Potholes In Their Arguments

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.