Opinionista Ivo Vegter 6 February 2019

Fossil fuel subsidies are not hampering renewable energy

A leading reason advanced for why the renewable energy revolution isn’t happening more quickly is that fossil fuels enjoy lavish subsidies that far exceed those paid for renewables. But how large are they really, and would removing them make much difference? The short answers are not large, and no, it wouldn’t.

In a recent Daily Maverick article on green investment, Melanie Gosling claims global fossil fuel subsidies rose from $4.9-trillion in 2013 to $5.3-trillion in 2015. Her stated source for this claim is a report the Global Commission on the Economy and Climate (GCEC) released in 2016.

These numbers are very, very fishy, however. The report actually says that fossil fuel subsidies amounted to $550-billion in 2014. This is obviously not the number Gosling quoted.

The 2018 report from the same group noted that many fossil fuel subsidies were being phased out, and that “known subsidies and other support to fossil fuel production and consumption globally have declined from recent levels of over US$600-billion per year to just over US$373-billion per year in 2015”.

The International Energy Agency (IEA) reports that fossil fuel subsidies declined from just below $600-billion in 2012 to $325-billion in 2015, while subsidies for renewable energy rose to $150-billion. By 2017, fossil fuel subsidies were down to about $302-billion.

That fossil fuel subsidies halved between 2012 and 2017 is obviously also not what Gosling highlighted in her article.

The 2016 report she cited does contain the $4.9-trillion amount, which is attributed to the International Monetary Fund, but for the increase to $5.3-trillion I had to turn to a 2017 paper in the World Development Journal, which appears to be the original source. This number is about 10 times larger than actual fossil fuel subsidies because it includes the estimated costs of externalities such as air pollution, traffic congestion and climate change.

This is an outrageously non-standard way to use the term “subsidy”, and is entirely meaningless from a policy perspective. One can reduce cash payments or tax breaks, which are the primary means by which governments grant subsidies, but externalities are not created by law or regulation, and can’t simply be removed at the stroke of a pen.

Externalities are notoriously hard to quantify, or even prove. If they weren’t, it would be a simple matter to sue for reparations, individually or as a class action. The difficulty of pinning down externalities makes any estimate suspect at best, as I’ve written before.

When you count negative externalities, however, it is only fair to count positive externalities, too. Inexpensive fossil fuel energy has produced the vast majority of the world’s present prosperity. It has lifted billions of people out of poverty and powers most of the world economy. Entire economic sectors, such as mining and manufacturing, and entire product categories, such as plastics, many chemicals and many medicines, exist for the most part thanks to fossil fuels.

Fossil fuels are energy dense, abundant, reliable, and stable. They made the world what it is today, so let’s put a value on that. According to the IEA, 80.8% of the world’s energy consumption consisted of fossil fuels in 2017. According to the World Bank, the global world product (the sum of all countries’ GDP) was $80.6-trillion in 2017. That means the positive externalities of fossil fuels can be valued at $65-trillion, making the net benefit overwhelmingly positive.

So the number Gosling chose to use is a one-sided thumbsuck, cherry-picked from a single paper, designed to place fossil fuels in as bad a light as possible. It is a contentious number, steeped in bias.

Still, the IEA fossil fuel subsidy estimate of $302-billion for 2017 is a fair chunk of change, and amounts to more than twice the subsidies renewable energy received in 2015. Does that mean that fossil fuel subsidies are hampering the growth of renewables?

No, it doesn’t. There are several reasons why this isn’t the case. For a start, consider the fact that defining fossil fuel subsidies is hard, even when you’re not trying to pad the numbers.

Is a tax break a subsidy? Is a tax break for which all firms, including renewable energy companies, could qualify still a fossil fuel subsidy? The UK anti-fossil-fuel website Carbon Brief notes some of these difficulties. It cites estimates of between R160-billion and R200-billion a year during 2010 to 2014, the IEA’s $325-billion a year in 2015, the IMF’s $5.3-trillion a year in 2015, and another estimate of R444-billion a year in 2013 and 2014. Even ignoring the obvious outlier, the variability in these estimates suggests that fossil fuel subsidies are hard to quantify.

For the purposes of this column, we’ll follow the IEA’s approach to estimating subsidies, which is to look at countries where consumer prices are cheaper than the international market price, and consider the price gap to be a subsidy, however, it is actually paid. This cuts through the complexity. (It ignores, of course, the countries where consumer prices are higher than the international market price, which would likely cancel out the estimated subsidies entirely.)

One must consider where those subsidies are paid. Just three countries, namely Iran, China and Saudi Arabia, account for 40% of the world’s fossil fuel subsidies. Russia, Egypt, Indonesia, Venezuela, India, Algeria, Mexico and the United Arab Emirates round out the top 10, accounting for another 40%. Good luck getting any of those countries to change their policies on subsidising fossil fuels.

South Africa makes it on to the list of 25 developing countries that subsidise fossil fuels, in 23rd place. No developed countries subsidise fossil fuels. South Africa contributes 0.5% to the global fossil fuel subsidy, which is slightly less than its contribution to global GDP of 0.56%, and is way less than most of its developing country peers.

In South Africa, the entire subsidy measured by the IEA, amounting to $1.6-billion (R21.3-billion at the current exchange rate) is made up of payments to Eskom. There’s a slightly higher estimate in a chapter written by Jesse Burton, Tawney Lott and Britta Rennkamp in a 2018 book entitled The Politics of Fossil Fuel Subsidies and their Reform, but it also attributes the bulk of the “subsidy” to government support for Eskom, and it stretches to counting the foregone interest revenue resulting from converting an Eskom loan to equity.

Of course, an electricity subsidy is neutral to the source of the electricity, so calling it a fossil fuel subsidy is a bit of a stretch. If you subtract the 35.2% worth of electricity subsidies from global fossil fuel subsidies, you are left with less than $200-billion a year.

When one hears the term fossil fuels, one immediately thinks of coal. However, coal subsidies account for only 0.8% of the world’s fossil fuel subsidies. The only country that significantly subsidises coal is Kazakhstan. The majority of subsidies are spent on oil (45.3%) and natural gas (18.7%).

But let’s count electricity subsidies, and stick with the total IEA figure of $302-billion. To evaluate it directly against the $150-billion received by renewables would be misleading, since renewable energy accounts for almost none of the world’s actual energy consumption (1.8%, to be exact, according to the IEA’s figures).

Specifically, renewable energy accounts for 254 million tonnes of oil equivalent (Mtoe), while oil, coal and natural gas account for 4,453 Mtoe, 3,750 Mtoe, and 3,107 Mtoe, respectively, for a grand total of 11,293 Mtoe produced by fossil fuels. That means that renewable energy is subsidised to the tune of $591-million per Mtoe, compared to fossil fuel subsidies of less than $27-million per Mtoe.

That means the subsidies for renewables are 22 times higher than those for fossil fuels. Even if you were to use the ludicrously inflated figure of $5.3-trillion, and consider renewable energy to be entirely externality-free, renewable energy subsidies would still exceed those of fossil fuels by a factor of 1.26.

Hopes are high that removing fossil fuel subsidies could help to mitigate climate change by discouraging inefficient energy consumption and levelling the playing field for renewable energy,” write Jessica Jewell et al. in a February 2018 article published in the prestigious journal Nature, arguing that “removing fossil fuel subsidies would have an unexpectedly small impact on global energy demand and carbon dioxide emissions and would not increase renewable energy use by 2030”.

So the argument that fossil fuel subsidies are undermining renewable energy and the transition to a low-carbon economy is entirely bogus. Most of the world — and all of the developed world — does not subsidise fossil fuel at all. Only a very small number of developing countries do so to a significant extent, and the majority of that comes in the form of consumer subsidies to make fuel more affordable for the poor. Per unit of energy, fossil fuel subsidies are a tiny fraction of those paid to renewable energy.

Here’s what’s holding renewable energy back. One often hears that solar and wind prices are competitive with those of fossil fuels. This is misleading, however, since it only measures the price of power at the generation facility’s gate. It still needs to be transmitted and distributed.

All-in, the cost of power sourced from independent power producers, of which 78.5% was from wind and solar, was a staggering 222c/kWh, according to Eskom’s Integrated Report as at 31 March 2018. This is 18.1% higher than the previous year, and 29.8% up from two years earlier. The utility expects it to rise further this year.

The effective price of renewable energy compares less than favourably with Eskom’s electricity revenue of 85c/kWh. In stark contrast, coal-fired electricity cost Eskom 30.9c/kWh, and nuclear energy came in at a bargain-basement price of 9.4c/kWh.

The problem for renewable energy is that it’s simply too expensive to displace fossil fuels. No amount of misdirection about fossil fuel subsidies, or even artificially inflating them by a factor of 10, will change that stubborn fact. DM


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