United States Is World's Number One Fossil Fuel Subsidizer

You Thought Green Energy Projects Got More Subsidies Now? Take a Closer Look

In March, International Monetary Fund released a study from 2011 in which they calculated fossil fuel subsidization at 1.9 trillion dollars - Trillion with a Capitol "T", that’s not a "B", and that stands for Trouble.  The music man song "Ya Got Trouble" was pure fiction, but the tax breaks and failure to price carbon pollution keeping prices artificially low is very real and has a very real cost.

The biggest offender was by far the United States, clocking in at $502 billion. China came in second at $279 billion, and Russia was third at $116 billion. In fact, the problem is so significant in the U.S. that the IMF figures correcting it will require new fees, levies, or taxes totaling over $500 billion a year, or more than 3 percent of the economy.

The most significant finding is that most of the problem — a little over $1 trillion worth — is the failure to properly price carbon pollution. Global warming is the ultimate example of a “negative externality” — a market failure in which one market actor enjoys the benefits of an exchange while another actor pays the costs.

The “T”rouble is how hidden the cost is from us.  When we see a natural disaster on TV, Americans rush to aid those in need, but we don’t as easily see and rush to action over countless farmers facing increased drought, coastal populations facing rising seas, or the global poor facing food supply disruptions – all of whom are directly bearing the burden of our subsidized energy use.  It’s the global ecological equivalent of burning all your garbage on your neighbor’s property and ignoring their pleas to stop. 

The garbage we are burning through?  Energy subsidies.  The IMF Study reviewed Pre-Tax Subsidies, Negative Externalities, and Value Added Taxes (VAT) across the globe. 

Many countries (mostly Emerging and Developing and Advanced Countries) have a national consumption tax called a Value Added Tax (VAT), and often offer price breaks through VAT’s related to energy purchases.  The largest users of VAT’s are advanced countries other than the United States.  The US does not currently use Value Added Tax system for goods or services. 

Nations considered Advanced, like the United States, don’t use “Pre-Tax” subsidization of energy, but pre-tax subsidization also creates a problem.  All told, these policies of subsidized fossil fuels sang to the tune of $480 billion in 2011, and ending these policies would, according the IMF, reduce greenhouse gas emissions by as much as two percent (Two percent is not a great shopping discount, but it is a pretty big deal when trying to combat climate change).

Now, it should be noted that America does subsidize all energy sectors through tax breaks, and between 2002 and 2008 oil companies received tax breaks around $10 billion per year, totaling $72 billion for the seven year period.  The same period saw $29 billion spent on renewables and energy efficiency.  More recently, in 2011, direct tax subsidies for oil companies were decreased to $2.5 billion, with $16 billion spent on renewables and energy efficiency.  2013 estimates are expected to be the similar, $7.3 billion for renewable energy, $4.8 billion for energy efficiency, and nearly $3 billion for fossil fuels.  This is an incredibly important step in the right direction, but there is one important caveat in this shift.  

What is as unfortunate as it is important to factor in is the subsidization of fossil fuels via Negative Externalities (i.e. ignoring the environmental/health/social costs of energy production and thus maintaining an artificially low “direct” consumer cost). As Jeff Spross, a contributor to, noted in a summary of the IMF study:

It’s worth noting that Western Europe has an (admittedly troubled) carbon pollution reduction program, so the big externality subsidy created by the advanced economies can likely be blamed mostly on the United States.

In calculating the value of the externalities subsidy, the IMF assumed the global warming damages of carbon emissions at $25 per ton. They then went through the policies of various countries to see who is and isn’t making an attempt to work that price back in through taxation, and to what extent. But the report notes that various studies have pegged the price as high as $85 per ton — and other studies have put it much higher than that — in which case the size of the externality subsidy would be much larger. Beyond global warming, the IMF also attempted to account for other externalities, particularly the pollution and health effects of coal burning.

See, by ignoring the external costs of fossil fuel production and consumption, even with increased tax subsidies for renewable energy, fossil fuels will still have a cost-competitive advantage and therefore be used longer and in greater volume than is sustainable for our global health.

Spross writes, “All told, the analysis found that eliminating all externality subsidies entirely would reduce carbon dioxide emissions as much as 13 percent, along with having lots of positive ripple effects by reducing fossil fuel demand and increasing investment and jobs in clean energy.

That doesn’t mean eliminating these subsidies won’t hurt poorer households (20 percent of households captured 43 percent of the subsidy benefits, on average. For gasoline subsidies specifically, they captured a whopping 61 percent). Because their incomes are so much lower, losing those subsidies can take a significant bite out of their resources, even if the share of the benefits they’re getting is a small portion of the total value of those subsidies. What it does mean is that these countries could help the poor much more efficiently by eliminating the energy subsidies and then just providing direct assistance to people in need.”

With the locavore culture continuing to grow, and more and more people wanting to vote their values with dollar bills, many realize how important it is to support producers of local, unsubsidized food and goods. The cost is sometimes more, but the result is healthier, and an increased market for healthier goods eventually brings prices down.  We have all enjoyed artificially low energy prices for a long time, and this has damaged our earth and stunted alternative fuel growth till recent years (and arguably still does). So, if those subsidies could be ended, and if help for those most affected by price increases were to be more efficient, (by eliminating the energy subsidies and providing direct assistance to people in need) would you be willing to pay the real cost of fossil fuel?


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