Yes, Fossil Fuel Subsidies Are Real, Destructive And Protected By Lobbying

Published on Forbes.com

In November, I wrote that fossil subsidies worth $700 billion are stalling the energy transition. Many readers emailed me asking for specific examples of these subsidies. Others pointed out that $700 billion is a low estimate because it doesn’t account for the related health and environmental costs that are borne by the general public.

Because you asked, let’s examine in more detail how your tax dollars give oil, gas and coal an unfair edge over clean energy. In addition, let’s consider why these subsidies persist despite their astronomical cost to taxpayers and victims of climate change.

What Counts as a Subsidy?

To recap, my team and I found that the 1,801 largest publicly traded oil, gas and coal companies worldwide earned net profits worth $500 billion USD in 2013 yet received direct subsidies worth $700 billion. This is a moderate estimate.

On the low end of the scale is the latest estimate from the International Energy Agency (IEA) that annual worldwide fossil fuel subsidies had somewhat declined but were still northward of $400 billion in 2018. The highest estimates come from a recent paper from the International Monetary Fund (IMF) asserting that subsidies reached $4.7 trillion in 2015 and $5.2 trillion in 2017—truly staggering numbers. These calculations depend on your definition of a subsidy. Clearly the latter includes related health impacts and environmental costs.

Michael Liebreich, the award winning energy consultant and founder of Bloomberg New Energy Finance, argues that the “externality costs” of fossil fuels should include medical care for air pollution and the defense of hydrocarbon supply chains, not to mention $69 trillion in climate-related damages expected to accrue between now and 2100. If neither consumers nor fossil fuel companies pay for these externalities, they are being subsidized indirectly.

What do Subsidies Look Like?

Many “direct” fossil fuel subsidies (minus the externalities) are hidden in tax codes. Let’s consider an example from my home country: Canada’s tax break for “flow-through shares.”

The International Institute for Sustainable Development (IISD), a think tank, estimates that this subsidy is worth $265 million CAD annually. It allows Canadian fossil fuel companies to pass 100% of their “exploration” expenses (the cost of searching for new hydrocarbon deposits) on to their investors, who may deduct these from their income tax.

Thus, the subsidy incentivizes investments in fossil fuel exploration rather than solar, wind, fusion, and other energy initiatives that might spare the world from that $69 trillion worth of damage. The IISD documents another seven Canadian tax provisions that, including flow-through shares, add up to nearly $2.15 billion CAD in annual subsidies for the fossil fuel industry. And that is just Canada.

What About Subsidies for Reducing Emissions?

Some subsidies look rosy but stink. Shell’s Quest carbon capture and storage (CCS) project in Edmonton, Alberta is a good example. Of the $1.35 billion CAD in capital costs, the Alberta government subsidized $745 million and the Canadian federal government shelled out $150 million. That doesn’t include the tax credits given for each ton of C02 captured.

The cost of capturing carbon with Quest’s old amine technology doesn’t even come close to a price the market could justify. So, Canadian taxpayers spent significantly more than Shell to reduce the environmental impact of the company’s for-profit operations.

Because Quest uses outdated technology, this project will not be replicated elsewhere. Therefore, the subsidies are not helping to create a CCS market. They merely spare Shell the cost of taking responsibility for its carbon emissions.

For comparison, Carbon Engineering and Svante (formerly Inventys)—two of Canada’s most innovative players in CCS—received subsidies worth $1.5 million CAD and $2.6 million respectively in the 2017-2018 tax year. Canada has rigged the playing field against companies working for the energy transition. Hence, my statement from November: we give them just enough capital to fail, and we don’t use our scarce public capital to build new technology jobs for the future.

Why Don’t We End the Subsidies?

It seems obvious that governments should end subsidies for fossil fuel companies. However, a lot of money works to ensure that they stay in place.

BP, Shell, ExxonMobil, Chevron and Total spend a combined $200 million per year(!) on lobbying “designed to control, delay, or block binding climate-motivated policy,” says a report by InfluenceMap, a nonprofit research group. These five companies also spend $195 million annually on branding campaigns meant to portray them as energy transition champions—even as they drastically increase spending on fossil fuel extraction.

$200 million in lobbying plus $195 million in greenwashing is more than enough to keep the system rigged. As a gentleman from Indonesia once told me, “You guys in the West complain about bribery in our system, but you have perfected bribery and made it acceptable just by giving it a new name: lobbying.”

The Cost of Corruption

Most people are unaware that their tax dollars subsidize fossil fuels. Canada’s flow-through shares and the Quest project are two cases where elected officials easily could intervene and divert taxpayer money to clean energy innovation. Why don’t they?

In government and business operations, old practices have inertia. And as I wrote in November, subsidies for fossil fuels were good initially. They lifted people out of poverty and created healthier environments. But the massive use of fossil fuels has created the unprecedented problem of climate change. That needs to be attacked urgently. We need a serious carbon tax, and the fossil fuel subsidies need to go ASAP. Once more: we need a subsidy transition for a successful energy transition.

Fossil fuel subsidies are a form of corruption that enriches fossil fuel shareholders at the expense of Earth’s 7.5 billion people. Every day we maintain these subsidies, we increase the likelihood that people will suffer from wildfires, flooding, drought, starvation, displacement, disease, and war due to climate change.

Let’s stop funding our own destruction. Instead, let’s invest our hard-earned tax dollars in clean technologies for a prosperous future.