Energy policy reform must begin with ending fossil fuel subsidies. And with the current "anti-spending, balanced budget" rhetoric in the US congress these days, that should be something that can gain bipartisan support by our elected representatives... at least if politicians' rhetoric was consistent with their actions. But I'm not holding my breath. Nonetheless, ending fossil fuel subsidies makes fiscal and environmental sense.
As it stands today, the fossil fuel industry gathers a fat welfare check every year, while posting huge profits. The Environmental Law Institute (ELI) completed a study and released a report on the subsidies distributed to various energy interests in the United States. The report was accompanied by a fabulous info-graphic that nicely summarizes energy subsidies in the US:
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| Breakdown of US energy subsidies by type: Fossil Fuel and Renewable. Carbon sequestration and ethanol subsidies are displayed on their own for better resolution. Source: Environmental Law Institute |
So let me propose that we cut all subsidies that fall beneath the horizontal axis of the ELI chart above. That would mean $70.2 billion of fossil fuel subsidies and $16.8 billion of corn ethanol subsidies would have been cut between 2002 and 2008. A total of about $14.5 billion cut per year in government spending between those years. It may not seem like much, but it's a start. Furthermore it helps the US federal budget and the environment simultaneously.
Fossil fuel subsidies are a problem around the world, not just in the US. The IEA said that there were $312 billion dollars in subsidies distributed to fossil fuel interests worldwide in 2009. That's about five and a half times more than the amount of subsidies distributed for renewable energy globally in the same year, which was $57 billion. IEA estimates that by 2015 fossil fuel subsidies will reach $600 billion if no action is taken.
An article from Scientific American, reported on a document released by the International Energy Administration (IEA). The IEA reported that cutting fossil fuel subsidies would go beyond positive effects for the environment it would even spur economic development. "Eradicating subsidies to fossil fuels would enhance energy security, reduce emissions of greenhouse gases and air pollution, and bring economic benefits," the IEA said in its World Energy Outlook report. There are some fantastic graphics in there and if you're interested in this topic I recommend you peruse that report. The IEA went on to estimate that cutting fossil fuel subsidies would decrease energy demand and carbon dioxide emissions each by about 5%.
Back in the United States, there is at least one bit of good news on this front. The subsidies for corn ethanol in the US are set to expire at the end of this year. This would end the $0.45 per gallon of ethanol produced as an additive to gasoline that the government pays to ethanol producing companies. It's not a slam dunk yet though. The Friends of the Earth Website reports that Congressman Earl Pomeroy (D-ND) introduced a bill that would extend ethanol tax credits for another five years, to 2015. However, with the current anti-spending sentiment in the US it's unclear if this will get much support. If the subsidy isn't extended before the new year when the House of Representatives switches hands to Republican control, then it won't be extended at all and will likely die then and there for good.
Kevin Bullis, over at the Technology Review at MIT, points out that even with the elimination of the subsidies for fossil fuels renewable energy technologies would still be struggling to be economically competitive. This is most likely true for solar energy, but wind energy would become an economically favored energy generation technology in more places. Regardless, Mr. Bullis is right in that the elimination of fossil fuel subsidies isn't the only policy change that would need to happen for renewable energy to be widely adopted. There would still need to be some kind of policy that instigates a more accurate reflection of the cost of fossil fuels in the market place pricing. But let's start somewhere, and I don't see any better place than here: ending fossil fuel subsidies.
First think that comes to my mind: one thing to remember is that those federal subsidies for non-renewables should have impact no only in fuels as energy source, but also on the raw materials made from hydrocarbons processed in Oil industry.
ReplyDeleteOil companies might argue that there are so many petroluem-based products in the market that eliminating subsidies will have much more negative consequences on the economy than keeping the subsidies. Now, that increased cost of hydrocarbons might lead to greener products be more competitive.
Good job brother.
What would the elimination of subsidies do to the cost of gasoline and diesel? How much would ordinary expenses such as milk and bread be impacted? Knowing this would the American voter take the "immediate gratification", i.e. cheaper gas, and ignore the long term consequences, i.e., having to transition during a crisis. One of the hallmarks of becoming a mature responsible adult in our society is being able to delay gratification for longer term rewards, but most people are unable to do that.
ReplyDeleteMy intuitive non-based in facts answer to your first question is a short but sharp increase in fuel price, until the market do the adjustments and bring the price back to just an increase of 5% over the original price.
ReplyDeleteIt will terrify the customer and investors but once a proper analysis is put in place, the public will realize that neither the fuel supply will be compromised nor the subsidies will have a great impact on fuel costs.
Increase in fertilizers price for wheat might be the biggest impact for bread.
One of the core consequences about shifting to a sustainable living is to slow the pace of living. Hence, for people living in capitalistic societies to expect long term gratifications is quite difficult to manage that as a life style.
Hey Manuel, thanks for commenting, good observation about the effects of this proposal on plastic consumer products.
ReplyDeleteI agree that removing subsidies will result in higher prices for all petroleum based products, including polymer products. This will be a short term negative for low-income individuals with less disposable income since it will cost disproportionately more for them to purchase most commodities. However, the long term benefits of lower consumption and better allocation of resources justifies this, in my opinion.
I think it's best to be realistic and accept that the true market price for a plastic blender is more than $15 at Walmart. $15 does not capture everything that went into the manufacture of that blender and then transporting it to a retail outlet in the U.S.
@jovaughn:
ReplyDeleteI'm going to do some research on your question about the effect on price of various commodities. I'll write up a separate post to address that.
I read this quote from a "geonomics" presentation referring to subsidies:
ReplyDelete(a) decrease apparent costs for some, addicting them to the state
(b) distort price, so people choose waste over efficiency
(c) require costly administrative bureaucracies
(d) benefit most the people who need them the least, unless you really needed that last SCUD missile.
Jeffery J. Smith
President, the Geonomy Society
www.geonomics.org
Manuel, Great point. Subsidies certainly distort the market and when they are for a problematic commodity like fossil fuels... well, frankly, it can be an infuriating situation.
ReplyDeleteAlso, I looked around that geonomics.org webpage and it looks pretty cool. The website explores a little about the idea of an intersection between earth's constraint (geosciences, perhaps) and economics. This has been something that I have been wanting to explore for awhile now. I have just begun such exploration and there are some incredibly fascinating intersections and applications there. Thanks for pointing out that site!