The Present Policy Position

The Present Policy Position

If you find yourself in a hole, stop digging.
- Often attributed to Will Rogers, U.S. humorist

We hope it is clear to everyone that inappropriate policy response can make this problem, or any other problem, worse—the discussion above assumes efficient policy responses. But, this raises the question of the current policy response—how much are we doing now to stop global warming?

Subsidies:

One measure might be to look at subsidies because their cost is probably much easier to estimate than the impact of regulations. The International Energy Agency (IEA), an intergovernmental organization established through the Organization for Economic Co-operation and Development (OECD), estimated subsidies for their World Energy Outlook 2012. They found world-wide subsidies for renewable energy in 2011 of $88 billion, or just over 0.1% of the world economy. (International Energy Agency World Energy Outlook 2012, chapter 7,). However, IEA also found that direct fossil-fuel subsidies worldwide totaled $523 billion, almost six times more, and just over 0.7% of the world economy (World Energy Outlook, Executive Summary, 2012).

The International Monetary Fund (IMF) provided a more comprehensive estimate of subsidies for fossil-fuel energy (Energy Subsidy Reform: Lessons and Implications, 2013). The IMF considered pre-tax and post-tax subsidies. Pre-tax subsidies are primarily payments or other ways that allow consumers to spend less than the market rate for fossil fuels, and are mostly found in the developing world. Post-tax subsidies include lower tax rates on sales of fossil fuels than on sales of other goods and services, and failure of tax rates to recover the externality damages from fossil-fuel use to health, environment, etc.; this includes climate change, which was calculated at the social cost of $25 per ton of CO₂, perhaps on the low end but within the range typically seen in such studies.

The IMF estimated global pre-tax subsidies in 2011 as $480 billion, similar to the IEA estimate; this is about 0.7% of global Gross Domestic Product (GDP, which is roughly, the size of the whole global economy), or 2% of total government revenues. Total subsidies, including lower tax rates and externalities, were much larger, globally $1.9 trillion in 2011, about 2 ½ % of world GDP, or 8% of total government revenue. Post-tax subsidies were more concentrated in the developed world, with the US the single largest subsidizer ($502 billion, to China’s $279 billion).

Worldwide, these reports indicate that direct subsidies for renewables and fossil fuels per kilowatt-hour are very roughly equal, with subsidies relatively larger for renewables in the developed economies and smaller in the developing countries. Including the full subsidies with externalities, the data suggest fossil fuels are much more subsidized than renewables per kilowatt-hour in developing and developed economies, including the US.

Research:

Public support for research is also relevant because it helps produce the technologies that enter the market. For example, the fracking boom was commercialized by private companies, but development received notable support from funding of the US Department of Energy and other sources (see, for example, Begos, K., Decades of federal dollars helped fuel gas boom, Sept. 23, 2012, Associated Press).

Estimates of research funding are available from the IEA. As of 2010, IEA member nations (most of the big players in worldwide research) had increased funding for Energy RD&D (Research, Development and Demonstration projects) to about 4% of their total research portfolio, still a very small fraction (research on topics such as health and medicine tends to be much bigger) (IEA, Global Gaps in Clean Energy RD&D 2010, International Energy Agency). Over decades, the energy research portfolio has been dominated by fission, fusion and fossil fuels, with fossil-fuel research exceeding research on all renewables combined. By 2010, increasing research on renewables had almost caught up with fossil fuels if stimulus funds during the recent widespread recession were omitted, although fossil fuels benefitted more from stimulus funds than did renewables. Thus, over the time during which much of the research was done that is now contributing to economic activity, fossil fuels have been favored over renewables in publicly funded research (Figure 1, p. 6 in Global Gaps, IEA, 2010).

You can be confident that many people, on many sides, would argue about the discussion here. Where the IMF has identified subsidies because fossil fuels are taxed at a lower rate than, say, computers, the fossil-fuel industry is likely to view any tax above zero as a subsidy for non-fossil-fuel energy sources. In the US, money is collected from fuel sales for cars and trucks, and used to build and maintain roads. Is this a tax, serving to reduce fossil fuel use? Or, a user fee, with no net effect on fossil-fuel use? Or, a subsidy, enhancing fossil-fuel use? (By having the government build new roads, “eminent domain” can be used to force private landowners to sell property for roadways, allowing more roads at lower cost and thus more car and truck transport than would be possible under private funding with “normal” landowner rights. Similarly, when the interstate highway system was started under the administration of President Eisenhower, it was authorized by the National Interstate and Defense Highways Act of 1956, with an explicit tie to national defense; this likely made funding easier, and the roads served to greatly increase truck and automobile traffic, and “suburban sprawl”, at the expense of trains.

Video: Road Subsidy (1:06)