Subsidizing The Epocalypse

Guest Post by Willis Eschenbach

I take as my subject for this post a claim made over at Forbes Magazine, viz:

I saw that and said “Whaaaa”? My urban legend detector light started flashing bright red at that claim that we’re on the primrose path to the epocalypse. 

Me, I always want to go the actual study instead of the media interpretation. In this case, the underlying study is by the IMF, the International Monetary Fund. It uses a most unusual definition of “subsidy”. Normally, subsidies are divided into direct and indirect subsidies.

A direct subsidy is money given to a producer or consumer. It’s actual cash.

An indirect subsidy, on the other hand, doesn’t involve actual cash, although it has a defined monetary value. An indirect subsidy includes things like tax rebates or R&D grants or the like.

The IMF definition, on the other hand, is quite bizarre. I’ve looked at a lot of studies of fuel subsidies, and only people with an axe to grind use one like this:

This paper updates estimates of fossil fuel subsidies, defined as fuel consumption times the gap between existing and efficient prices (i.e., prices warranted by supply costs, environmental costs, and revenue considerations), for 191 countries.

To highlight the difference between the standard definition and the IMF definition, let me give you a crystal-clear example of what the IMF considers to be a subsidy for “environmental costs” to the evil oil industries … but first I am obliged to warn you this stuff is not for the lily-livered or the faint of heart. So I’ll offer you a chance to avoid spoiling your digestion … any takers? OK, for those remaining hardy souls, one of the IMF’s many environmental 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 environmental “subsidy” that they claim is going to the energy companies. 

And what are “environmental subsidies” when they are at home? I thought you’d never ask. Fortunately, they give examples, viz:

local air pollution mortality, broader costs associated with the use of fuels in road vehicles, and global warming

In the strange IMF parallel universe, the cost of fixing each of those 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?

Let me pause a moment here. They say that we should include “broader costs associated with the use of fuels in road vehicles”, meaning building the roads, building the bridges, and maintaining both of them.

But if you’re going to include that, how about the “broader costs associated with the use of fuels in building construction”? Buildings, like roads, are built using fossil fuels and run on fossil fuels. So … why include the costs of one and not the other?

These kinds of sort-of-related-not-really-costs are generally called “externalities”. The HUGE problem with using them is once you start to include anything but direct costs … where do you stop? Why include the cost of road construction and maintenance, but not the cost of building construction and maintenance?

From the study, the claimed reason for including the road costs is:

Environmental costs are just as real as supply costs, and undercharging for an unbiased (albeit uncertain) estimate of them is tantamount to undercharging for the true social costs of consumption.

Well … no. For many reasons. First, supply costs have an actual dollar figure to them, to the penny. Environmental “costs” do not. You can just pick a number.

Next, if your estimate is “uncertain”, how on earth would you know if it is “unbiased”.

Next, there is no rule or even rough guideline regarding what to include. Roads? Bridges? Potholes only? The possibilities are endless.

Next, if you need a clear example of how ludicrous this process is, consider the total impossibility of putting a dollar figure on the last item in their list, “global warming”. Seriously?

And finally, here is the real difficulty—in calculating the “externalities”, they are only including the external COSTS that they claim are associated with fossil fuels. They are totally ignoring the external BENEFITS of fossil fuels. Yes, there is a cost to fixing the roads, but there are also benefits. 

These benefits, of course, are just as hard to put a price on as are the external costs. How much is it worth to have a good road to take me to the hospital after my seizure in November? Well … to me, a hell of a lot, although of course YMMV. I discussed this whole problem of monetizing externalities here.

And to me, this is why you should NEVER mix real costs and “monetized externalities”. One is real and very measurable. The other is an “accordion variable”, one that you can make as wide or as thin as you wish.

In other words, this IMF study has nothing to do with actual subsidies. The IMF: 

• calculates an imaginary “efficient” price level that the authors think fuel would be supplied at on some kind of imaginary ideal planet, 

• adds in the price of everything but the kitchen sink, e.g. they’ve added in the cost of “traffic congestion”, the cost to repair potholes, and even the imaginary cost of “global warming”, 

• subtracts from that giant bulked-up number the actual price, and 

• calls the difference a “subsidy”.

Yeah, when you add in highly suspect cost estimates of repairing potholes and traffic congestion and “global warming” as “subsidies” to fossil fuels, it’s easy to get up to a really, really big number. And that big number is many things. It’s impressive. It’s alarming. It scares children.

But it’s not a subsidy of any kind, direct or indirect. It’s a morass of monetized externalities, but only costs, not benefits.

For comparison, let’s look at real numbers. The US Energy Information Agency keeps records of actual subsidies. These cover both direct and indirect subsidies, viz:

• Tax expenditures: the amount of tax benefits or preferences received by taxpayers and forgone by the federal government

• Direct expenditures to recipients (i.e., both producers and consumers): the amount of grants, loans, or other financial assistance awards made directly to recipients

• Research and development (R&D) support: the amount of grants, loans, or other financial assistance awards made for R&D

• DOE loan guarantees: financial support authorized to be provided by DOE for innovative clean energy technologies that are typically unable to obtain conventional private financing because of their high technology risks.

This is the standard definition of subsidies. No nonsense about externalities. No ridiculous attempt to add in the fantasy cost of “global warming”

From Table 3 in the document linked to above, the total of direct plus indirect subsidies for oil and natural gas is about $2 billion dollars per year. For coal, it’s about $1.15 billion per year … a far, far cry from their claimed $649 billion. 

Grrrr …

---

Intermezzo:

I took a break to go visit the ocean with my gorgeous ex-fiancée. Analyzing this kind of IMF garbage tends to angrify my blood. We went to the point out at the mouth of Bodega Bay. No whales today, big waves though. The waves are supposed to keep building for a couple days, the surf spot at Mavericks will be pounding …

We went out on the point where there is a curious kind of Stonehenge-like monument to the men and women who go to sea, and to those who don’t return. That good woman and I used to fish commercially out of this harbor, so it holds many memories for us. Here’s the monument, set up like the bow of a ship, with a boat’s steering wheel hidden on the back side of the square center stone. You can stand there, hold the wheel, and look out to sea:

And here’s the brass plaque on the center stone:

We walked out to the point, and looked out over the channel between the shore and a nearby offshore island, the narrow entry that she and I would use to bring the boat back to harbor, the passage that the sailors call “between the rock and the hard place” …

And the wind and the sea did their usual magic, soothed my blood and left me enjoying the very last day of 2019.

But I digress …

---

To return to the article that I’m analyzing, the headline comparing subsidies with education expenditures is very deceptive. To begin with, their calculated “subsidy” (which is nothing of the kind) is $649 billion per year. This is a huge, monumental, unbelievable exaggeration … but let’s pretend it’s real for just a moment. This is indeed about ten times larger than FEDERAL spending on education.

But what they don’t bother to mention is, the Feds are only responsible for a tiny bit of US spending on education, only about $59 billion.

Most spending on education is at the state and local level. Between Federal, state, and local direct cash outlays, we spend $1.23 TRILLION on education, about twice the amount of even their bogus figure. See here for details. 

And the final problem with their analysis? It is that you cannot just look at raw subsidy numbers as they are doing. Once again, it’s a “cost/benefit” deal, and once again, they have left out the benefits. Consider: which one is better … spending $100 to subsidize the production of lots of energy, or spending $10 to subsidize a business like Solyndra that crashed and burned?

Obviously, the $100 option is far preferable to the $10 option. Raw subsidy numbers are meaningless.

So here’s a graph of those same EIA direct and indirect subsidies discussed above, but this time expressed per barrel of oil equivalent energy produced. 

As you can see, per the amount of energy produced, we’re spending a hundred times more subsidizing renewables than we spend subsidizing natural gas and oil.

SUMMARY:

• Total US subsidies for fossil fuels, both direct and indirect, are about $3.2 billion dollars with a “b”. Their $649 billion dollar figure is nonsense.

• Total US spending on education, combining Federal, state, and local, is about $1.23 trillion dollars with a “t”, or about five hundred times as much as we spend on fossil fuel subsidies. Their $59 billion figure is only about 5% of the total educations expenditures.

• Per unit of energy produced, subsidies on renewables (solar, wind, biomass) are about a hundred times as large as the subsidy on oil.

CONCLUSION:

• Epocalypse canceled, sorry, no ticket refunds.

My very best New Years wishes to all,

w.

PS: Misunderstandings are the bane of the intarwebs. When you comment, please QUOTE THE EXACT WORDS you are discussing, so we can all be clear just what and who you are referring to.