Fossil Fuel Subsidies

What is a fossil fuel subsidy?

A fossil fuel subsidy is any government action that lowers the cost of fossil fuel energy production, raises the price received by energy producers or lowers the price paid by energy consumers.

How much money does the government give the oil, gas and coal companies?

Estimates of the value of US federal subsidies to the domestic oil industry alone (not coal) range from roughly $6 billion a year, to an amazing $39 billion annually. The most recent comprehensive study of US energy subsidies (see graph below) identified $72.5 billion in federal subsidies for fossil fuels between 2002-2008, or just over $10 billion annually.

Internationally, subsidies are even more difficult to estimate but they are likely more than $600 billion annually, of which at least $100 billion are production subsidies.

Didn't President Obama and the G20 announce an end to fossil fuel subsidies?

No.  The Obama Administration has proposed eliminating roughly $3.8 billion annually in fossil fuel subsidies.  However, even in the wake of BP's oil disaster in the Gulf of Mexico, Congress has not shown enthusiasm for ending these subsidies.

Even if Congress did act, there is a lot left out of the Administration's proposal.

Similarly, the Administration has proposed to the G20 nations that they all eliminate fossil fuel subsidies. Although this process has generated some new studies and data, so far very few subsidies have actually been eliminated as a result.

To take action and learn more about why subsidies are so difficult to eliminate, please visit Dirty Energy Money.  To research and gain a better understanding of the subsidy issue - read on.

Background

The G20 group of nations have committed to ending fossil fuel subsidies. Eliminating fossil fuel subsidies is a great idea, if it's done right.  This is trickier than it sounds.

The principle is simple and clear: You can't really say you're committed to the fight against climate change if you're still funding oil and coal.   Many global leaders including U.N. Secretary General Ban Ki Moon, Sir Nicholas Stern, Al Gore, and John Browne (the former Chief Executive of BP) have all spoken out against the ongoing practice of subsidizing fossil fuels with public funds.  Obama campaigned on the idea, and the administration has already proposed eliminating some domestic subsidies in the 2010 budget.

But the reality, is, as usual, stickier.  Calls for subsidy removal tend to be answered by the oil industry and their allies with dire predictions of rising gas prices and consumer pain thus leading to unemployed politicians.  This is because the poor oil industry couldn't possibly have anything less than record profits, and they'll continue to either use our tax money to do it, or they'll jack up prices on us.  In other businesses involving addiction, this is called a protection racket.

Consumption vs. Production Subsidies

As mentioned above, a fossil fuel subsidy is any government action that lowers the cost of fossil fuel energy production, raises the price received by energy producers or lowers the price paid by energy consumers. There are a lot of activities under this simple definition—tax breaks and giveaways, but also loans at favorable rates, price controls, purchase requirements and a whole lot of other things.

Generally, subsidies are either on the production side (making the cost of production cheaper), or the consumption side (making the price of fuel cheaper to the consumer). In the U.S. and the rest of the industrialized world, we generally have production subsidies, which also serve as corporate welfare to the oil and coal industry who return the favor with lavish campaign contributions.  But in the developing world, consumption subsidies, which make access to energy and fuel affordable to the poor, are far more common.

Excluding the military and wars for oil, consumption subsidies are the largest subsidies—the IEA just published a report indicating that consumption subsidies in 37 developing countries were worth $557 billion annually.  However, the intent of these subsidies is generally not to increase consumption of fossil fuels per se—rather it's often simply to help make access to energy and transport affordable in developing countries.

Therefore, eliminating consumption subsidies is not the place to start leveling the playing field for clean energy. Like raising prices on U.S. consumers, it's likely to provoke a backlash in developing countries, ensuring gridlock for years to come.

US Domestic Subsidies

Source: Environmental Law Institute

Estimates of the value of US federal subsidies to the domestic oil industry range from roughly $6 billion a year, to an amazing $39 billion annually. The most recent comprehensive study of US energy subsidies (see graph above) identified $72.5 billion in Federal subsidies for fossil fuels between 2002-2008.

There are several reasons for this discrepancy. First, accounting methods and exact definitions of subsidies vary. Second, while environmental and consumer groups tend to calculate the total amount of revenue to the American taxpayer that these subsidies cost, others note that "many subsidies have a higher value to recipients than their direct cost to the government." Finally, some of the highest estimates includes a portion of defense spending (more info on defense subsidies to oil here and here).

In other words, the higher values are more indicative of the corporate welfare given to the already highly profitable oil industry annually, while the more conservative figures are a better estimate of how much the elimination of these subsidies would save the U.S. taxpayer. It should be noted that while the high estimate does include some of the cost of US military "defense" of the Persian Gulf region, it does not specifically incorporate any increase in defense spending relating to Iraq, or any quantification of the environmental externalities associated with oil. Neither includes any amount of international subsidies, or Oil Aid.

While the estimates of how much subsidies are worth varies, estimates of the relative levels of funding of energy types are consistent. The chart above illustrates that the vast majority of subsidies still go to fossil fuels.

These energy subsidies are completely out of step with a nation that now broadly accepts the need to end our collective "oil addiction".

International Subsidies

A better idea would be eliminating international subsidies via institutions like the World Bank, the U.S. Export-Import Bank, or the Overseas Private Investment Corporation—all of which are supported by U.S. tax dollars, all of which gave billions last year to the fossil fuel industry, and all of which could be important sources of public funds for clean energy.

These institutions actually use our tax dollars to build infrastructure for fossil fuel extraction and use in the developing world. So, if we don't end this practice first, we're essentially saying to the rest of the world that we'll use our public funds to support Exxon, Chevron, and Shell to build carbon intensive infrastructure in the developing world, but we'd like the developing world to remove the subsidies that make use of that infrastructure affordable to its population.

Visit End Oil Aid - our coalition site that details international subsidies to the oil industry.

So how do we transform oil companies into energy companies and jumpstart the new energy economy? The first step is a Separation of Oil & State – including an end to governmental subsidies to Big Oil and an investment in renewable energy alternatives and energy efficiency instead.

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