Subsidies Series: Part I
Photo by Mathias Reding on Unsplash
As climate change dominates the news, reports of ‘generous’ subsidies to fossil fuel and renewable energy industries have become commonplace. But journalistic publications and media companies have done a poor job reporting subsidies accurately, leading many leaders and politicians to make incorrect conclusions and those misinformed conclusions are then amplified by social media.
The inundation of half-truths and outright lies has been perpetrated at scale. This has resulted in dangerous groupthink. The widely held untruths of what a subsidy is, what governmental subsidy programs do, and the level of total subsidies per unit of usable energy has harmed the national consciousness surrounding energy policy.
This subsidies series will present research in an attempt to illuminate the many untruths, define what a subsidy is and what a subsidy is not, explain the various subsidy programs supporting each primary fuel, and demonstrate each subsidy’s impact. Let me be clear, though; subsidies are not inherently good or bad. Thus, our research does not make any moral argument for or against any particular subsidy other than whether it is achieving its purpose.
‘Subsidy’
No fish are caught in clear waters. – Chinese proverb
Subsidies can be confusing because different credible sources define them starkly differently. While semantics can be mind-numbing, they are unavoidable in this discussion. My research has revealed they are essential to dispelling the misleading headlines, half-truths, and great untruths embedded within the current national and international discourse. Those interested in political gain actively muddy the waters with these half-truths and untruths so they are able to catch some big government subsidy fish of their own.
In this section, we will focus on the prevailing four definitions of subsidy from the Merriam-Webster dictionary, Energy Information Agency (EIA), International Energy Agency (IEA), and International Monetary Fund (IMF) to clear the waters.
Merriam-Webster Dictionary:
The dictionary defines a ‘subsidy’ as a grant or gift of money.
In the strict sense of the word, as defined since 1828, a subsidy is when a government grants monies to a private person or company or when one state grants monies to another state. Note that it does not include any tax considerations or any other consideration other than actual cash granted to private companies.
Energy Information Agency (EIA):
The EIA defines subsidies as follows:
So, the EIA quickly diverges from the dictionary when it chooses to include tax breaks also known as “Tax Expenditures” by the EIA.
However, the balance of categories created by the EIA does collectively fit within the definition of subsidy by the dictionary, being Direct Expenditures, DOE Loan Guarantees, and Research & Development dollars. These categories can be referred to as “Direct Subsidies” if not individually tabulated in our research.
The International Energy Agency (IEA)
The IEA further expands the EIA definition of subsidies by allowing any incentive or program that involves direct consumption, whether they be Tax Expenditures or Direct Subsidies.
The IEA (a) estimates subsidies to fossil fuels that are consumed directly by end-users or consumed as inputs to electricity generation, and (b) measures that provide a benefit or preference for fossil-fuel production.
Given this overbroad definition by the IEA, however, many are surprised to learn that the United States does not crack the Top-25 countries with the most fossil-fuel subsidies. Those are listed below by the IEA.
The International Monetary Fund (IMF)
The IMF defines a ‘subsidy’ in two more eggregious departures from the Merriam-Webster dictionary: ‘pre-tax subsidies’ (i.e. something more similar to the method of the EIA and IEA) and ‘post-tax subsidies’, which are wholly different.
Pre-Tax Subsidies reflect the differences between the amount consumers actually pay for fuel use and the corresponding opportunity cost of supplying the fuel.
Post-Tax Subsidies reflect the differences between actual consumer fuel prices and how much consumers would pay if prices fully reflected supply costs plus the taxes needed to reflect environmental costs and revenue requirements.
Thus, the IMF uses post-tax subsidies to mislead the public about the scale of fossil fuel subsidies. Moreover, the IMF calculations are harshly distorted by the influence of corrupt authoritarian governments and third-world countries.
The IMF has made many headlines using its overbroad definition of post-tax subsidies, claiming that the fossil fuel industry receives $5.9 trillion per year in subsidies. This dubious claim has then been amplified more than any other on social media and from the largest accounts, like that of Elon Musk.
So, while the IMF reports $5.9 trillion in fossil fuel subsidies in the most recent fiscal year, the IEA concludes a far smaller number. The IEA’s most recent report estimates $440 billion in 2021 (up from just $186 billion in 2020). The delta between the two resides in the IMF’s overbroad definition.
This ‘post-tax’ definition is so egregious that not one of the G20 countries is willing to use it, and neither should you.
Should you want to go down the rabbit hole, which has enough material to support a standalone whitepaper, I recommend starting with the following analyses that quickly debunk the IMF calculation:
IMF Report On $5.3 Trillion In Energy Subsidies; Careful, It’s Not Quite What You Think (Tim Worstall, Forbes)
The IMF’s Huge Miscalculation of Energy Subsidies (Bjorn Lomborg, Forbes)
Subsidies Part I Conclusion
The first step to subsidy enlightenment is to understand the difference between the various definitions that people are using. We will begin to explore specific subsidies and how they are calculated in Part II.
This week the Biden Administration announced that they will be purchasing 60 million barrels of oil to refill part of the Strategic Petroleum Reserve after two significant releases from the SPR that failed to ease market prices. At $100 per barrel, that’s 6 billion dollars. With the way that the IEA and IMF define things, this decision by the Biden Administration will be considered a “fossil fuel subsidy.” Should the SPR be included in the calculation for fossil fuel subsidies or not, particularly when no oil and gas companies asked for it?
What to expect in this Subsidies Series:
A review of the United States federal subsidies
A review of Global subsidies
Dollars subsidized per usable energy ($/MWh)
Specific subsidy programs and their purpose
What industries are actually the recipients of generous Direct Subsidies
What industries are actually the recipients of generous Tax Breaks
Half-truths highlighted with nuance
Lies exposed
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