From Climate Scepticism

By MARK HODGSON

Almost two years ago, Jit wrote an article pointing out that claims made in the Guardian and elsewhere about alleged UK subsidies for fossil fuels were more than a little dubious. When he investigated the claims, he found, almost without exception, that the alleged subsidies were no such thing. Instead, the alleged subsidies amounted to tax reliefs or taxation at a lower level than might otherwise be the case. For example, it takes extraordinary chutzpah to claim that a reduced rate of excise for red diesel is a subsidy, when fuel excise duty in 2019-20 cost the average UK household around £1,000 and amounted to 1.2% of national income.

My Concise Oxford English Dictionary defines “subsidy” as:

a sum of money granted from public funds to help an industry or business keep the price of a commodity or service low; a sum of money granted to support an undertaking held to be in the public interest; a grant or contribution of money.

The common factor in all three limbs of the definition is the giving of funds to the person being subsidised. It does not involve taking less money from someone than might otherwise be the case. Doing so might or might not be controversial, but whatever else it is, it is not a subsidy.

World Bank

Using language correctly doesn’t seem to matter when there’s a planet to save. The World Bank recently issued a report with the title “Detox Development – Repurposing Environmentally Harmful Subsidies”. The report covers a number of areas, and focuses on agricultural impacts on land, fishing in the oceans, and the effect of fossil fuels on air quality. As it runs to over 300 pages, I will confine my gaze to the section dealing with supposed fossil fuel subsidies. In passing, I note that the Guardian seized gleefully on the report with an article carrying the alarmist and alarming headline: “Vast fossil fuel and farming subsidies causing ‘environmental havoc’ – World Bank says subsidies costing as much as $23m a minute must be repurposed to fight climate crisis”.

What, then, of these awful fossil fuel subsidies? It isn’t always easy to separate the “subsidies” relating to fossil fuels from those relating to fishing and agriculture, since the headline-grabbing introduction lumps them all together. The first thing to notice is that the “subsidies” are alleged to exceed US$7 trillion per year, but:

This includes both explicit subsidies—which are direct public expenditures totaling about US$1.25 trillion—and implicit subsidies—which measure the societal impacts of externalities and amount to more than US$6 trillion.

Immediately we notice that just over 17% of the “subsidies” are actually subsidies, as defined by my dictionary. The other 83% or so aren’t subsidies at all, not unless you decide to redefine words, as the World Bank and others have obviously decided to do. They introduce (or repeat) the concept of an “implicit subsidy”, which seems to mean someone’s assessment of what fossil fuel producers are getting away without paying. Or, as the World Bank puts it:

Implicit subsidies are measured as unpriced externalities and account for the rest of the burden of subsidies on society and the economy.

In any event, persevere with the report, and the explicit fossil fuel subsidies apparently amount to less than half of the headline sum across the three sectors, namely US$577 billion in 2021. Keep reading, and it turns out that the numbers are in any event someone else’s estimate, not the result of World Bank research.

Parry, Black and Vernon

The $577 billion figure covers 191 countries and comes from a 2021 report by Parry, Black and Vernon. As does the $5.4 trillion figure for “estimated impacts from local air pollution, greenhouse gas emissions, road congestion, and forgone tax revenues”. That report (which can be downloaded here tells us that:

Underpricing for local air pollution costs is the largest contributor to global fossil fuel subsidies (Figure ES3), accounting for 42 percent, followed by global warming costs (29 percent), other local externalities such as congestion and road accidents (15 percent), explicit subsidies (8 percent) and foregone consumption tax revenue (6 percent).

They recognise that:

Although environmental costs are subject to uncertainty and controversy, they are a key component of the societal costs of fossil fuel use and therefore it is important to factor an unbiased estimate of them into fuel prices.

It in turn refers to earlier papers, which introduced concepts and methodology seeking to assess these costs, and before you know it, you’ve disappeared down a rabbit hole:

Coady and others (2015) introduced the concepts of narrow or ‘pre-tax’ subsidies and broad or ‘post-tax’ subsidies where the former reflected (most importantly) underpricing for supply costs and (less importantly) subsidies for fossil fuel producers, while the latter also included underpricing for (most importantly) environmental costs and (less importantly) general consumption taxes. Coady and others (2019), for example, put global post-tax subsidies at a striking $4.7 trillion in 20153, or 6.3 percent of world GDP, with only 5 percent of this figure reflecting pre-tax subsides. This paper uses a slightly different terminology4, referring to explicit subsidies as undercharging for supply costs and producer subsidies (i.e., pre-tax subsidies), and implicit subsidies as undercharging for environmental costs and general consumption taxes (i.e., post tax subsidies less pre-tax subsidies).

Reading on (I’m still in the Parry, Black & Vernon paper) and we learn that most of the alleged indirect subsidies (or under-pricing) relate to the power generation sector and that:

By region East Asia and the Pacific accounts for 48 percent of total energy subsidies. And by country, China remains the biggest subsidizer in absolute terms, followed by the US, Russia, India, and the EU.

I can’t help thinking that what all this means is that mostly (but not invariably) developing countries are trying to keep prices low in order to ensure that their poor inhabitants can enjoy affordable power supplies. I’m not sure that counts as an unqualified evil, but I am sure that you won’t easily persuade them to stop doing it. I am also confident that in the unlikely event that you do persuade them to stop doing it, the inhabitants of those countries will be extremely unhappy.

The study identifies annual subsidies (both explicit and implicit) per capita in the UK of US$352. This compares to other countries at the following per capita rates (al in US$):

Argentina: 644

Australia: 1,729

Canada: 1,686

China: 1,569

Germany: 863

France:457

Indonesia: 470

Italy: 676

Japan: 1,348

Russia: 3,560

Saudi Arabia: 4,548

South Africa: 848

[South] Korea: 1,332

Turkey: 1,387

USA: 2,006

Iran: 1,815.

Remind me why we in the UK keep beating ourselves up and have to “lead the way”.

Nigeria

Here, in the real world, is an example of what happens when you revoke explicit subsidies (heaven help you if you go for those “implicit” subsidies). Nigeria recently scrapped (or announced the scrapping of) direct subsidies, and it’s not going well.

“Nigeria fuel subsidy: Tinubu’s plan to scrap measure sparks rush to stock up” says the BBC:

The first full day in power of Nigeria’s new president has seen people panic-buying fuel following his decision to scrap a decades-long subsidy on petroleum products…

…Some people have posted videos online of filling stations already increasing prices, in some cases by more than 200%.

Some drivers of private buses, which many Nigerians rely on to get around, have also been unable to fill up their vehicles.

This has left people stranded at major bus stops in the capital, Abuja, and the country’s biggest city, Lagos.

And here’s Amnesty International’s take on it – “Nigeria: Removal of fuel subsidy must not exacerbate poverty”:

The Nigerian authorities must urgently put in place measures to protect the rights of people most affected by the removal of the fuel subsidies and prioritize addressing widespread hunger, higher unemployment and the rapidly falling standard of living.

Problems with the World Bank Report

The first and most obvious problem is how we define subsidies. Although it is clear that much work has been done to try to justify the concept of “implicit” subsidies, and to render that concept an objective one, it seems to me that a great deal of subjectivity remains.

That can readily be illustrated by the briefest of analyses of the central thrust of the report, to the effect that fossil fuels cause air pollution which lead to premature deaths. Yet its own analysis says that:

While outdoor air pollution is pervasive, poor air quality also poses severe health risks inside people’s homes. Indoor air pollution results from the burning of solid fuels like coal, wood, dung, or crop waste for cooking, lighting, and heating (Ritchie and Roser 2022). The combustion of such substances releases various pollutants that are harmful to human health. As with ambient air pollution, long-term exposure to these pollutants increases the risk of life-threatening diseases, making indoor air pollution one of the leading global environmental risk factors (Murray et al. 2020). Global estimates of premature deaths caused by indoor air pollution are similar in number to those caused by outdoor air pollution. The World Health Organization (WHO 2022) estimates that nearly 4 million people die annually from exposure to indoor air pollution, compared to the 4.2 million deaths from ambient air pollution in 2016 (WHO 2021a).

This leads to the second problem – the denial of cheap and reliable electricity to hundreds of millions (perhaps billions) of people in developing country forces them to rely on polluting substances within their homes for cooking, lighting and heating. Making fossil fuels more expensive in order to remove their alleged “implicit” subsidies and (in fine neo-colonial manner) insisting that developing countries must follow us down the “net zero” road, renders it less likely that inhabitants of developing countries will escape from their polluted homes. This point is made forcibly by looking at the map that accompanies the World Bank report – death rates from indoor pollution are at their highest in sub-Saharan Africa and in east Asia, notably China, but especially the Indian sub-continent and Indonesia. As the World Bank report itself says:

Indoor air pollution poses particular health risks to people in low- and middle-income countries and vulnerable groups like children, women, the sick, and the elderly. The vast majority of deaths due to indoor air pollution—that is, 81 percent (or 1.8 million deaths)—occur in low- or lower-middle-income countries, especially in South Asia and Sub-Saharan Africa (IHME 2020). Globally, progress has been made in reducing deaths due to indoor air pollution, as the number of annual premature deaths was halved between 1990 and 2019. Yet improvements have been significantly smaller in SubSaharan Africa, where the annual number of deaths from indoor air pollution declined by only 15 percent in the same time frame (Ritchie and Roser 2022). Map  B2.3.1 highlights the above-average mortality from air pollution in Sub-Saharan Africa and South Asia. Indoor air pollution disproportionately affects poor people. Households that cannot afford clean cooking and heating fuels, like electricity or natural gas, are forced to use polluting solid fuels instead. Figure B2.3.1 summarizes the WHO’s Energy Ladder, which highlights the higher dependency of poor households on toxic fuels. According to World Bank data, about 3 billion people—40 percent of the world’s population—still lack access to modern energy sources for their home use.

In low- and lower-middle-income countries, the use of dirtier, unsafe solid fuels is more prevalent, and the death rate from indoor air pollution is higher. This situation highlights the risk that removing subsidies on relatively clean-burning fossil fuels, such as liquefied petroleum gas, will force households to switch to cheaper polluting biomass fuels.

And remember what Parry, Black and Vernon said, namely that most of the alleged indirect subsidies (or under-pricing) relate to the power generation sector and that:

By region East Asia and the Pacific accounts for 48 percent of total energy subsidies. And by country, China remains the biggest subsidizer in absolute terms, followed by the US, Russia, India, and the EU.

The third problem is that removing the alleged “indirect” subsidies, by increasing the price of fossil fuels will (despite the claims of the World Bank report that the rich benefit most from “subsidies”) cause huge pain and societal problems, especially if forced upon developing countries. The recent example of Nigeria amply demonstrates what happens when explicit subsidies are removed.

Finally, there is the problem that demand for fossil fuels is relatively inelastic. As the World Bank report says in its introduction:

On average, a 10 percent increase in the unit price of energy results in a short-run reduction of consumption of about 2 percent. This means the demand for energy is only sluggishly responsive to prices, especially when cleaner alternatives are unavailable or unaffordable.

In other words, increasing the price of fossil fuels (by removing direct or “indirect” subsidies) won’t make much difference to demand (though it will make people poorer).

I am left with a sense of considerable bemusement. The World Bank report purports to justify claims that fossil fuels enjoy massive “indirect” subsidies; that removing such subsidies will affect rich people more than poor ones; and that the result of increasing the price of fossil fuels will reduce air pollution and save lives. Yet the real world evidence, and much of the contents of its own report seem to contradict those conclusions.

And words no longer mean what they used to mean.