Renewables often get blamed for getting big subsidies. As reported in the Dec 2013 issue of this newsletter, Europe’s biggest 10 utilities recently called for an end to all renewable subsidies. Those who dislike subsidies on fiscal or ideological reasons must be reminded of two facts that are not widely known: Virtually all forms of energy extraction and production receive some form of subsidy, tax break or other incentives; and the biggest culprits are not renewables but fossil fuels.
In a working paper titled The Economic Cost of Fossil Fuel Subsidies, Lucas Davis at Haas Energy Institute at the University of California, Berkeley, reports that global subsidies for gasoline and diesel totaled $110 billion in 2012 – far more than renewable subsidies. Using the latest available data from the World Bank, Davis highlights the top 10 countries, who account for 90% of global fuel subsidies.
As one might imagine, when prices are artificially low, consumption tends to be artificially high (graph below).
Davis writes: “The most extreme example is Venezuela where gasoline costs only 6 cents per gallon. That’s not a typo. The price in Venezuela is less than 1/50th of what I pay in California. It is no coincidence that gasoline consumption in Venezuela is 40% higher than any other country in Latin America, and three times the regional average.”
The correlation between gasoline prices and per capita gasoline consumption is stunning and persuasive. European countries, where prices are highest, have low per capita consumption levels, as one would expect. Middle Eastern countries and/or OPEC members are on the opposite end of the scale. US, Canada and Australia, geographically big countries have relatively low prices and high per capita consumption rates.
Davis points out that, “Many of these (gasoline-subsidized) countries are major oil producers. Gasoline and diesel subsidies have long been viewed in many oil-producing countries as a way to share the resource wealth with a nation’s citizens. This is not the view in all major oil-producing countries, however. Prices are at or above market in Iraq ($2.95 per gallon for gasoline), Mexico ($3.26), Russia ($3.74), and Canada ($5.00).”
What’s the harm? “These subsidies impose enormous economic costs,” resulting in deadweight loss, “it costs the government more to provide the subsidy than the value the subsidy creates for gasoline consumers. In Venezuela right now there is someone driving around who values gasoline at only $.50 cents per gallon. Gasoline can be sold in international markets for about $3.00, so each time this person uses a gallon of gasoline the world becomes worse off by $2.50,” Lucas notes.
Davis puts the global deadweight loss in 2012 at $44 billion, with the top 10 losing countries – not identical to prior graph – identified (graph on left). Wonder why Venezuela’s economy is in dire shape?
But that is not the end of it. There are external costs associated with heavily subsidized fuel, leading to wasteful over-consumption. Lucas figures that global fuel subsidies impose external annual costs of $32 billion, which brings the total economic cost to $76 billion annually.
While the numbers may be off a little, his conclusions are spot on. And viewed from this newsletter’s perspective, before we eliminate renewable subsidies, as has been proposed, it may be worth asking how much subsidy goes to big oil, gas, coal and nuclear.
This post is extracted from EEnergy Informer, January 2014 issue.