There is no fossil-fuel subsidy pot of gold

Mark Milke and Lennie Kaplan, Financial Post, July 22, 2021

Some supporters of renewable energy argue that taking supposedly massive current subsidies to oil and gas and switching them over to renewables will help make renewables cost-effective for legions of new consumers. Is that true?

Unfortunately, estimates of current worldwide oil and gas subsidies differ in the hundreds of billions of dollars. For example, the OECD puts them at just over $178 billion in 2019; the International Energy Agency (IEA) has them at just under $317 billion that same year; and the International Renewable Energy Agency (IRENA) estimates fossil fuel subsidies were fully $447 billion in 2017, the year of its latest estimate.

As for subsidies to solar, wind, energy efficiency, e-vehicles such as Tesla and other self-described green sectors, IRENA estimated those at $166 billion, with nuclear subsidies at another $21 billion.

Some combinations of these numbers would support the claim that future subsidies to renewables could be financed out of existing subsidies to the oil and gas sector. IRENA recommends doing just that, in fact. It would “flip” fossil fuel subsidies from $447 billion in 2017 to a forecast $139 billion in 2050, while increasing green subsidies from $166 billion in 2017 to $315 billion in 2050 and holding nuclear flat.

There are two problems with this scenario, however, and they are severe.

First, the flip assumes that renewables pack the same energy density — or “power punch” — that oil and gas do. But, according to a leading expert in energy transitions, Professor Emeritus Vaclav Smil of the University of Manitoba, that belief is mistaken. As Smil noted in 2018, ignoring energy density by moving to all-renewable sources of energy could require countries to “devote 100 or even 1000 times more land area to energy production than today… [which] could have enormous negative impacts on agriculture, biodiversity, and environmental quality.”

Second, in many cases estimates of subsidies to the fossil fuel industry worldwide depend on dubious assumptions. In 2011, economists Kenneth McKenzie and Jack Mintz noted that measuring fossil fuel subsidies was a “tricky art.” They spotted numerous methodological errors in existing measures, including inappropriately adding up individual tax expenditures and royalty relief items without accounting for critical interactions between taxes and royalties — a mistake akin to arguing that people’s behaviour would not change if the top marginal rate of personal income tax rose from 25 to 75 per cent.

Another example: In 2017, University of Guelph economist Ross McKitrick found numerous problems with the International Monetary Fund’s estimate that US$5.6 trillion was being spent subsidizing energy worldwide. In addition to not taking account of the behavioural effects of changes in tax expenditures, the estimate counted non-tolled roads as a subsidy, among other errors. As McKitrick argued, it “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’s summary observation was that as additional assumptions are added to the analysis “the (subsidy) numbers get dramatically higher but they also become meaningless and potentially misleading.”

Even with subsidy estimates that may be closer to reality, the have-your-subsidized-renewable-cake-and-fewer-fossil-fuel subsidies-too scenario runs into the political problem of who currently benefits from subsidies. For example, the OECD’s estimate of $178.2 billion in oil and gas subsidies in 2019 judges that $34.2 billion or 19 per cent went to producers, while another $18.3 billion, or 10 per cent, went to fossil fuel development without directly benefiting individual producers.

But by far the largest share — fully $125.5 billion or 70 per cent — went to consumers. That’s usually in the form of below-market prices for gasoline in countries such as Venezuela and Iran, where per litre prices were recently about 25 cents and 75 cents (Canadian) respectively.

Large consumer subsidies of this sort mostly do not exist in Canada. Our subsidies are usually either one-offs, such as when the federal government bought the Trans Mountain pipeline, or tax concessions for innovation, research and development, often on environmental problems.

That suggests countless billions of dollars will not flow seamlessly and painlessly to the renewables sector from the oil and gas sector, because much of the assumed fossil fuel subsidies that anti-oil activists claim exist are either not there, or take the form of consumer subsidies that lower gasoline prices in countries such as Iran and Venezuela, but not in Canada.

There is no “pot of gold” — whether black gold or regular gold — from which to divert future trillions of dollars to green/renewable subsidies. Subsidies to these energy forms will have to be paid for with 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.