How Big Are Fossil Fuel Subsidies? Let’s Make it Clear
Every year, the world spends billions of dollars subsidizing the production, exploration and use of oil, coal and natural gas. By all accounts, these subsidies don’t make sense for the economy or for the environment. They impose significant burdens on government budgets, in many cases more than is spent on health or education, encourage wasteful use of scarce resources and tend to benefit the rich more than the poor. For example, IMF analysis has shown that on average only 3 percent of gasoline and 7 percent of diesel fuel subsidies reach the poorest 20 percent of households. And a recent GSI study found that removing fossil fuel subsidies in 20 countries between now and 2020 could reduce greenhouse gas emissions by as much as 11 percent.
However, reforming fossil fuel subsidies is very difficult without knowing how big the subsidies are. The International Energy Agency and other international organizations have been estimating the size of consumer fossil fuel subsidies in developing and emerging economies for a number of years. But until recently, the details of fossil fuel subsidies in industrialized countries have been a mystery, and we still only have a partial picture. If we want the public to understand whether these subsidies are the best use of their taxes, we need better, more transparent data on how much countries are spending on subsidies and tax breaks for fossil fuel production.
Finding Out Who Pays and Who Benefits
More transparent reporting can make us aware of the extent of these subsidies, who pays for them and which companies benefit, and make it more likely that we all will call for a change.
In 2013 the Organization for Economic Co-operation and Development published the first comprehensive accounting of fossil fuel subsidies in developed countries. This year, it has updated the numbers and made them accessible through an online portal. According to the findings, the 34 OECD member countries spend about $65 billion on subsidies and tax breaks for consumption, exploration and production of fossil fuels each year.
Just having these numbers in the public domain is a substantial improvement. For example, the U.S. government has identified close to $5 billion of lost revenue at the federal level through fossil fuel production tax provisions in 2015. But the OECD portal also lists significant state subsidies, including $1.2 billion in consumer and production tax breaks in Texas and just under $1 billion in Alaska.
Last week, a new report from the Overseas Development Institute and Oil Change International introduced yet more useful new data on subsidies by the major economies of the G20. It found that G20 country governments spend $452 billion on fossil fuel production subsidies a year (including direct subsidies and tax breaks, investments by state-owned enterprises, and public finance from government-owned banks).
Because of such initiatives, transparency on fossil fuel subsidies has been increasing. A big driver of this change was the G20 Leaders’ commitment in 2009 to phase out inefficient subsidies. Clarity about who pays and who benefits from subsidies is an absolutely essential first step to build understanding and support for reform.
But more transparency is needed. Some countries, like the United Kingdom, are beginning to release not just information on the amount of tax breaks and subsidies that go to fossil fuels, but also which companies benefit from them. Thus, we now know that between 2009 and 2014, the UK granted tax breaks worth $838 million to Total (headquartered in France), $407 million to Statoil (Norway), $305 million to Premier Oil (UK), and $72 million to Chevron (U.S.). Is this the best use of UK taxpayer revenues?
To make informed judgements about tax breaks and subsidies that fossil fuel companies get, it’s important to be systematic. When governments don’t release these figures, rough estimates of the subsidies going to major oil companies have to be made. A 2012 study estimated that in the U.S., oil tax breaks benefited Exxon Mobil by $600 million per year, Chevron by $700 million and Royal Dutch Shell by $200 million. Do these companies really need these government subsidies?
All countries providing subsidies and tax breaks to fossil fuel production and exploration should adopt the kind of advanced transparency the UK has. Their citizens deserve to know which fossil fuel companies profit from the taxes they pay.
About 30 countries have launched or accelerated fossil fuel subsidy reforms in the past 3 years, recognizing the significant economic and social benefits. This is an excellent start, but we need to build on the momentum, and on the lessons we have learned on what works and what doesn’t, as outlined in a new paper from the New Climate Economy released this week. It’s no coincidence that most of these recent reforms relate to consumption subsidies, as that’s where we have the most transparent information. We now need to tackle the next challenge: subsidies and tax breaks to fossil fuel production and exploration. The more we know about how big these kinds of subsidies are and who benefits, the more likely that momentum for reform can grow.