Government Energy Subsidies – Parsing through energy subsidy estimates.

When the issue of taxpayer subsidies for energy comes up — oil and gas and renewables alike — the public, policymakers and media could be forgiven if they feel like they’re drowning. Endless decimal points and numbers that run into the trillions can make it near impossible to grasp what it all means to one personally.

In addition, competing estimates of such subsidies are bound to leave the casual observer perplexed and not much better informed. After all, most people do not wade into the technical assumptions behind published numbers to determine where they are accurate and where they are not.

All this does matter though. That’s because when governments worldwide are routinely pressed to spend taxpayer money on energy, be it oil, natural gas, or renewables, one can disagree or agree with a specific ask (or all), but the first necessary “job” is to get to accurate numbers from which subsequent decisions can be made.

A useful example has arisen with calls by some for governments to provide greater subsidies to renewables, along with initial estimates of present and possible costs of doing the same. In some cases, the call for more government funding for wind, solar, and much else is paired with the claim that all that governments need do is switch from subsidizing oil and gas activity (in Canada or worldwide) to green energy.

Thus, the argument goes, take one dollar from “over there” in oil and gas subsidies, use it to subsidize green energy, and there will be no extra cost to taxpayers.

There are a number of assumptions in all of this. The first is the faulty trillion-dollar claims of substantial subsidies to the fossil fuel industry. This situation can happen if assumptions used to calculate fossil fuel subsidies are so wide-ranging as to render resulting numbers largely meaningless. The result is an overestimate of actual subsidies to fossil fuels.

For example, in 2011, economists Kenneth McKenzie and Jack Mintz noted that measuring fossil fuel subsidies was a “tricky art.” They spotted numerous methodological errors from anti-oil and gas activists, including using a subsidy definition designed for a different purpose, and inappropriately adding up individual tax expenditures and royalty relief items without accounting for critical interactions between taxes and royalties, among other flaws.

In other words, some anti-oil and gas activists assume, wrongly, that high tax and royalty rates bring in just as much revenue per unit (i.e., a barrel of oil) as more moderate rates. It’s akin arguing that top marginal personal income tax rates should be set at, say, 75 per cent, and anything less than that constitutes a subsidy, and that there is no difference in behaviour between top marginal rates set at 75 or 40 per cent.

Another example: In 2017, University of Guelph professor, economist, Ross McKitrick analyzed energy subsidy estimates including the International Monetary Fund estimate that US$5.6 trillion was spent on subsidizing energy worldwide.

McKitrick found numerous problems with the estimate. They included overstating the size of a subsidy using tax expenditure calculations, i.e., overstatements that result when a particular policy is cancelled and the subsequent effect on revenues is not accounted for (akin to the personal income tax example above); or labelling non-tolled roads a “subsidy,” which “clouds the subsidy discussion if we arbitrarily select one type of public good and call it a subsidy without applying the same reasoning to all other public goods.”

McKitrick found other flaws as well, but his summary observation was that one can include all sorts of “kitchen sink” assumptions to produce high fossil fuel subsidy estimates, but when that occurs “the numbers get dramatically higher, but they also become meaningless and potentially misleading.”

For the sake of argument and analysis, however, let’s accept one estimate of fossil fuel subsidies to date and break it down. The OECD estimates that in 2019, worldwide subsidies for oil and gas amounted to $178.2 billion.

As it turns out, worldwide, $34.2 billion or 19 per cent went to producers, i.e., the companies. Another $18.3 billion, or 10 per cent, went to general services, otherwise known as policies, transfers or expenditures where fossil fuel development is the main beneficiary, but does not include any payments to individual producers. The largest portion of estimated oil and gas subsidies in 2019 worldwide, $125.5 billion went to consumers or 70 per cent. That’s usually in the form of below-market prices for gasoline in countries such as Venezuela and Iran, where per litre prices were recently about 25 cents and 75 cents (Canadian) respectively.

The large subsidies to consumers mostly do not exist in Canada or the United States or most Western countries where subsidies are more often instead one-off activities such as the federal government buying the Trans Mountain pipeline when a legal uncertainty and anti-oil activism made the prior owner desirous to sell.

The International Renewable Energy Agency (IRENA) has its own estimate of fossil fuel subsidies, which is much higher than others ($447 billion in 2017) in part by engaging in assumptions that economists such as McKitrick found “potentially misleading.” IRENA also pegged subsidies for nuclear at $21 billion 2017 and $166 billion for renewables.

In any event, IRENA wants to flip the assumed subsidies where in 2050 subsidies to nuclear would stay flat at $21 billion but green subsidies would be worth $315 billion, with oil and gas subsidies down by two-thirds to $139 billion.

That’s the have your-subsidized-renewable-cake-and-fewer-fossil-fuel subsidies-too scenario.

The problem, as McKitrick and others have found, is that it appears trillion-dollar estimates of fossil fuel subsidy estimates are far too high. Thus, countless billions of dollars will not flow seamlessly and painlessly to the renewables sector from the oil and gas sector, because much of the assumed fossil fuel subsidies that anti-oil activists claim to have spotted are mostly not there, or exist in the form of consumer subsidies for lower gasoline prices in countries such as Iran and Venezuela, but not in Canada

The corollary then is that there is no “pot of gold” from which to divert trillions of dollars to green/renewable subsidies. Instead, those proposed future subsidies will have to be paid for from taxes or by additional government debt.

by Mark Milke and Lennie Kaplan