Guest Post by Willis Eschenbach
For folks with sensitive stomachs, I’d advise that you do not read the “Working Paper” named How Large Are Global Energy Subsidies? It was produced by the IMF [the “I” stands for “International” and most folks know what a “MF” is] as part of the media blitz in preparation for the upcoming quackathon in Paris, the 21st IPCC Climate Gabfest and Conference of the Partygoers. The Working Paper has attracted all kinds of alarmist headlines. The Guardian says “Fossil fuels subsidised by $10 million a minute, says IMF – ‘Shocking’ revelation finds $5.3 trillion subsidy estimate for 2015 is greater than the total health spending of all the world’s governments” … YIKES! One thing is clear from all of the ranting—those folks think energy subsidies are a baaaad thing.
Now, this is a curious point of view, since the Guardian and their friends are 1000% behind subsidizing renewables, particularly renewables that don’t work … go figure. But since the renewables are trivially small players in the global energy game, this report is about subsidizing the energy players who actually, you know … produce energy in significant amounts. That would be the evil oil and coal and natural gas companies. As a result, in the world of the Guardian, such subsidies are bad by definition.
So like an idiot, I decided to explore their Working Paper. Hey, I’m a fool for punishment, and I like to go where the map says “Terra Incognita” … but in the event, this wasn’t pleasant.
I’m sure most folks have heard of a “cost/benefit analysis”—you draw a vertical line down the middle of a piece of paper. On one half of the page, say the right hand side, you list all of the costs of the item in question. And on the left hand side of the page you list all of the benefits of the item in question. Figure 1 shows one of the earliest known examples of a cost/benefit analysis:
Figure 1. One of the most ancient cost/benefit analyses known to historians.
What the IMF has done is rip the paper vertically along the line down the middle, handed us the half with the costs of the purported “subisidies”, and claimed that it is a proper analysis. It is not. It is a list of wildly exaggerated costs, and costs alone.
Now, let me be clear about my biases. I have no inherent problem with subsidies. We subsidize all kinds of activities, we just need to pick the right ones. And I have no problem with cost/benefit analysis. It is a very useful tool.
But looking only at costs and ignoring the benefits? That is not an analysis of any kind.
But wait, it gets much, much worse. Allow me to give you the short version of the IMF Working Paper. First, to set the scene, here is their abstract (emphasis mine):
This paper provides a comprehensive, updated picture of energy subsidies at the global and regional levels. It focuses on the broad notion of post-tax energy subsidies, which arise when consumer prices are below supply costs plus a tax to reflect environmental damage and an additional tax applied to all consumption goods to raise government revenues. Post-tax energy subsidies are dramatically higher than previously estimated and are projected to remain high. These subsidies primarily reflect underpricing from a domestic (rather than global) perspective, so that unilateral price reform is in countries’ own interests. The potential fiscal, environmental, and welfare impacts of energy subsidy reform are substantial.
As you can see, we’re already into specialist jargon. No problem with that, all specialties have jargon. In their world, “pre-tax energy subsidies” means money that flows to the company or industry or activity that is subsidized. More generally, pre-tax subsidies are subsidies that actually affect the bottom line of the balance sheet of some limited subset of economic actors. In other words, “pre-tax energy subsidies” are what most of us think of when we hear the word “subsidies”.
What these good folks refer to as “post-tax energy subsidies”, on the other hand, are not subsidies in the usual sense. They are not money that flows to the energy companies at all.
To highlight the difference, let me give you a crystal-clear example of what the IMF considers to be a “post-tax energy subsidy” to the evil oil industries … but first I am obliged to warn you that like I said, this stuff is not for the lily-livered or the faint of heart. So I’ll offer you one last chance to avoid spoiling your digestion … any takers? OK, for those remaining hardy souls, one of the IMF’s many, many “post-tax energy subsidies” is …
The cost of fixing the potholes on the road to my humble abode.
Truly. I’m not making this up. Pot-hole repair is part of their “post-tax energy subsidy” that they claim is going to the energy companies. It’s listed under the rubric of “non-carbon externalities”.
And what are “non-carbon externalities” when they are at home? I thought you’d never ask. Fortunately, they give examples, viz:
“(congestion, accidents, air pollution, and road damage)”.
In the strange IMF parallel universe, the cost of fixing each of those (including “road damage”) is considered as a SUBSIDY TO EXXON AND SHELL! Fixing potholes as a subsidy to the energy companies! Have you ever heard such a daft thing?
So let me engage in a bit of technical jargon here myself. I’m going to refer to those subsidies that flow only to energy producers and distributors and that affect the bottom line of those subsidized producers and distributors as “real energy subsidies”. It’s a catchy name, I like the ring of it, cuts to the heart of the matter.
And for things like say claiming that fixing potholes is a subsidy to the energy industry? Well, for those types I’ll use the term “imaginary energy subsidies”, it’s short and to the point.
As for the relative size of real and imaginary subsidies, the big headline news from the paper has been making its way around the web under headlines like “Energy subsidies are $5.3 trillion dollars per year!” Well, let me point out that their number is ninety-four percent imaginary energy subsidies, and is only six percent real energy subsidies. Strange but true. Like I said, I’m not making this up. Heck, I couldn’t imagine this level of absurd venality. I’m just yr. intrepid explorer hacking my way through miles of verdant verbiage in my quest to uncover the truth … and when I get there, I find that the truth is six percent, and the made-up is ninety-four percent. Figure 2 shows the ugly claims …
Figure 2. From the IMF Working Paper. Note that while real energy subsidies have been steadily decreasing, imaginary energy subsidies have been steadily increasing. Alarmism, anyone?
Well, now I finally understand why there are so many potholes in the roads around where I live. I’ve been thinking all along it was because, as one of our County Supervisors remarked, the county can’t fix the potholes because they’ve gone broke paying for the obscene pensions of one generation of the folks who used to lean on the County shovels and prop up the County keyboards.
But now, I see that is not the case at all. My eyes have been opened. Leaving the potholes unfixed isn’t a sign of economic malaise. Instead, it is a bold political statement by the County Board of Supervisors! Not fixing the potholes is a clever means to reduce the dastardly “post-tax energy subsidy” that the Country residents have foolishly been paying to Exxon and Shell! It’s a daring blow against the running dog imperialists of global energy supply … do I really need to supply the [/sarc] tag? I suppose so …
Honestly though, folks, if you’re going to count fixing potholes as a subsidy to the oil companies, then $5.3 trillion dollars is nothing. They can go as high as they wish, that’s the beauty of imaginary energy subsidies. There’s no limit to them.
But wait, there’s more. Even though the real energy subsidies are nowhere near the five trillion mark, they are still at around $340 billion per year. That’s a third of a trillion, real money in any world. But of course, once again things aren’t at all what they seem.
The first thing you need to understand about this $340 billion in real energy subsidies is that globally, the largest energy subsidies are those that oil-producing countries like Venezuela and Nigeria give their own citizens by charging them below-market prices for gasoline and diesel. The second thing you need to know is that most of the real energy subsidy is in the developing countries. In a previous working paper about subsidies that I analyzed here, I find:
According to estimates by the International Monetary Fund and International Energy Agency, global “pre-tax” (or direct) subsidies for fossil energy and fossil electricity totaled $480–523 billion/yr in 2011 (IEA 2012b; IMF 2013). This corresponds to an increase of almost 30% from 2010 and was six times more than the total amount of subsidies for renewables at that time. Oil- exporting countries were responsible for approximately two-thirds of total fossil subsidies, while greater than 95% of all direct subsidies occurred in developing countries.
If we’re talking about most folks reading this, those of us in the developed world are only are involved in a measly five percent of the real energy subsidies … which in turn are only six percent of their notional $5.3 trillion in subsidies. This five percent of the $340 billion dollars is about $17 billion dollars. But that’s still not the whole story. Remember, that’s split out between all of the developed nations, Australia, Japan, US, UK, Germany, Israel, New Zealand, the list is long.
So when you get down to it, if you are living anywhere in the developed world, the real subsidies given to the energy are likely around half a billion dollars per country. Actually, speaking of technical jargon, I call a half-billion dollar subsidy “one Solyndra” … but I digress …
Now, if your country is paying one or two Solyndras per year in subsidies, is it worth it? Well, that depends on what the Solyndras are paying for. If they are paying for renewables, it’s most likely not worth it. If they’re paying for real energy, it might be worth it.
Let me close by pointing out the effect of cutting energy subsidies. Since most of them are in developing countries and are in the form of reduced energy prices to the poor … won’t cutting them harm the most vulnerable citizens?
Well, fear not, the International MoFo’s have thought of that. Here’s what they say about the effects of cutting fuel subsidies to the poor … one measly sentence is all they could spare for the impoverished, maybe there’s an electron shortage or something, but in any case here is that lone sentence in all of its glory:
In addition, energy subsidy reform should protect the poor and vulnerable, making sure their well-being is not adversely affected.
That’s it. That’s the full extent of their concern for the poor. Well, that’s good to know … but if you yank a $1 per gallon gasoline subsidy out from under the poor of Nigeria, just exactly HOW do they propose to make sure that “their well-being is not adversely affected”? That’s what I despise the most about these arm-chair experts who propose to restructure the world economy to fit their fears and fantasies. They simply ignore anything that they judge to be immaterial, the poor are often the first on that list, and second on the list of things they ignore is HOW to do what they so airily propose.
Anyhow, that’s the latest wild exaggeration on the run-up to Paris. My advice? Don’t believe anything you read … and remember, you read that here first …
Best wishes to all,
w.
As Per Custom: If you disagree with someone, please have the courtesy to quote the exact words you disagree with, so that we can all understand your objections.
Externalities: Things like fixing the potholes or releasing CO2 into the atmosphere are termed “externalities” or “external costs” by people writing on cost/benefit analysis. These are basically things that either the writer really doesn’t like, or things the writer would like to tax but hasn’t been able to figure out how to tax it. Yet.
While occasionally such externalities are relevant, I have some big objections to including externalities in most cost benefit analyses.
First, how do we price them? What is price we should assign to, say, of a ton of emitted CO2? I’ve seen numbers ranging from zero up to hundreds of dollars per ton. With no agreed upon value, the analyst is free to pick any number they like.
Next, which ones do we include? If we include fixing the roads as a “subsidy” to the oil barons, shouldn’t we include building the roads? And if we include the cost of building the roads, how about the cost of designing the roads? And what about the cost of the pensions of the legislators (never cheap) who authorized the road-building? Where does it all end? Clearly the IMF thinks it ends after potholes, not before …
Finally, if you include external costs, YOU ABSOLUTELY MUST INCLUDE EXTERNAL BENEFITS. As I discussed in Monetizing the Effects of Carbon, the increase in plant growth due to increased atmospheric CO2 is about a $300 billion dollar per year benefit to the world’s farmers from burning fossil fuels … but the pluted bloatocrats at the IMF ignore that completely, as they ignore all benefits they don’t like.
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This introduction says it all about the misguided agenda of the IMF and the crowd massing in Paris to tell us how we should live, be fed, and keep warm. . Better yet if they looked in the mirror and admitted all the taxpayer subsidies, carbon footprint, waste of fossil fuels these hypocrites are wasting to travel there and bask in luxury with no benefit whatever to anyone except themselves. Would these resources be better spent to help the poor? In general I am opposed to subsidies because they inevitably involve government corruption and “payola”, look at Ethanol! Now they are not even honest about what a subsidy actually is.
It is not difficult to see the agenda within the introduction below, and it is not good for the “common” man
“I. INTRODUCTION
The issue of energy subsidy reform remains high on the international policy agenda,
reflecting the need for countries to pledge carbon reductions ahead of the Paris 2015 United
Nations Climate Change Conference, the opportunities for reform created by low energy
prices, and continuing fiscal pressures in many countries. The sustained interest in energy
subsidy reform also reflects increasing recognition of the perverse environmental, fiscal,
macroeconomic, and social consequences of energy subsidies:
2
Energy subsidies damage the environment, causing more premature deaths through local
air pollution, exacerbating congestion and other adverse side effects of vehicle use, and
increasing atmospheric greenhouse gas concentrations.
Energy subsidies impose large fiscal costs, which need to be financed by some
combination of higher public debt, higher tax burdens, and crowding out of potentially
productive public spending (for example, on health, education, and infrastructure), all of
which can be a drag on economic growth.
Energy subsidies discourage needed investments in energy efficiency, renewables, and
energy infrastructure, and increase the vulnerability of countries to volatile international
energy prices.
Energy subsidies are a highly inefficient way to provide support to low-income
households since most of the benefits from energy subsidies are typically captured by
rich households.”
Bob,
Thanks for bringing this to our attention.
A lot of people benefit from roads, but these maroons actually think that the oil companies and the oil companies alone should be paying for those roads.
Any who, aren’t most roads paid for by gasoline taxes? So in what sense are the users of oil not paying for the maintenance of roads?
Beyond that, last time I checked, those magical electric cars also use roads. So aren’t they also being subsidized?
At least electric cars can run on the existing roads without expensive modifications to those roads, save perhaps the odd charging point or two. Plus the electric car driver still needs a licence, which can be taken away if they start to abuse the privelege.
By contrast, cyclists demand a costly scheme of nationwide road modifications which serve no purpose to anyone other than cyclists, and expect that the public should pay for that out of road fund taxes, to which they themselves contribute nothing. Plus, the cyclist needs no licence and no training or proficiency test, and is therefore at liberty to flout the law with little risk of being banned from the road. Most operate uninsured, so if they do cause third party injury there is little chance of compensation for the victim. As if that were not enough in the way of special priveleges, they then start brazenly stealing the space allocated to pedestrians for their own, selfish use.
There was a case in the papers a few days back in which a cyclist riding illegally on the footway mowed down a 3yo toddler, swore at her, then rode away. It will be interesting to see if he gets an appropriate punishment. I would not be at all surprised to see him given a trivial fine and allowed to keep on riding. A car driver in similar circumstances would be banned for at least a year, and would likely have to retake a driving test before going back on the road.
@MarkW
I too thought about the magical properties of electric cars that prevent them from using up the roads and creating potholes.
“post-tax energy subsidies, which arise when consumer prices are below supply costs plus a tax to reflect environmental damage”
So the logic is: if environmentalists have proposed a tax on fossil fuel, and the tax has not been passed, then fossil fuels are being subsidized.
As usual a well written analysis. I am continually surprised how normally well regarded organisations can produce such unbalanced drivel.
The fundamental truth is that if fossil fuels are taxed more, the relative cost of renewables will fall. Even assuming that the total output of renewables would be sufficient to supply market demand (questionable), the cost of energy to the consumer would rise. Normal economic theory suggests that increasing costs in an economy without increasing output simply reduces the standard of living/growth.
Increased energy costs would have their own externalities impacting health, agriculture/food supply, transport and distribution, unemployment, welfare costs etc. A belief that the additional taxes raised from fossil fuels could somehow redirected to largely balance these externalities would be truly naive.
“The fundamental truth is that if fossil fuels are taxed more, the relative cost of renewables will fall”
No, isn’t a fundamental truth or a truth. It’s an hypothesis based on how little fossil fuel renewables use.
Well regarded organisations produce biased drivel all the time, we just don’t notice when we agree with their objectives.
For genetic reasons, truly rigorous balanced analysis is abnormal in human discourse.
I need to call up the DOT in my state and counties where I have oil royalties and explain to them that they must be making a mistake. You see, for some reason I get billed each year somewhere around 4% directly from local governments and it explicitly lists county maintenance as one of the taxes. They must have it backwards, I shouldn’t be paying them because all their services are subsidized. This is even on top of the hefty property taxes and fees on each DOT commercial vehicle that is required for oil and gas exploration. I can’t wait for the refund.
Big red flag when the subsidies are not calculated per unit of energy produced.
William Connolley May 29, 2015 at 12:17 pm
Thanks for an interesting article on the total global sea ice coverage, William. However, I fear I don’t see the relevance to the current discussion, or how that means that Mr. Taylor “got there ahead” of me. You sure you’re in the right thread?
There are two curiosities about that statement. The first is that your link to “prior art” takes us all the way back to ten days ago …
The other curiosity is that for a couple of decades, the alarmist, record-distorting climate view that you exemplify so well has had everything going your way. For a long time, you’ve had the support of the media, and of the governments, and of the universities and rent-seekers, a host of green and green-washed corporations, and of everyone who thinks that humans are a virus on the planet or that development is bad.
Not only that, but as we know and as the Climategate emails revealed, the leading lights of the climate alarmist movement acted in secret behind the scenes to subvert the IPCC rules, forestall public enquiry, pack the peer-review boards, and illegally avoid FOIA requests.
And despite that huge, monumental advantage you’ve had since the beginning, despite the fact that Peter Gleick and others were willing to lie, cheat and steal to push your message, despite your ruthless Wikipedia censorship of any opposing views, you guys STILL can’t convince either the American public or the world public that the the climate issue is of any real-world importance. Climate regularly comes in last on the list of things that people care about, and that is even more true in the developing world. Check out the UN opinion poll. Increasingly your alarmism isn’t working anywhere except among folks like true believers, Hollywood spokesmodels, residents of ivory and other towers, Eurotrash, and California nuts and flakes. The rest of the planet is unwilling to trade your brimstone threats and your honey-coated promises for more expensive and more unreliable energy, and I don’t blame them one bit.
In fact, these days studying the failure of alarmist climate scientists to convince the public has become a cottage industry. It seems like every few weeks Judith Curry publishes a new explanation of why you guys have not been able to get your message across.
And of course, you personally have been publicly disgraced by being discharged from Wikipedia because of your bitter unending partisan edit wars … you lost that battle royally.
And despite all of that, despite years of not getting your message across to the very people you want to convince, despite being kicked off of the Wikipedia airwaves, now here you are to advise us regarding what we’re doing wrong? Really? You’re the expert now on how it all should be done?
Gotta say, William, I almost have to admire your nerve and audacity … but instead any admiration gets drowned out by my laughter at you thinking you’re the man to advise anyone. Sorry, gotta pass on that one …
w.
Extremely well said Willis. Kudos.
+100
This comment is better than the article. Two thumbs up; one for each.
+100
Willis: I agree with Gary. Check your math as it must be 97% imaginary subsidies.
Surely the economic benefit of plant growth from extra CO2 goes mainly to consumers in the form of cheaper food? The other main beneificiaries, I presume, are subsistence farmers, who have more to eat for themselves and their families.
If there was less CO2 food would be more expensive for consumers, which would mainly harm the urban poor, and subsistence farmers would go hungry more often and starve to death more often, but commercial farmers would benefict from scarcity pricing. The exception would be commercial famers on marginal land who might not be able to grow a viable crop, but I would have thought that marginal land is more likely to be occupied by subsistence farmers in any case.
For example, how many lives are saved annually because fossil-fueled ambulances rush trained EMTs and Paramedics to injured or critically ill people and then transport them back (over roads, sometimes even having to dodge potholes) to hospitals where more highly-trained people can provide specialized urgent care? Hmmmm? I agree a solar-powered Star Trek transporter would be better, but development seems to have stalled — should we leave people to die in the meantime?
The “external” costs of fossil fuels are affordable because an industrial society using mechanical energy instead of muscle power produces plenty of surplus to cover those costs and still have enough left over that people can enjoy a better material standard of living throughout a longer life.
Any business understands that increasing your costs by 25% in order to increase you income by 500% is such an obvious good deal that only a certified moron in the throws of a major convulsive fit would turn it down.
Lets not forget that cold weather kills a lot more people than does hot weather.
I’m still unclear about what is being included in these fossil fuel energy subsidy figures. In the case of renewables we at least know what subsidies are paid and how they relate to expenditure and production.
In the case of electricity, for countries using mainly fossil fuel or nuclear supplies the bulk of the cost is in maintaining the distribution system, not the energy cost itself. UK wholesale power being about 4.5-6p per unit for fossil fuel sources, maybe 8p for nuclear, as compared to 13-15p per unit retail. I don’t have wholesale figures for Germany or Denmark to-hand but it would be interesting to compare the wholesale/retail ratio for a country using a large proportion of renewables.
Declining not. Subsidies for renewable energy are increasing at a mind boggling rate, from $66 billion in 2010 to $101 billion in 2012. I wonder where they stand today. And that for incentives which we can all agree are definitely naughty.
Declining not,indeed. The Agenda rolls on…
http://www.forbes.com/sites/larrybell/2011/08/23/the-alarming-cost-of-climate-change-hysteria
(with apologies to The Beatles)
I read the news today, oh boy!
4000 holes in Blackburn, Lancashire
And though the holes were rather small
They had to count them all
Now they know how many holes it takes to subsidise the Albert Hall
Willis, excellent smackdown, WWF style. An easy calculation as to benefits – if the costs are 6% of global GDP, then benefits are 94% (it is a logical fact that, if every possible negative internality and externality and his dog is excised from the global GDP and counted as a summed 6% cost, then everything that remains must be a positive externality, or benefit). Even Adam would have gone back for a second apple with that ratio.
This is very much like the attitude of a marketing manager I knew who became responsible for sales and service.
He questioned me about the expenses of my service division and wanted explanations for being over budget on particular lines. These were higher as we were producing more revenue from service and there were consequent expenses attached to this.
Even though we were making more profit than budgeted, his focus was on the expenses only. In marketing he never had to worry about revenues, only expenses and so this was his prime concern.
The IMF ‘analysis’ may have been produced from people who do not have to live in a world with both sides of a budget.
I examined a similar report a few years ago and it was the same crap – almost all the “subsides” were actually bread and circuses for 3rd world citizens who’d likely riot without them.
Laughable developed world “subsides” included the US Strategic Petroleum Reserve without which I’m pretty sure every American would spend their days perched on a toilet bowl worried where their next meal was coming from.
I got to a section where they mulled if the construction of natural gas-fired power plants was subsidized since their design was similar to taxpayer-funded military jet engines. I stopped reading there; not wanting to hog so much precious laughter for myself.
Impressive to see that even the WikiFiddler crawled out from under his rock for this hilarious IMF garbage.
On this basis the sewerage system is a ‘post tax’ subsidy to food manufacturing companies.
Great how Willis listed ‘real energy subsidies’ and I was dutifully reading along and them WHAM – the punch line of ‘imaginary energy subsidies’. I didn’t see it coming and it hit me like a truck. My 1st good laugh of the day.
What I don’t like is how when I buy a few gallons of gas, a fair chunk of that sale goes to subsidize the state and federal governments, who then turn around and tell me Texan floods are my fault for burning that gas.
Then when my state doesn’t do exactly what Washington says, they threaten my state with some sanctions, such as not returning to my state the highway repair funds they previously confiscated that were meant to fix all those potholes and rebuild deteriorating roads (no doubt caused by ‘climate change’ – sarc off).
MFs!
Why didn’t the IMF also add the cost of all the climate change research as a subsidy to the oil industry?
“Why didn’t the IMF also add the cost of all the climate change research as a subsidy to the oil industry?”
Beats me, Chris. I guess they couldn’t think of everything. But now that you’ve brought it up, we’ll probably see it in the next go ’round.
Oh… I’ll have to see if kitchen sinks are in there. Wouldn’t surprise me if they were.
I would hazard a guess that food subsidies do not register in the brains of watermelons.
I assume they forgot to include the tax on fossil fuels that offsets or overwhelms the subsidies as well.
Nigeria may pay some of the cost of the petrol pump for its citizens but most Western Countries have a big fuel tax instead.
Hmmm. Still waiting for the Connellyweasel to reply to Willis’s hammering. Won’t hold my breath. Where’s what-his-face to criticize Willis in a sort of inscrutable way? Good ol’ Scrotum or whatever of few choppy words having little or no meaning. Mods, help me, you know who I mean.
” prices are below supply costs plus a tax to reflect environmental damage”
were you able to break out how much of the imaginary subsidy was due to externalized costs of global warming?
I disagree. It’s an excellent psychonalaysis of the creators of said “analysis”.