What If Oil Subsidies Were Phased Out by G-20 Leaders?

Every minute of the thousand minutes of meeting time by the G20 muckety mucks costs Canadian taxpaying hosts a million dollars, critics complain. But the Return on Investment could be as high as 557 to 1 if G20 governments gathered in Toronto follow their own pledge from last year’s meet in Pittsburgh, which pledged to cancel billions in global subsidies to oil and gas companies each year. If indirect subsidies are added in, the million dollars a minute invested by Canadian taxpayers could yield a return of anywhere from 557 billion to a trillion dollars a year.

No reason to sweat the small stuff and kvetch about a million dollars a minute when the real opportunity to blow or save global taxpayers’ money is from 557 to 1000 times more, and deserves 557 to 1000 times more attention. Someone needs to build a clock that registers every minute that blows at least 557 million dollars up in hot air.

The extent of direct government welfare programs for oil and gas companies is embarrassing to some government officials for a number of reasons. It’s hard to make the case that oil and gas companies – seven of which yielded 171.2 billion in profits in 2009, according to the Financial Times – should qualify to feed at the government trough, when the same governments are making a to-do about the need to cut support for people on low incomes. Others worry that two dollars is spent to subsidize dirty fuels for every dollar spent to speed development of clean fuels, at a time when governments like to appear as if they’re trying to do something to reduce global warming.

G20 leaders concluded in Pittsburgh last year by issuing a statement to “call on all nations to adopt policies that will phase out such subsidies worldwide,” and to work instead “for a resilient, sustainable and green recovery.”

G20 leaders of 2009 also asked for financial reports from the International Energy Agency, Organization for Economic Cooperation and Development, and so on. These reports were duly completed. Although they only tell part of the story – the direct, not indirect and hidden subsidies, mostly from the Global South – both the total numbers and the pedigree of those citing them are impressive.

An International Monetary Fund report released in February estimated that if G20 countries cut their oil and gas subsidies in half, they would score two quick victories. They would cut government debt loads by 17 per cent, while cutting global warming emissions from between 14 and 17 per cent.

On June 9, the OECD and IEA came up with a $557 billion estimate for direct fossil fuel subsidies in emerging (Brazil, for example) and developing (Indonesia, for instance) countries. Good estimates are harder to come by in developed countries, the OECD and IEA regretted.

The numbers, most easily available at the U.S. website Earth Track, aren’t that hard to track down by researchers whose paychecks aren’t signed by G-20 powers.

For most of the last decade, US fossil fuel subsidies have averaged about $72 billion a year, according to the Environmental law Institute and Woodrow Wilson International Center. A few of these might cause some to blush. The Energy Policy Act of 2005 granted billions in tax relief to encourage offshore drilling in areas such as the Gulf of Mexico. Then-senator Barrack Obama voted in favor. Among indirect subsidies that also stand out are six fuel contracts valued at $2.1 billion dollars a year between the U.S. department of defence and BP, which the Nader-inspired organization Public Citizen has asked to be cancelled. The Obama administration hopes to pare back tax breaks by $36.5 billion over the next decade, about one per cent of industry annual earnings.

Canada’s tax break subsidies are estimated by a 2006 study of the Pembina Institute to be in the ballpark of $1.4 billion a year. Instead of conservation programs that save 20 dollars here and there, Ecojustice lawyer Albert Koehl has commented, “here we have a briefcase with $1.4 billion.”

Even a March 18 document signed by federal finance deputy minister Michael Horgan suggested that Canada take the lead at this year’s G20 summit by phasing out such subsidies.

Lest anyone think these subsidies tell more than half the story, it’s worth having a sense of how any of these numbers can be doubled by including indirect subsidies. Back in 1996-7 when he was chair of the federal government’s Technical Committee on Business Taxation, Jack Mintz used to argue at meetings I chaired of the Green Coalition that the dirtier the industry, the more subsidies it got. He came to this conclusion by adding up all the contributions from different departments to resource-exploiting companies – workers compensation and chronic disease care for miners, unemployment insurance for seasonal industries like fisheries and logging, roads for pulp and paper or oil and gas companies, and so on – that extra zeroes had to be added to the publically-supported cost of tax breaks. Mintz changed his political tune after his stint with the C.D. Howe Institute, but his two-volume study for former finance minister Paul Martin remains a masterpiece.

Since Mintz did his research during the 1990s, scientists have also identified the hidden costs of destroying environmental services – due to water and air pollution and global warming linked to fossil industries, for example – that quickly mount to billions a year. Yet there’s no equivalent to tobacco taxes for the harm done by oil industry second-hand smoke.

Likewise, no modern list of indirect and hidden costs of the oil industry is complete without calculating the opportunity costs of local farms bankrupted by imports that are fertilized, sprayed with pesticides and transported cheaply, all thanks to subsidized fossil fuels that drive industrial agriculture and make it artificially competitive with local and sustainably-produced food.

Oil subsidies belong to the bygone era of abundant natural resources, relatively unpolluted skies and water, and high-wage manufacturing jobs in the Global North. The idea behind incentives boosting capital- and energy-intensive industries during the 1950s was that they boosted productivity per hour of labor. That allowed high wages to go to otherwise-rebellious industrial workers in the Global North. But today, resources are fast becoming scarce, skies and waters are over-polluted,and high hourly productivity makes for swollen numbers of unemployed. In other words, oil subsidies are obsolete and dangerous, a holdover of the past at a time when we need to ramp up productivity per unit of resources, and lighten up on labor productivity. Abolishing oil and gas subsidies, much like carbon taxes, are ways of easing that transition to a resource-productive (ie conserving) and human skill-intensive, rather than capital-intensive,technologies.

The public savings from cancelling fossil fuel subsidies will be enormous, perhaps a trillion dollars a year, more than enough to end world hunger and kickstart the new economy. The clock will be ticking millions of dollars every second that G20 leaders meet. And their failure will set the real cost and define the real victims of the summit.

Comments

  1. Chris Chopik says:

    Wayne,

    Great perspectives. It seems our entire global economic system is unsustainably underpinned with these subsidies. The retraction of these subsidies would certainly relate to an excellerated interest in Green Building and Renewable Energies.

    Chris

  2. Ron Steenblik says:

    Wayne, I was one of the contributors to the report.

    Several things need to be born in mind when interpreting the $557 billion per year number. First, it represents only the subsidies that are implied by comparing below-market domestic prices with a reference price (e.g., an export or an import price in the case of oil) in countries that have policies that depress prices paid by final consumers. The actual subsidies involved may be provided through budgetary expenditure, but very often they are provided by regulations that prevent oil, gas or electricity companies from charging what they could otherwise in the market. In several cases, the big subsidizers are oil-exporting countries with state-owned oil companies, who export crude oil at a high price and then cross-subsidize imported processed petroleum products for domestic users.

    The second is that the $557 billion number it is a snapshot, for 2008, a year in which oil prices peaked. The higher the world price, the bigger the number will be for the year. (See the IMF study you referred to, which shows considerable variations from year to year.)

    Third, much of the $557 billion occurs in a handful of energy-exporting countries, particularly energy-exporting countries over which the G-20 has little influence (e.g., Iran and Venezuela).

    Fourth, the figure you cite from the study by the Environmental law Institute and Woodrow Wilson International Center — that US fossil fuel subsidies have averaged about $72 billion a year — is incorrect. Look at the study again (www.eli.org/pressdetail.cfm?ID=205): the number refers to a six-year period (2002-08), not a single year or an average over six years.

    Fifth, I can understand why you might write “The numbers, most easily available at the U.S. website Earth Track, aren’t that hard to track down by researchers whose paychecks aren’t signed by G-20 powers”, but you need also to understand how numbers are treated in such reports. Generally, those for individual countries are not singled out unless a complete and comparable series is available for all the countries. The federal government of the United States is actually relatively transparent with its information on subsidies and tax expenditures, at least if one knows where to look for the information. Not all countries are as transparent; or, language difficulties make it difficult to dig out the numbers. Citing mainly numbers for the countries for which data are readily available gives a distorted picture, and places a focus on those countries that are transparent rather than on those that are the heaviest subsidizers.

    But that brings me to my final point, which is that the report to the G-20 of the four “tasked” organizations (the IEA, OPEC, OECD and World Bank) marks the beginning, not the end, of work to identify, measure and reform fossil-fuel subsidies. A late start, I would be the first to agree. But better late than never.

  3. alas, the violene that marred the wonderfully peaceful and positive demo in Toronto on Saturday has diverted public attention from issues to pose to G20 leaders. I totally agree with Curis that phasing out oil subsides will transform the economics and competitiveness of many green industries, from food to home-building, because, as chris says, oil prices underpin almost every aspect of the old economy.

  4. Ron Steenblik says:

    Actually, I wouldn’t agree that phasing out oil subsides will transform the economics and competitiveness of many green industries — at least not in developed countres like the United States. Oil prices certainly underpin almost every aspect of the old economy, but OECD economies already pay world prices for oil (and usually a tax on top of that). It is mainly in the countries where oil prices are artificially surpressed that raising prices will have radical effects. And as that happens, let’s hope that the developed countries have some policies in place to constrain emissions, because one of the effects of reducing demand in countries like Iran, Iraq, Nigeria and Venezuela is that there will be more oil available on the world market.

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