Common Tragedies

Thoughts on Environmental Economics

A subsidy by any other name…

Posted by Daniel Hall on November 10, 2008

A couple of posts in recent months on energy subsidies, and particularly subsidies to fossil fuels in non-OECD countries, have drawn immediate responses implying that energy subsidies in the U.S. are quite large themselves, particularly indirect subsidies through the military to maintain international oil production.

I am skeptical that this comparison is relevant, or fair.  A few points:

1. The IEA estimated in 2006 that subsidies to fossil fuels in non-OECD countries were $220-280 billion per year.  This represented the net economic value of subsidies — essentially, the amount by which local fuel prices were lower than a competitive market price (i.e., an international oil price combined with some calculation of local refining and delivery costs).  These are net direct subsidies; they make fuel prices lower and encourage (over)consumption.

2. In the U.S. the EIA recently estimated that current energy subsidies are around $16.6 billion on gross, with about half of this going to renewables (particularly biofuels), nuclear power, conservation, and energy R&D.  Fossil fuels get around $5 billion, and this is gross, not net.  Note that the Highway Trust Fund, which is filled mostly from America’s small 18.4-cent per gallon gas tax, collected almost $39 billion in 2007.  The simple truth is that on a per-unit basis energy is neither much subsidized nor taxed in the U.S.*  In most other OECD countries meanwhile, fossil fuels — particularly transport fuels — are taxed on net.

3. What about indirect subsidies?  You can certainly find estimates that imply total U.S. energy subsidies are north of $100 billion a year, but I haven’t seen any estimates that look rigorous or convincing.  This study put out by (or linked from) EarthTrack looks at least somewhat more respectable; it finds that total U.S. subsidies are $37-63 billion per year.  But notice that much of this is of an indirect nature — more than a third comes from the estimates of defending Persion Gulf oil shipments — and it is unclear who these indirect subsidies are supporting.  Securing the Gulf arguably subsidizes the world oil market — U.S. consumers may benefit, but so do all other world consumers.  Further, what percentage of our military expenses should be counted as an energy subsidy?  We have many strategic objectives beyond energy policy when we deploy forces in the Middle East (or elsewhere).

4. What about indirect subsidies in non-OECD countries?  China has made no attempts to hide its policy of securing access to energy supplies for its national firms.  Much of this is being done in a naked quid pro quo way in Africa, with aid such as infrastructure development tied directly to energy access.  Are we going to count these costs?  And don’t forget that China is also dealing with — and turning a blind eye to the actions of — some unsavory regimes in Africa.

In the end I think the basic story you should have in your head goes essentially like, “Fossil energy is subsidized in most of the non-OECD, is not much taxed or subsidized in the U.S., and is taxed on net in most of the rest of the OECD.”  Yes, there are complications and you can do lots of spinning of sophomoric midnight theories while sitting with your friends over cigarettes and coffee, but you are going to need to offer me some hard evidence and persuasive arguments to get me to change my basic tune.

*As a result the U.S. price for transport fuels is frequently used as the international metric for a competitive market price.  See Figure 3 in this report for a nice graphic comparing gasoline and diesel prices in the U.S. to many of the large non-OECD countries.

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2 Responses to “A subsidy by any other name…”

  1. [...] that U.S. military spending ought to be considered in a tally of energy subsidies. Daniel Hall thoughtfully disagrees: You can certainly find estimates that imply total U.S. energy subsidies are north of $100 billion [...]

  2. [...] fuel subsidies that distort the market and lead to greater emissions, at TNRs The Vine and Common Tragedies. China is taking steps toward a national emissions-trading platform, but has yet to install a [...]

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