Opinionista Ivo Vegter 1 October 2013

The fossil fuel subsidy myth

It is a common trope among free-marketeers that unsubsidised renewable energy simply is not cost-competitive with existing fossil fuels, and particularly natural gas. It is a common trope among greens that this is because fossil fuels are also subsidised, and that these subsidies exceed those paid to renewables. Who’s right?

Wind energy had a “good year” in 2012, according to Steve Sawyer, secretary-general of the Global Wind Energy Council. He was quoted in an article in the Cape Argus, addressing the Windaba 2013 conference in Cape Town last week.

However, he adds that the effort to reach the council’s long-term goal of generating between 10% and 12% of global energy from wind by 2020 “had fallen behind” since 2010. Also, overall investment in renewable energy was down, to $244-billion from $279-billion the previous year, the article notes.

Sawyer noted the International Energy Agency’s 2011 report, entitled Are We Entering A Golden Age of Gas?. He says this report held “the promise of ‘plentiful, clean and wonderful natural gas’ produced by fracking,” though he neglected to mention the equally important 2012 follow-up, Golden Rules for a Golden Age of Gas.

This gas, Sawyer reportedly told the conference, “could be a serious problem for us,” meaning the wind energy sector. If that is Sawyer’s idea of a “good year”, consider my eyebrow firmly raised. It sounds like, how shall I put it delicately, grade-A spin.

Casting further doubt on the fellow’s veracity, he is said to have claimed, “in terms of total greenhouse gas emissions you’d be better off burning coal.” In support of this view, he cited the argument by Cornell University’s Robert Howarth and Anthony Ingraffea that so much methane is lost to the atmosphere that it negates the far lower carbon dioxide emissions of burning gas.

I’ve debunked this study often before. For example, see point 12 in Rolling Stone reprises Gasland fracking fantasies. Ingraffea himself described it as follows: “We do not intend for you to accept what we have reported on today as the definitive scientific study in respect to this question, clearly it is not. We have pointed out as many times as we could that we are basing this study on in some cases questionable data.” New research has further discredited the claim that fugitive methane is a grave concern that disqualifies shale gas as a cleaner, more efficient fuel than coal. Even the New York Times says so.

Taking to Twitter, Nico Boshoff, an advocate in Cape Town, challenged Argus reporter John Yeld over “journalistic standards”. At issue was Yeld’s apparent credulity in uncritically reporting obvious wind industry propaganda. In the ensuing discussion, I remarked: “Of course shale gas poses a threat to wind. It’s called competition, and it’s good for consumers.”

Yeld was good enough to respond, raising an oft-cited point about competition between different sources of energy: “But competition should be fair, right? And how do massive government subsidies impact on this? According to figures at Windaba [yesterday] by Sawyer, fossil fuel subsidies [are] way bigger than renewables.”

That he fell for that old saw (if you’ll excuse the pun) merely served to prove Boshoff’s point. Is it reasonable to accept, just because a wind energy spin-doctor says so, that fossil fuel subsidies are large, or indeed “way bigger” than renewables?

Let’s break this down. Unfortunately, there isn’t much local data to go on, especially since we do not have a well-developed shale gas industry, but the universal nature of subsidies and energy technology allows us to use foreign research without too much fear of contradiction.

First, let’s get some clarity about the term “subsidy”. This is often used to describe a positive contribution from tax coffers for the establishment of an industry or its preferential protection against competitors. It can take many forms, such as matching investments in capital, or picking up some of the sales price of the energy produced. In South Africa, for example, guaranteed off-take tariffs paid by Eskom to renewable energy producers amount to a subsidy, in that the newly licensed independent power producers will not receive less than this minimum price for their product.

The term “subsidy” as used in this argument can also refer to tax breaks, however. Such tax breaks may be available by industry, in which case they really do amount to a subsidy. However, they may also apply more generally, for example to all industry in a given city, province or country. In such a case, the purpose of the tax break may be to attract an industry that otherwise would locate elsewhere, or to encourage job creation, or both.

There are more subtle points to be made about how one measures subsidies, such as whether they ought to be measured as government expenditure or in terms of the economic effect on the targeted industry, how benchmarks in other industries ought to affect the measurement of effective subsidies, and whether maximum subsidies available to an industry reflect actual subsidies utilised. For a good academic overview of these questions The Tricky Art of Measuring Fossil Fuel Subsidies, a 2011 paper by Kenneth McKenzie and Jack Mintz of the School of Public Policy at the University of Calgary, is a great starting point.

For the purpose of this discussion, let’s not bicker that tax breaks available to anyone do not really count as a preferential subsidy for one competitor such as fossil fuels, and concede the greens the term “subsidy” in its broad interpretation, to mean all financial support from government, in all forms.

Second, we need to be clear about what we’re comparing. If subsidies are “way bigger” for fossil fuels, this may just be an artefact of the size of the fossil fuel industry compared to the renewables sector. Coal, according to the Shift Project Data Portal, accounts for 42% of the world’s electricity production. Gas comes second, with 21%, hydro with another 15%, and nuclear produces 12%. Wind falls under “other”, making up the remaining 9%. In the United States, the balance is more favourable to gas, but even further against renewables, according to the Energy Information Administration. There, coal and gas account for 37% and 30% respectively; nuclear and hydro make up 19% and 7%, with wind producing 3.5% of the remaining 5%. For interest’s sake, solar limps in dead last, with only 0.11% of the total energy produced.

A small percentage on a large revenue base may indeed in nominal terms exceed a large percentage on less revenue. If this is the case, the obvious response would be that a higher subsidy per unit of energy produced (or a higher percentage of revenue) might support Sawyer’s argument, but since fossil fuels also account for the lion’s share of energy and revenue produced, a subsidy that is only higher in nominal (dollar) terms would in no way give it an unfair advantage over renewables.

So, what we need to show, if Sawyer is to be believed, is that the subsidy received by fossil fuels, usually coal, exceeds that offered to renewable energy, and particularly wind turbines in this case. If only the nominal amount available to coal is higher than the subsidies spent on renewables like wind, but the amount by revenue or by unit of power produced is lower, Sawyer would be guilty of disingenuity. If even the nominal amount is less, then Sawyer is lying in service to the wind lobby, which he represents.

To find out which it is – truth, spin or lies – let’s look at the numbers.

Conveniently, the Congressional Budget Office (CBO) in the United States has measured the cost of energy-related tax preference since 1977, and presented the results in a tidy little chart. In 2013, some 45% of the expenditure is earmarked for renewable power, with a further 29% going to energy efficiency. Only 20% is dedicated to fossil fuels, and 7% to nuclear energy.

This distribution was not always the case. Renewables got a huge boost in the closing years of the George W Bush presidency, and an even bigger windfall due to post-2008 stimulus funding under Barack Obama. The CBO also points out that the expiry of some temporary stimulus funds means it will not always remain so rosy for renewables.

But, as it stands today, even in nominal terms subsidies for renewables are more than double those paid to fossil fuels. In relative terms, by unit of power produced, and by using the most generous assumptions (such as including hydroelectricity in renewables’ share of power produced), renewable subsidies are 12.5 times as high as fossil fuel subsidies.

Clearly, there is no measure, not even a deceptive nominal one, by which one can argue that fossil fuels enjoy a cost advantage over renewable energy because of subsidies.

The way I see it, this leaves Sawyer with only one defence: fossil fuels involve “externalities” for which the industry and energy consumers do not pay, which amounts to a “subsidy” of sorts. An example of this argument can be seen in this article about how solar and wind power will be cost-competitive without subsidies by 2025: “As is often the case, this assumes fossil fuels retain their huge subsidies in the form of externalities, which common citizens (and disproportionately the poor) pay through illness, early death, healthcare bills, higher health insurance premiums, disasters relief, and so on.”

I have thoroughly examined the difficulties of relying on externalities in economic or policy arguments before. Notably, in this case, the externalities of fossil fuels are contentious and hard to quantify, and a different set of externalities applies to renewable energy sources. An appeal to externalities acts like a joker: it can fill any gap in your argument you need it to fill. As a cover for misleading wind industry propaganda, it is a very small fig leaf indeed.

The self-contradiction in Sawyer’s own statements should have raised an eyebrow. His reliance on a discredited and outdated study should have raised a red flag. Journalists seem ever eager to disbelieve that shale gas might be a viable energy source that can be relatively safely extracted, is much cleaner than coal and is much more cost-efficient than renewable power. But they do not extend their scepticism to the green energy industry, and uncritically repeat whatever hot air the wind lobby cares to blow their way. Boshoff’s sharp remark about journalistic standards is well justified. DM

PS. Tip to writers: never write “without too much fear of contradiction”. Grant McDermott at the Norwegian School of Economics points out that the International Energy Administration’s World Energy Outlook 2012 provides different figures for fossil fuel subsidies ($523-billion in 2011) versus renewable subsidies ($88 billion). These are worldwide numbers. My use of US figures alone gives a limited picture, since several oil-producing countries heavily subsidise their own industries. While they are not very susceptible to domestic energy policy decisions, it would change the equation, clearly.

Worldwide, the nominal amount spent on fossil fuel subsidies appears to be higher, especially outside of countries that actively develop renewables. However, the relative subsidy for renewable energy, per unit of power produced, remains higher even under this scenario, which makes the claim that fossil fuels receive more subsidies misleading.

McDermott also points out another issue: if you’re opposed to subsidies, it would be consistent to oppose them on both fossil fuels and renewables. I agree. In an ideal world, neither would receive any subsidies. However, this is not relevant to debunking the myth that renewables are uncompetitive because fossil fuels get preferential tax treatment.


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