OECD calls for the elimination of fossil fuel taxes

Guest opinion by Alberto Zaragoza Comendador

There comes a point in your Internet life when you know what an article will be like before hitting the first dot. Not what it will be about, as that should be clear from the title, but specific things about the article’s content and structure. Perhaps you’re smart, perhaps you’re not; what matters is not your intelligence, but the fact that you have seen this movie before, and you remember the plot.

So when the press started issuing headlines like Report: fossil fuels receive $5.3 trillion in subsidies worldwide, I knew before clicking that:

a) The bulk of these ‘subsidies’ are not in fact money anybody in the fossil fuel business receives, whether in the consumer side or the production side, but untaxed negative externalities.

The number is simply too ludicrous to be made up of what we have traditionally known as subsidies. Thus, what the IMF is really saying is that fossil fuels cause a few trillion

Again before clicking, you know that the report is going to suffer from the irresolvable problem inherent to all externality studies: nobody knows how to calculate them. Even in the largely-unsettled field of climate science, specialists have been able to ‘agree’ on an equilibrium climate sensitivity ranging from 0.6C to 6C; virtually all the recent estimates fall between 1C and 3C. If the field of externality analysis was making any progress, you’d see a similar whittling away as outliers get discarded and academics converge on a series of ‘consensus’ estimates – but this isn’t happening. Is the social cost of CO2 $1,500 a ton, $1 a ton, or negative? Are we even taking into account all estimates? 100 years? 200 years? What is the discount rate for things that may in fact never happen? Assuming that we keep burning fossil fuels, how long into the future do you make the calculation? The issues even affect the underlying science (epidemiology, environmental impacts and so on). Are particulate matter emissions from diesel engines killing people or not? Are trans fats bad for you or are they fine?

The high political and financial stakes involved in any cost calculation and the endless, thoroughly entangled confounding factors conspire to make any estimate of ‘total costs’ essentially impossible. Sure, costs for US involvement in the Gulf War have to include the many billion spent caring for soldiers affected by Gulf War Syndrome – too bad the UK government concluded this syndrome does not exist.

Of course it doesn’t stop there. The moment you set your eyes on the actual IMF report and its associated press release you realize the authors jumped several more sharks. For example: they included several hundred billion in ‘subsidies’ as the untaxed negative externalities of… transportation. So if while driving you kill your neighbor’s dog and have to fork out $5,000 in compensation that’s considered a ‘fossil fuel subsidy’, never mind the fact that the money comes out of your own pocket and car repair is covered by your insurance (which you are already paying for), not to mention that (am I stating the obvious here) electric cars also kill dogs.

There’s healthcare costs which aren’t covered either by the culprit or the insurer, as well, but again these are largely private and the authors seem to have totally ignored that. The authors also rip out a page from the anti-car playbook and blame fossil fuels for congestion. Gee, I wonder who is ‘paying’ for the ‘costs’ of congestion – other than drivers and riders themselves!

While the IMF’s press release is short on caveats, the report covers its back:

‘Disclaimer: This Working Paper should not be reported as representing the views of the IMF. [Bolded in the original] The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate’

You know, it’s an IMF report when we want to have a headline. But in case when it turns out to be a load of rubbish, it will in fact be only the authors’ opinions, who were just trying to start a conversation.

There’s much, much more nonsense in the IMF paper. However, at one point I decided not to bother anymore because…

b) The report’s authors completely ignored positive externalities.

Hold your horses. It turns out the paragraphs above were unnecessary, as the IMF committed the same mistake as 95% of big externality analyses out there – discarding this report by intuition would have saved me a couple hours.

We may all agree that ‘externality’ is just fancy academic-speak for consequence. We may also agree that everything, absolutely every single thing you could find or do in this world has consequences.

An hour spent writing an article in front of the computer is an hour not spent reading a novel or playing football or working your biceps or strolling around the park or staring at the wall. Donuts may cause obesity, yes, but so do computers. And obesity, as about fourteen million peer-reviewed papers have shown, has healthcare costs (estimates of its cost range from – ok, you get the point). Computers are also obviously used to facilitate terrorist attacks, frauds, and mischief of all sorts. By providing healthcare to those who spend then hours of their every day playing League of Legends, aren’t we implicitly subsidizing these people and their gadgets at the expense of the rest of society? Shouldn’t we have some sort of computer tax, or perhaps more generally a gadget tax, to account for the untaxed negative externalities of electronics use? Somebody actually beat me to this idea.

To most readers, the idea of a computer tax to fight obesity and terrorist attacks may sound absurd from the get-go. Yes, computers can be used for bad stuff and can have negative consequences; the same can be said of every activity or item. What matters is not whether one activity has negative consequences, but whether on the net it leaves us better off or not. And yet, this is the very common sense that the authors of the IMF report forgot.

If I consider the negative externalities of working for a year as a missionary in Kenya, and ignore all the benefits accruing to both myself and others, of course I will discard this idea (missionary tax, anyone?). If I look at the costs of jogging, in terms of lost time and injuries, I also have to think at the advantages in terms of calories burnt and steam blown off. If you’re thinking about getting a college degree, and simply fail to take into account the increased earnings and enriching life experience that people who go there usually get – well, if we did so colleges would be empty.

To consider only the costs and negative consequences, in any activity, is pure tomfoolery. That the IMF report did so invalidates it completely. I may still take a look at it in the future, if I happen to have a weekend with nothing else to do. Readers are also encouraged to take a look, if only for the fun of debunking yet another clueless paper. But it’s not worth a serious discussion.

Please notice that one can look at only one kind of externalities (positive, negative, or a subset) and still do worthy research. For example, here’s an estimate of the impact of CO2 on food production. The author was very upfront about what he was measuring, and did not attempt to estimate an ‘overall’ cost of CO2. The IMF’s fault is that it didn’t make clear, at any point in the report, that it was in fact excluding positive externalities. Before I showed that the word ‘positive’ didn’t appear at all, but in fact ‘negative’ was written only once; the authors simply assumed that externality equals negativity. So they didn’t consider stuff like warzone hospitals running on diesel and intrepid explorers saved by fossil-fuelled machines and gasoline-burning sports. Indeed, by assigning the cost of transportation externalities to fossil fuels, the authors are basically saying that without those fuels our transportation system would not exist. Well, now try to imagine a world without ambulances, fire trucks and helicopters to get a sense of how much we owe fossil fuels.

So the IMF report debunked itself, but what about the other estimates of fossil fuel subsidies?

Enter the OECD (Organisation for Economic Co-operation and Development)

A couple weeks ago I saw this headline and immediately knew something was off. The article states that the 34 OECD nations, plus the BRIICS, spend up to $200 billion a year subsidizing fossil fuels. Just intuitively, I knew that it was impossible for OECD to spend anywhere near that much, so I dug a bit deeper.

I must praise the OECD for actually disclosing how much of this money comes from OECD countries, as opposed to ‘emerging’ economies, in the very press release. Then again, instead of hiding behind a disclaimer the OECD endorses the results and even threw a mini-conference to announce their publication, so they understandably want to avoid tarnishing their reputation by publishing IMF-level balderdash.

So the bulk of these ‘subsidies’ are in fact coming from Brazil, Russia, India, Indonesia, China and South Africa. Anti-fossil fuel activists usually try to stir up a bit of white guilt in their overwhelmingly Western audience by lumping all these ‘subsidies’ in one Big Bad Blob, as if their readers were somehow responsible for what goes on in India. And who are we to tell Indians what to do with their money, by the way?

I couldn’t find these numbers in the report itself, but it seems that OECD subsidies are in fact a bit over $60 billion, while total subsidies exceed $160 billion. (The PDF is unfortunately for-pay only, and I’m still not done reading the web version, but you don’t need to read it all to reach the conclusions I arrived at in this article).

Now, I’m not an expert in energy subsidies in the BRIICS region, but for OECD the $65 billion figure still seemed off. The US probably accounts for about half of fossil fuel consumption in this bloc, and EIA estimates yearly subsidies of $1 billion for coal, $2.3 billion for hydrocarbons, and $3 billion so that low-income people can heat their homes i.e. LIHEAP (page 16). That was in 2013, mind you; the OECD was instead talking about 2014, when average prices for all fossil fuels were considerably lower. There’s also $3 billion in ‘end use’ subsidies that probably include some fossil fuels, but then LIHEAP also includes electricity.

Apart from these subsidies there are of course a series of tax loopholes or incentives, which generally affect all manufacturers and extractive industries, from lithium miners to solar panel makers; the main ones are accelerated depreciation and the domestic production tax abatement. I’ll admit to being a bit ignorant here, as the issue involves not just the value of these subsidies but whether they should be considered subsidies at all. And since a lot has been written about US subsidies already, and by people who this better than me, I figured I could contribute something by zeroing in on my home country, Spain. What, exactly is the OECD counting as a subsidy?

It does not mean what you think it means

If I’m going to buy chocolate and I find that the milky one is cheaper than the composition, because the government has decided that this product shouldn’t collect value-added tax, well, whether that’s a ‘subsidy’ is at least open to debate.

So before calculating subsidies you have to know taxes. In Spain, as is the norm in Europe, hydrocarbons get hit first with an excise tax and then with the VAT (which is applied over the inflated, after-hydrocarbon-tax price). For the year 2014, the Impuesto Especial de Hidrocarburos was:

• 330€ per thousand liters (diesel)
• 400€ per thousand liters (gasoline)

There are other rates for kerosene and different types of gasoline and so on, plus a further tax charged by our ‘regions’ (Comunidades Autónomas), but let’s not get bogged down in details (here are a ton if that’s your thing). As stated before, both diesel and gasoline pay the standard VAT rate, i.e. 21%, on top of this. Of course not all products pay this rate; for example, I teach English for a living and my students don’t pay VAT at all – I’m subsidized like crazy.

So let’s see how this plays out in the real world. Assuming average oil prices of $80 over 2014, with average EUR/USD exchange rate of 1.2, that would mean in 2014 oil cost us in Europe €66.67/barrel. As there are 15€ of refining/transportation costs for gasoline and diesel; that would leave a pre-tax price of €81.67/barrel, or €0.51/liter.

This chart sums everything up:

I used assumed prices because there are different benchmarks for oil and its derived products, so it would take a lot more effort to get the ‘real’ price, and a difference of a few cents per liter between estimations and real prices doesn’t really matter.

Alright, so nearly half of diesel’s cost (and over half of gasoline’s) comes from taxes. Let’s exclude the portion of VAT applied to the ‘normal’ price (51 cents per liter), as we can argue that this is the tax paid for videogames and toilet paper; that happens to be 10.7 cents. We’re left with 39.9 cents of taxes for diesel (39.3% of retail price) and 48.4 cents for gasoline (43.9% of retail). Remember, this includes both the hydrocarbon tax itself, and the portion of VAT that exists only because of the hydrocarbon tax.

On the face of it it’s hard to see how the OECD could see any ‘subsidies’ here.

You’ve seen this movie before, so you know what’s coming: the OECD managed to find subsidized fossil fuels in my country. They do this because they consider it a ‘subsidy’ when a fuel pays a reduced hydrocarbon tax, even if said fuel still pays VAT.

Really.

Don’t take my word for it, click here. There are two categories of subsidies:

• Budgetary transfer: this is actual money coming out of the government’s coffers. It has problems of its own, but I’ll deal with it later. In Spain it mostly exclusively means money for coal producers. In 2014 it accounted for €414 million.
• Tax expenditures: a spectacularly misnamed category that actually counts foregone tax revenue. In 2014 it made up two thirds of overall subsidies, or €817 million.

And what are these tax expenditures tax cuts? Well let’s see:

• Fuel tax exemption: well, as the name says some activities do not pay Impuesto de Hidrocarburos. However, the fuel these people buy is not exempt from VAT.
• Fuel tax reduction: farmers and miners pay less hydrocarbon tax than others. Huh? They still pay some hydrocarbon tax plus standard VAT, and the OECD finds several hundred million worth of ‘subsidies’ here?
• Fuel tax partial refund: another provision for farmers and perhaps a few more sectors. Remember when I said diesel pays 330 euros per liter? Well this gives them back 78 euros per liter, so of course OECD has to count it as a subsidy.

Now, I’m not sure if the ‘fuel tax partial refund’ effectively wipes out the hydrocarbon tax for farmers; you have to apply for it anyway, i.e. it’s not like you get the discount at the pump. But even if it does, I have to emphasize this again: farming diesel still pays VAT. Right now it costs €0.784/l, or €124.6/barrel, or $110/barrel; Brent right now is $48!

So you see why I didn’t want to pay 16€ for the PDF.

Now, to be fair to the OECD, at least they published a detailed database online so that the world could see their calculations. But that’s not an excuse for propaganda work.

And to be clear, the organization admits as much when explaining its methodology:

‘The OECD inventory addresses a broader range of measures, including many that do not reduce consumer prices below world levels. It uses a broad concept of support that encompasses direct budgetary transfers and tax expenditures that provide a benefit or preference for fossil-fuel production or consumption, either in absolute terms or relative to other activities or products.’

They just forgot to say what are the ‘other products’ they are comparing fossil fuels with… and those turn out to be other fossil fuels.

You couldn’t make this up.

Look, OECD, if you really want to get a big figure you can say that, because diesel pays less tax than gasoline, all of diesel is subsidized. You can squeeze another billion that way – imagine the returns if repeated across all the countries in the study.

Just to make it totally clear that this is in fact how they arrived at the $60 billion figure for OECD countries (and $160 billion when including BRIICS), here is the report itself, in page 35:

And page 39:

Budgetary transfers: real subsidies not for fossil fuels

What about the ‘real’ money my government spends subsidizing the Earth’s destruction? Well, one has to admit that there are real subsidies – all of them for coal producers. Many Spanish, myself included, consider these total nonsense and in fact the subsidies will be cut off when coal mining ends (probably before 2020). There’s a long backstory I don’t want to bore you with, but let me just say that if coal production subsidies have survived for decades it’s because of certain political sectors.

(The power plants would burn coal anyway, and will do so when the subsidies end. The aim of the subsidies has been not to prioritize coal per se, but to defend coal from Asturias over that of Australia).

If you click in the database, it turns out that by far the biggest category of ‘budget transfer’ is ‘Inherited liabilities due to coal mining’, which costs €353 million. And what is that?

This measure provides certain non-profit organizations — along with coal miners and their families — with budgetary transfers to help address the social and technical costs that stem from the decline of the coal-mining sector in Spain.

I can’t even…

Alright, so subsidies intended to ease people away from coal production are classified by the OECD as coal subsidies.

I’m not positive what is included in these €353 million; it may be miner pensions, or infrastructure for coal-mining regions or whatever. In any case, it is not intended to help coal as a fuel. If anything, its result will be the opposite; a case can be made that without this money, coal-mining regions would be even more insistent on keeping this activity alive, and as a result would receive more subsidies for actual production.

You know what’s funny: if you ask a government economist, he may tell you that these ‘liabilities’ (miner pensions and so on) are in fact an asset, and these ‘subsidies’ are a boon to government. Because, you know, the multiplier effect – for every dollar we spend on X, we get $1.60 or something like that. So to kickstart the economy we may have to subsidize these coal liabilities a bit more.

Leaving snark aside, the two categories that actually constitute subsidies to producers (there no consumer-side subsidies) are:

• Operating aid to Hunosa / coal producers: this accounts for €53 million
• Adjustment aid to coal producers: this adds another €8 million

That’s it: a big frigging $61 million. Quite a pullback from the €1.2 billion OECD reported!

I guess I could find a lot more problems and contradictions and sheer nonsense if I looked into the other countries’ databases; readers can of course check it and communicate any notable findings, either in the comments section, by email or on twitter. I will of course acknowledge any such find if/when a new article comes up. But my time is limited, and further debunking of a garbage study isn’t a priority.

What about the IEA?

This organization will publish its World Energy Outlook, which includes data on subsidies for the previous year, in November. I could use the 2013 version and see how their figures for the BRIICS stack up compared to OECD data… but since better data will be available in a month, it’s not worth the hassle.

One of the most curious things is that the much-quoted $548 billion in ‘fossil fuel subsidies’ for 2013 includes $130 billion spent on… wait for it… electricity.

How to put an end to fossil fuel subsidies

Perhaps the message the OECD is really sending has been lost. After all, this is the situation they are criticizing:

I assumed that ‘special diesel’ pays 100€ per thousand litres. Of course this special fuel does not exist; there are instead different fuels we call ‘diesel’ and different tax rates for ships, farming and so. But this simplification can help illustrate the message.

Perhaps what the OECD is suggesting is something like this:

So it looks like, by wiping out the hydrocarbon tax, we also wipe out subsidies. Now that is a subsidy cut I want to see!