OECD

PJM Interconnection is a regional transmission operator (RTO) serving more than 60 million customers in 13 states and the District of Columbia.  The service region is centered in the mid-Atlantic region of the United States. Incumbent base load generators within PJM have complained that subsidies to renewable resources have been cutting their ability to win capacity market auctions, stripping them of revenue, and harming them competitively. They have been proposing adjustment factors that would improve their competitive position by adjusting bid prices to exclude the subsidy.

These proposals have been contentious, and PJM established the Capacity Construct/Senior Policy Task Force to work through them. From my perspective, two features of conventional generators are problematic for their case. The first is that while renewables play a growing role in energy markets, they are still quite small in capacity markets. Competitive pressures, such as from new gas plants, have been much more significant.

The second is that government subsidies to energy -- at all levels of government -- have been around for a very long time.  Indeed, many of these very same conventional energy resources have also received significant subsidies for their entire operating lives. For some, subsidies helped them to reduce plant construction costs. Others have reduced their cost of input fuels, a significant cost factor in fossil plants. Still others have shifted the long-term costs of fuel extraction or refining, accident risks, or managing toxic wastes from the power plant to taxpayers or plant neighbors.  Risk shifting is particularly important with regards to coal and nuclear.

To demonstrate the complexity of the situation, working with the Natural Resources Defense Council, I assembled an initial listing of state-level subsidies to conventional energy within PJM states. Data compiled by the OECD in Paris, and by Good Jobs First, an NGO, were extremely helpful inputs.

Although the timeline was short and it was impossible to capture everything, the listing is nonetheless long. The figures are sometimes quite big as well.  The unfunded cost to remediate abandoned coal mine sites within PJM states, for example, exceeds $8 billion and the region comprises nearly 80% of the national total.

The list is available here or on the PJM website (file in Excel).  If you know of big ones we are missing, please email me.

For more on the general issues before PJM, Jennifer Chen of NRDC has a blog post and statement before FERC that summarizes it well.  A recent paper by Amory Lovins at the Rocky Mountain Institute challenges some of the claims by coal and nuclear plants that they deserve special subsidies because of their provision of baseload dispatchable power. 

The PJM task force has proposed a structure to identify relevant subsidies to power markets in the region.  Since the most important subsidies to particular forms of energy can vary tremendously, unless one captures all categories the results can be highly skewed.  Part of the work for NRDC was to evaluate potential areas where PJM might miss important policies.  The results were summarized in the table below.

Here's hoping that 21 will be the magic number, and there will be real progress on a global agreement to constrain greenhouse gas emissions at COP21 meetings now underway in Paris. 

Removing subsidies to fossil fuels are now well recognized as a central element to getting energy prices right, and the topic is evident in the COP21 agenda and side events.  For people interested in getting up to speed on what subsidies are and recent assessments of their magnitude, I've assembled a list of resources on in this posting.  As a testament to the growing recognition of the important role of subsidy reform, it is notable that many of these analysis have been produced during 2015.

1)  Fossil Fuel Subsidy Events at CoP21 

Thanks to Laura Merrill at the Global Subsidies Initiative (GSI) for pulling together a listing of the many events at the Paris meetings focused on fossil fuel subsidy reform. 

2)  What are subsidies, how are they measured, and why do they matter?

These resources are helpful for people looking to gain a general understanding of how energy subsidies work and why they are a problem.

• Subsidies to Energy Industries (2015).  This is one of my papers, recently updated for Elsevier and re-released.  It provides an overview of generic subsidies to energy fuel cycles, along with some background information on the different ways that people have measured subsidies over time. 
• An animated introduction to fossil fuel subsidies done by the GSI in 2014.  It's an entertaining and understandable way to learn about this complicated topic.
• If you want to dig in to more details, I'd also highly recommend this comprehensive Subsidy Primer written for GSI by Ron Steenblik.  
• Why do subidy estimates vary across studies?  Fossil Fuel Subsidies: Approaches and Valuation is an (admittedly technical) overview that I wrote with Masami Kojima of the World Bank.  For detail on what the commonly-used price gap approach captures and does not capture, this paper prepared for the GSI may also be helpful.

3)  How big are fossil fuel subsidies globally?

• Fossil Fuel Subsidy Reform: From Rhetoric to Reality (2015).  Working paper by Shelagh Whitley and Laurie van der Burg for the New Climate Economy (itself a very interesting initiative).  Summarizes global data on fossil fuel subsidies, their detrimental impacts on economies, and strategies for reform.  See also their review of fossil fuel subsidy reform in sub-Saharan Africa.
• OECD Inventory of Support Measures for Fossil Fuels, 2015.  The latest installment of OECD's detailed policy-level review of subsidies to fossil fuels within the OECD and BRIIC countries.  Jehan Sauvage, project manager; Franck Jésus and Ronald Steenblik, project supervisors.  See also my blog post on the analysis.
• Empty promises: G20 subsidies to oil, gas and coal production (2015).  Detailed review of production subsidies to fossil fuels in the context of carbon lock-in jointly released by Oil Change International and the Overseas Development Institute.  Presents country-specific data that includes distortionary patterns of support through export credit agencies and state-owned enterprises (SOEs).  Although only gross flows through credit and SOEs could be quantified, the analysis demonstrates the importance of these interventions, underscoring the need for much greater visibility on the terms of credit and state support to SOEs going forward.   Elizabeth Bast, Alex Doukas, Sam Pickard, Laurie van der Burg and Shelagh Whitley. 
• See also OCI's joint report with WWF on the role of OECD financing of coal infrastructure on human health.  Hidden Costs: Pollution from Coal Power Financed by OECD Countries (2015).  Written by Michael Westphal, Sebastien Godinot, and Alex Doukas
• IEA's updated data on price gap subsidies (2015).  IEA's most recent World Energy Outlook (unfortunately not accessible for free) again contains comprehensive updates to their multi-year effort to track price gap subsidies to fossil fuels in the world's major fossil fuel producing and consuming nations.  As in past years, this section was overseen by Amos Bromhead of IEA.  Subsidy data from WEO 2014 is accessible here; and there is some discussion of more recent data starting on page 90 of this IEA special report.  However, the full dataset used in WEO 2015 does not appear to have been posted yet.
• The International Monetary Fund also has a variety of assessments of fossil fuel subsidies released in 2014 and 2015.  Their assessments incorporate imputed taxes and externalities in addition to other forms of government support, and as a result report significantly larger global tallies.  In addition to their publications, the Fund is providing access to some of their core data so other researchers can build upon the work. 

4)  How big are energy subsidies in the United States?

The good news is that multiple parts of the US federal government have taken up the issue of subsidies to energy.  The less-good news is that the "official" analyses tend to use a fairly narrow definition of subsidies, often primarily driven by a sub-set of the available tax breaks.  Credit support, subsidized insurance, embedded subsidies within state-owned enterprises (yes, these exist even within the United States), market price support, and other more opaque subsidy transfer mechanisms are generally included only in part or not at all.  Like the parable of the blind men and the elephant, if you examine only part of the beast, you can come up with an inaccurate assessment of what the full animal really looks like.

• Federal Support for the Development, Production, and Use of Fuels and Energy Technologies (2015).  U.S. Congressional Budget Office.  Good coverage of common tax expenditures and federal energy R&D.  Analysis includes renewables and nuclear as well as fossil fuels, though valuation challenges on credit subsidies and missing subsidy types make the nuclear figures unrepresentative of actual government support to the sector.  Interesting metrics of subsidy cost-effectiveness (see page 11), a topic that should get much more attention.  Philip Webre and Terry Dinan prepared this report in collaboration with Mark Booth.
• Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2013 (2015).  US Energy Information Administration.  One of EIA's periodic reviews of domestic energy subsidies to all fuels (their first one was in the early 1990s).  Good detail in many areas, but also with some systemic gaps that tend to dramatically understate federal support to the nuclear fuel cycle and also understate subsidies to fossil fuels.  For more details on core EIA assumptions and omissions and how they affect EIA's estimates, see this review I did a few years ago.  EIA's 2015 report is the first time the Administration has even acknowledged this criticism publicly, which is at least a step in the right direction.
• Assessments outside of government have tended to come up with larger subsidy values.  Cashing in on All of the Above: U.S. Fossil Fuel Production Subsidies under Obama, produced by Oil Change International in 2014 is a good example.  This analysis includes a broader array of support instruments, though focuses only on the production side of the oil and gas fuel cycle. 

Do you have a favorite study or resource on the subsidy issue that I've missed?  Email it to me.

I'll say right up front that I am not an unbiased observer of this particular effort by OECD to tabulate support measures to fossil fuels.  I've collaborated with Ron Steenblik, one of the project supervisors, for decades at this point; and with project manager Jehan Sauvage since his early days of deciding to enter the bizzarre-but-fascinating world of energy subsidies.  I also contributed directly to the 2013 version of the Inventory. (Access the report and associated data via this link).

Since I started working on subsidy issues more than 25 years ago, a key goal was always to take this whole area of perniciously invisible support -- distortions that were surreptitiously undermining our economies and our environment -- and to force it into the fore where it would become an unavoidable part of policy discussions and make the subsidies much harder to defend.  I clearly think what OECD is doing here is very important.

But it is because of this long involvement that I can see the many ways in which the current work moves the ball on subsidy transparency and reform. Here are some of them:

• Capturing the policy-level details for more supports; filling in pieces missing from price gap.  Measuring the gap between market prices and domestic prices for fossil fuels (the "price gap" approach used in subsidy estimates by IEA and the World Bank) is by no means easy, and in many countries is still the only way to assess government support.  But the metric does not capture everything.  Further, the reform of subsidies is, at its root, a political rather than an economic battle.  The politics lie not with national aggregate figures but with individual tax rules and grant programs.  It is these policy details that set the fault lines that drive or block reform.  Although tracking these supports is time consuming and often quite challenging, if you want to see the points of distortion, prioritize the worst ones, and have a focal point around which others can organize politically for reform, you need the line-item detail. 
• Expanding the countries evaluated beyond the OECD member states.  The challenges OECD faced in getting the first fossil fuel subsidy inventory off the ground were very big.  I am gratified to see this newest update cement the OECD data collection effort as an important and integral part of the move towards transparency in fossil fuel subsidy reporting around the world.  Of particular note is that this edition expanded beyond OECD member countries, with the important addtion of Brazil, Russia, India, and China. 
• Inclusion of both national and sub-national supports.  It is increasingly recognized that the market distortions and environmental damage from particular fossil fuel activities may not be visible by looking at any particular support in isolation.  Rather, the combination of support policies flowing to a single economic actor or activity (often referred to as "subsidy stacking") needs to be evaluated as a group.  In addition to a growing range of supports captured, the OECD Inventory continues to be one of the few resources to include state and provincial subsidies rather than just national policies.   
• Free access to detailed subsidy data, under the oversight of OECD.Stat.  The 2015 Inventory brings with it a big expansion in data access.  The information is now housed at the OECD Statistics group, and will benefit from their strong reputation and ability to manage the information over time.  The data sets include granular policy-level estimates, and OECD's decision to make the information available at no charge on the internet will greatly leverage the ability of other researchers to build on OECD's work. 
• Build-out of time series.  Each iteration of the Inventory brings in additional years of coverage, providing a much clearer picture of policy change over time.  Rather than publish just the most recent data, OECD is presenting the full historical time series.  

Two years from now, in 2017, the next update will arrive.  As with the 2015 Inventory, my hope is that the next one will also include a number of important innovations.  The area I would particularly like to see is an expansion of the types of support systematically reviewed and captured.  Right now, the Inventory primarily captures tax expenditures and direct government support.  For the next update, my hope is that government subsidies via credit markets, indemnification, and preferential market rules (e.g., dispatch order that puts coal plants first) would also be captured; and that the coverage of all policy types at the sub-national level continues to expand.

I'm happy to announce the release of Fossil Fuel Subsidies:  Approaches and Valuation, a paper I wrote with Masami Kojima at the Bank.  Masami has written about fossil fuels for many years, often focusing on the functioning of the price mechanism in oil markets.

The working paper takes a deep dive into the main subsidy measurement approaches used to estimate global subsidies to fossil fuels -- including estimates produced by the IEA, IMF, OECD, and the World Bank.  We look at the many challenges regarding data acquisition and valuation, how these challenges are likely to affect reported estimates, and important factors that contribute to large differences between global estimates. 

Recognizing that available budgets to track and value fossil fuel subsidies are always limited, we also identify some promising options for increased institutional cooperation going forward.  These initiatives would broaden the informational base on fossil fuel subsidies overall, and help to standardize subsidy measurement and key data inputs.

Cross-institutional collaboration is already growing, and key staff from all of the institutions we looked at graciously provided their time to review drafts of our paper and to contribute their ideas for future improvements.  It is my hope that this trend that will continue to accelerate in the years ahead.

The Inter-American Development Bank (IDB) is embarking on a major work program to identify and assess fossil  fuel subsidies throughout Latin America and the Carribean.  I had the privilege of presenting a number of ideas on how to leverage their effort during an expert meeting on the topic a few weeks back.  The slides from my presentation can be viewed here.

Growing consensus that fossil fuel subsidies need to go

IDB joins a growing array of global institutions that have recognized the importance of finally addressing large and pervasive subsidies to oil, coal, and natural gas.  The list includes the World Bank, OECD, IMF, IEA, UN, G-20, and many national governments, including even a growing number of OPEC members. The degree of attention, including at the top levels of many governments, was unimaginable 25 years ago when I started working on the issue. 

Even recognizing that political attention is but first step of a much more difficult process of reform, this is still an exremely positive trend.  It is progress that data series (such as IEA's price gap figures) are being developed annually rather than intermittently, and for a growing number of countries.  It is progress that the types of market interventions being measured and tracked are slowly expanding to include policy instruments on the producer side (work undertaken most broadly by OECD).  And it is progress that these organizations are starting to talk to each other on a regular basis to more effectively leverage the limited funding available to track the subsidy programs.

Why now?  Partly it's about the money:  well over half a trillion dollars per year goes to subsidize fossil fuels around the world, and with at least as much in associated damage to environmental quality and human health.  The expenditures are stressing many governments, and even though some of the subsidies aim to help the poor obtain access to energy services, it is well recognized that there are more efficient pathways to do so. Partly it's about the environmental impacts:  subsidy elimination is a no-brainer if one wants to deal with bringing down greenhouse gas emissions.  It hardly makes sense to institute a carbon tax while you are subsidizing the exact same fuels a the same time.  And partly there is an internal momentum that builds once enough organizations have put an issue on their agenda and other groups pick up the discussion as well.

Recommendations to leverage IADB's work

The areas covered in my presentation included:

• Understanding why global subsidy estimates reported by OECD, IMF, and IEA differ from each other (see Slide 1 below), and what subsidy types nobody is tracking.
• Taking steps to ensure that work is coordinated across the international organizations, such that methodologies are consistent (so results can be more easily combined) and key unanswered questions are divided up amongst them to avoid duplication.
• Separating environmental externalities from fiscal subsidies in the presentation of data on government support.  The wide variance in externality estimates (see Slide 2 below), along with some methodological issues in what specific external costs are being attributed to fossil fuels (as opposed to vehicles, or roads, or congestion), both contribute to this recommendation.
• Supplementing price gap data with critical case studies of energy market distortions in the Latin America and Carribean region (LAC).  Expanding price gap coverage is useful, but it is not sufficient to properly map subsidies in the LAC region or the political impediments to reform.  Recommended case studies include examining subsidies to bulk energy transport and how those policies can undermine market entry points for distributed energy; and evaluating in detail the multi-layered subsidies to government-owned energy enterprises (such as in Mexico and Brazil), even if the fuels they produce are sold at world prices (and therefore would not show up as subsidized using the price gap approach). 

Slide 1

Slide 2