By Mark Milke
and Lennie Kaplan
Canadian Energy Centre
When the issue of taxpayer subsidies for energy comes up – oil and gas and renewables alike – the public, policy-makers and media could be forgiven if they feel like they’re drowning. Endless decimal points and numbers that run into the trillions can make it near impossible to grasp what it all means.
And competing estimates of such subsidies are bound to leave the casual observer perplexed and not much better informed. Most people don’t wade into the technical assumptions behind published numbers to determine where they’re accurate or not.
When governments worldwide are pressed to spend taxpayer money on energy – be it oil, natural gas or renewables – one can disagree or agree with a specific request, but the first job is to get accurate numbers from which subsequent decisions can be made.
We have heard calls for governments to provide greater subsidies to renewables, along with initial estimates of present and future costs. In some cases, the call for more funding for wind, solar and much else is paired with the claim that all that governments need do is switch from subsidizing oil and gas activity to green energy.
The argument goes: take money from oil and gas subsidies, use it to subsidize green energy and there will be no extra cost to taxpayers.
There are a number of faulty assumptions here. The first is the claims of trillion-dollar subsidies to the fossil fuel industry. Assumptions used to calculate fossil fuel subsidies are so wide-ranging as to render numbers largely meaningless. The result is an overestimate of actual subsidies to fossil fuels.
For example, in 2011, economists Kenneth McKenzie and Jack Mintz noted that measuring fossil fuel subsidies was a “tricky art.” They spotted numerous methodological errors from anti-oil-and-gas activists, including using a subsidy definition designed for a different purpose and inappropriately adding individual tax expenditures and royalty relief items without accounting for critical interactions between taxes and royalties.
Some activists assume, wrongly, that high tax and royalty rates bring in just as much revenue per unit (i.e., a barrel of oil) as more moderate rates. It’s akin to arguing that top marginal personal income tax rates should be set at 75 percent, with anything less constituting a subsidy.
In 2017, University of Guelph economist Ross McKitrick analyzed energy subsidy estimates, including the International Monetary Fund estimate that US$5.6 trillion was spent on subsidizing energy worldwide.
McKitrick found numerous problems. They included overstating the size of a subsidy using tax expenditure calculations – overstatements that result when a policy is cancelled and the subsequent effect on revenues is not accounted for; or labelling non-tolled roads a subsidy, which “clouds the subsidy discussion if we arbitrarily select one type of public good and call it a subsidy without applying the same reasoning to all other public goods.”
McKitrick summarized that one can include all sorts of assumptions to produce high fossil fuel subsidy estimates. However, “the numbers get dramatically higher but they also become meaningless and potentially misleading.”
Let’s break down one estimate of fossil fuel subsidies. The Organization for Economic Co-operation and Development (OECD) estimates that in 2019, worldwide subsidies for oil and gas amounted to US$178.2 billion.
Worldwide, US$34.2 billion or 19 percent went to producers. Another US$18.3 billion, or 10 percent, went to general services, otherwise known as policies, transfers or expenditures where fossil fuel development is the main beneficiary. Seventy percent of estimated oil and gas subsidies in 2019 worldwide, US$125.5 billion, went to consumers. That’s usually in the form of below-market prices for gasoline in countries such as Venezuela and Iran.
Large subsidies to consumers mostly don’t exist in Canada, the United States or most other Western countries. Subsidies in these countries more often are for one-off activities such as the Canadian government buying the Trans Mountain pipeline.
The International Renewable Energy Agency (IRENA) estimates fossil fuel subsidies at a much higher level than others (US$447 billion in 2017), in part by engaging in assumptions that economists such as McKitrick found “potentially misleading.” IRENA also pegged subsidies for nuclear energy at US$21 billion and US$166 billion for renewables in 2017.
IRENA wants to flip assumptions so that by 2050, subsidies to nuclear would be flat at US$21 billion but green subsidies would be worth US$315 billion, with oil and gas subsidies down by two-thirds to US$139 billion.
The problem, as McKitrick and others have found, is that it appears the trillion-dollar estimates of fossil fuel subsidies are far too high.
Countless billions of dollars won’t flow seamlessly to the renewables sector from the oil and gas sector, because much of the assumed fossil fuel subsidies are mostly not there, or are consumer subsidies for lower gasoline prices in a few countries.
There’s no pot of gold from which to divert trillions of dollars to green/renewable subsidies. Instead, those proposed future subsidies will have to be paid for from taxes or additional government debt.
Mark Milke and Lennie Kaplan are with the Canadian Energy Centre, an Alberta government corporation funded in part by carbon taxes. They are authors of the report No Free Lunch for Taxpayers: Examining Estimates of Subsidies to Renewables and Fossil Fuels.
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