeling of reforming fossil fuel subsidies to consumers indicates ghg reductions of 6-13% by 2050.  More important analysis from my friends at the Global Subsidies Institute.  The work was conducted with the Nordic Council of Ministers.  You can read more details here.

The Nordic countries have been strong supporters of increased transparency on fossil fuel subsidies for many years.

5)  Nuclear: NRC "caves" on foreign ownership of US nuclear reactors.  The issue was central enough to be part of the original Atomic Energy Act, but the Nuclear Regulatory Commission recently voted unanimously to allow a "graded" approach to foreign ownership.  This would still prevent 100% foreign ownership, but would allow much higher levels of foreign ownership, control, and financing than is currently permitted.  And having unanimous votes on standards weakening in the nuclear sector never seems a good thing.

NEI has viewed the old regulations as unnecessarily hampering foreign investment.  That's par for the course:  pretty much any regulation unnecessarily hampers nuclear progress in their view.  But if foreign money from China or Russia comes in to build subsidized reactors in the US, it will raise all sorts of complicated trade, geopolitical, and competitive issues - both in the nuclear sector and beyond.  It seems a bit odd that the Obama administration was so worried about the terms and transparency of Chinese-led $100 billion Asian Infrastructure Investment Bank, yet seems fine with Chinese money building what will inevitably be subsidized nuclear infrastructure in the US. 

Maybe the best case outcome for the NRC's recent vote would be if the subsidized reactors come from France instead...

6)  Nuclear:  French nukes not doing so well.  So I'm linking to two Michael Mariotte posts in a row.  He raises interesting and important issues, and presents them well.  And in this post, he notes that the nuclear powerhouse known as France has been messing up items both big and small, and is having an increasingly difficult time convincing people to take a risk on their services going forward (not that the problems with France's nuclear program are actually new).  So I guess maybe we ought not count on France being the country to subsidize new foreign-controlled reactors in the US.

Subsidy measurement is a pre-requisite to any effective program of subsidy reform, whether through the WTO, the G20, or domestic policy initiatives.  Too often, policy makers take accurate and comprehensive subsidy measurement as a given.  It isn't.  In fact, making subsidies difficult to measure can be part of a political strategy to slow or block reform.  It is no accident that subsidy mechanisms able to transfer value without easily-tracked government cash flows are popular -- purchase mandates, tax breaks and loan guarantees are examples. 

In light of the growing recognition that fossil fuel subsidy reform needs to occur in tandem with efforts to constrain carbon through taxes or caps, and that information on producer subsidies is often lacking, Earth Track teamed up with the Global Subsidies Initiative in Geneva to evaluate the availability of subsidy data in four case study countries. The FiFo Institute of Public Economics at the University of Cologne, and two independent energy researchers also supported the effort.

While we did identify a number of fossil fuel subsidies, the focus of this research was on data availability, examinining how information varied across subsidy types and countries.  The result of this effort, Mapping the Characteristics of Producer Subsidies: A review of pilot country studies has just been released.   The report provides an overview of data availability for each country, along with a more detailed subsidy data review in template form that includes url links to source materials.

Case studies of subsidy data availability were done for China, Germany, Indonesia, and the United States.  The countries were chosen to model data availability under a variety of conditions:  energy market importance, type of governance, and levels of transparency.  The project team hopes that others will replicate this work in a broader array of countries, and that the data review can be used to produce a detailed analysis of fossil fuels within the case study countries in the near future.

Among the key findings:

• Standardized review highlights data gaps, ensures systematic assessment of policies.  Many prior energy policy reviews have focused on the information that is most available within each country.  While intuitive, this approach may miss some of the most important subsidy policies, often less visible and that may never have been quantified.  To overcome this limitation, it is critical to use a standardized template of subsidy mechanisms, and for researchers to systematically assess each type of policy.  In addition to ensuring no types of subsidies are skipped, the template clearly highlights data gaps.  Some training of researchers so they become comfortable with less familiar transfer mechanisms will be needed. 
• Evaluation team requires mix of skills.  Accessing data proved to be quite difficult in countries with limited transparency.  The research requires a mixture of expertise to carry out successfully.  First, policy-type expertise is needed in order to evaluate complex subsidy mechanisms across countries.  Second, strong local knowledge of language, cultural operating norms, and governance structure is needed within each country in order to effectively navigate domestic data sources and bureaucracies. 
• General transparency aligns with accessibility of subsidy data.  Countries with a variety of mechanisms supporting data disclosure (e.g., private capital markets; audited financial statements even for public institutions; mandatory reporting and publication of detailed budgets, tax expenditures and credit subsidies; and public liability and rights to litigate) had better information in each category of subsidy than those countries without a culture of transparency.  The deficit can be partly addressed in less transparent countries by using more researchers with larger budgets.  Fully addressing the gaps, however, may not occur until the country itself views subsidy transparency as benefitting its own broader interests rather than harming them.  Building this case will be important, and will likely encompass fiscal, trade, environmental, and competiveness elements.
• Complex subsidy mechanisms had relatively worse data in all case study countries.  Though more transparent countries generally had more comprehensive and accessible subsidy data than less transparent countries in all categories, the relative quality of data within countries showed similar patterns.  For example, data on tax expenditures, credit subsidies, purchase mandates, and subsidies through government-owned enterprises were of relatively worse quality than direct expenditures in all countries evaluated.
• Sub-national subsidy data lacking in most cases.  Subsidy policies at the sub-national level (state/province, country, municipality) were poorly characterized and quantified in nearly all cases.
• Producer subsidies are significant even in developing world.  Conventional wisdom notes that the developing world primaily subsidizes fossil fuel consumers while the developed world primarily subsidizes producers.  Our case studies indicate that producer subsidies are also pervasive in the developing world.

Another important publication by the Global Subsidies Initiative exploring potential options for improved transparency on fossil fuel subsidies. The report was written by Tara Laan, who also did a great deal of analysis on Canadian biofuel subsidies last year.

Zero defect manufacturing doesn't work without good, real time data collection.  Managing business cycles doesn't work without good data on the macro-economy.  And addressing the many perverse economic and environmental outcomes from widespread subsidies to environmentally-harmful activities won't work without good information either.