Fossil fuel subsidies: how can we end our addiction?

Published on March 3rd, 2022
*This article was written before the Russian invasion of Ukraine [1]

Professor Luc Soete

Maastricht University and Brussels School of Governance, VUB

There is a long history of government intervention in energy markets. For both political and economic reasons, countries have always subsidized the production of cheap and abundant fossil energy. Over the last hundred years, the availability of inexpensive fossil-fuel energy has been a hallmark of the growth of most countries—including both the industrial growth of the last century and the information-intensive growth of our current era. In both high- and low-income countries, government subsidies have contributed to the world’s addiction to cheap, easily available fossil energy

Commentary

Fossil fuel subsidies: how can we end our addiction? Luc Soete [1]

There is a long history of government intervention in energy markets. For both political and economic reasons, countries have always subsidized the production of cheap and abundant fossil energy. Over the last hundred years, the availability of inexpensive fossil-fuel energy has been a hallmark of the growth of most countries—including both the industrial growth of the last century and the information-intensive growth of our current era. In both high- and low-income countries, government subsidies have contributed to the world’s addiction to cheap, easily available fossil energy.

The transition of the world’s energy system from fossil fuels to sustainable sources is full of complexities. The “weight of the past” keeps societies locked into a fossil-fuel-based mode of economic development, which holds true not only for oil- or gas-abundant countries, but equally (or more so) for countries with little internal fossil fuel production, where the competitiveness provided by inexpensive energy significantly obstructs any quick transition towards sustainable sources. The fossil-fuel subsidies granted by national authorities, which encourage both fossil-fuel production and consumption, most directly embody this “weight of the past”.

The figure below from the Elements Newsletter [2] highlights that, after a few years of decline, fossil-fuel consumption subsidies are estimated to have risen dramatically in 2021. Given the current high oil and gas prices, 2022 is likely to witness similar, if not higher, subsidies.

Not surprisingly, Sustainable Development Goal 12 (“Ensure sustainable consumption and production patterns”) [3] includes a specific target to “rationalise inefficient fossil-fuel subsidies that encourage wasteful consumption”, requesting countries to report the amount of subsidies per unit of GDP for both fossil-fuel production and consumption.

The Fossil Fuel Subsidy Tracker [4] provides detailed information on fossil-fuel subsidies for 2010–2020. Over the period illustrated in the figure, the total amount of fossil-fuel subsidies provided by governments around the world exceeds $5 trillion. This is approximatively the same as the estimated combined negative environmental, climate, and health impact of fossil fuels. It would be difficult to find a worse example of damaging policy and misallocation of public funding! Why, despite all the evidence, is there so little action to remove or redirect such harmful subsidies?

A major problem is that the energy transition involves both a production side (exploration for and extraction of fossil fuels, bulk transportation and storage, refining and processing) and a consumption side (combustion or use of fuels by private consumers and end-use sectors). Fossil-fuel consumption encompasses the full spectrum of economic activities in our societies: from their use in power and heat generation to industrial processes and activities outside of the energy sector to all other uses in transport, the residential sector, or non-energy industries. In the transition away from fossil fuels, while the focus has been primarily on the production side, the real subsidy problem hampering the transition is on the consumption side, where such a transition is much more complex.

The consumption side represents a public-policy minefield, in which we must address both direct and indirect trade-offs between the sustainable-energy transition and its social implications. This transition may result in employment losses and will be comparatively more costly and impactful for low-income households and those living in less urban areas who rely heavily on transport, for example [5]. There will also be trade-offs between a sustainable-energy transition and the economic competitiveness of sectors that are heavily dependent on energy use, such as chemicals or tourism. There will be trade-offs in terms of maintaining product quality standards—consider the pervasive and diversified use of plastics as wrapping and packaging material, for instance.

A good starting point for policy makers might be to admit that, over the past 100 years, our societies have become totally “addicted” to fossil-fuel consumption, as described by Columbia University economist Jeffrey Sachs. On the production side, well-known, multi-national big oil and gas companies gladly continue to supply “addictive” fossil fuels to fill an insatiable societal demand. The Dutch legal case against Shell, on May 26th, 2021, was the first climate-change ruling to illustrate this point. The company defended itself by arguing that it was doing everything it could to speed up the sustainable-energy transition, but that it couldn’t be held responsible for the negative climate impact caused by consumption of the oil and gas it produced. [6] Fossil-fuel production companies find themselves “locked in” to the production of fossil fuels. They will gladly use any subsidies they receive to experiment with piloting alternative, renewable energy production, but these companies are effectively playing for time—hoping to ready themselves for the implications of the sustainable-energy transition, when their capital stock, including cheap exploitation rights, will be fully written off. For Sachs, ending the world’s massive addiction to fossil fuels therefore requires both the end of production subsidies and a total ban on new extractions of fossil fuels.

On the consumption side, the focus should be on redirecting huge fossil-fuel subsidies into clean energy development. Here, too, many sectors (the chemical sector, for example) comprise firms locked in “waiting” strategies—trying to control the long-term, potentially massive adjustments in capital and assets that the transition to sustainable energy will require. Subtracting the misallocated, $440 billion of fossil-fuel consumption subsidies in 2021 (as illustrated in Figure 1) and adding them to the speedy development of renewable-energy technologies should make a significant difference.

The analogy of drug addiction is actually too nice of a comparison. Imagine public authorities continuing to massively subsidize the consumption of drugs over the past ten years, despite all the evidence of their detrimental impact, leaving the addiction problem to future generations. It is time to stop the provision of subsidies that fuel the world’s addiction to fossil energy.

If you think, there is little one can do at the individual level about it, think twice. Why not counter fossil-fuel subsidies by buying up and destroying the “carbon rights” under one of the existing emission trading systems. The EU’s Emissions Trading System (EU ETS), the world's first major international carbon market, enables polluting industries to buy allowances from industries that emit less. The economist’s idea behind such “cap and trading” schemes in CO2 emissions is to set a “cap” on the one hand on the total amount of CO2 emissions that authorities “allow” to be emitted annually, gradually being reduced over time, and then to allow such “allowances” or “carbon rights” to become traded.  In line with the addiction to fossil energy, the number of sectors exempt from the scheme and the total amount of “free allowances” granted undermined the effectiveness of the initial EU ETS until the system was revised in 2018 and became an essential tool in the European Green Deal.

Over the last two years, the price of a tonne of CO2 has quadrupled and is now approaching the €100 benchmark [7]: a price more in line with the environmental damage caused by the use of fossil fuels. Contributing to a further increase in the CO2 prize by buying up “allowances” with the sole aim of destroying such carbon “rights” [8]  which have nothing rightful about them, might well be the best example of individual altruistic punishment needed to get rid of society’s fossil-fuel addiction.

[1] This article was written before the Russian invasion of Ukraine. Russia’s unilateral invasion of Ukraine might well represent from this perspective a watershed in the political and economic use of fossil energy. It has given both Western governments and their large multinational oil and gas companies a crisis opportunity to write off the large participations they had in Russian fossil-fuel production and the construction of its supply infrastructure. With Russia holding 24% of the world’s total natural gas reserves, there has been a sudden awareness, at least in Europe, that its dependency on Russian gas represents not just an economic but also a major political risk. It offers European countries the opportunity to address their foreign economic dependency on fossil-fuel production as a threat to both democracy and to climate jointly.  It will now be important, despite the different time perspectives involved in dealing with these two threats, to address those in a combined fashion. The current immediate threat to democracy might call for quick, alternative energy supplies with even more negative long-term climate impacts, such as replacing Russian gas with coal. So far, both political and economic forces seem to work hand in hand with the very high fossil fuel energy prices pushing governments to accelerate the transition towards the production of renewable energy sources, including policy measures to increase energy efficiency such as better insulated buildings, the rolling out of heat pumps and delaying the planned closure of nuclear power stations. In Europe at least, the unexpected war in Ukraine has made one suddenly become much more aware of the addiction to fossil fuels.
[2] See Charted: $5 Trillion in Fossil Fuel Subsidies (visualcapitalist.com)
[3] https://en.wikipedia.org/wiki/Sustainable_Development_Goal_12
[4] The Fossil Fuel Subsidy Tracker is a collaboration between the Organisation for Economic Co-operation and Development (OECD) and the International Institute for Sustainable Development (IISD). See https://fossilfuelsubsidytracker.org/
[5] The unexpected “gillets jaunes” phenomenon in France illustrates this point. See https://en.wikipedia.org/wiki/Yellow_vests_protests.
[6] “The court held that Shell owes:
· an “obligation of result” to reduce CO2 emissions generated worldwide by its group’s operations (e., an obligation to ensure that the emission reduction is achieved to the level specified by the court);
· a “significant best-efforts obligation” to reduce CO2 emissions generated worldwide by its business partners, including suppliers and end-users (e., an obligation to take necessary steps to remove serious risks and limit any lasting consequences to the best of its abilities).” See: https://www.clearygottlieb.com/news-and-insights/publication-listing/dutch-court-orders-shell-to-reduce-emissions-in-first-climate-change-ruling-against-company
[7] The war in Ukraine smashed CO2 prizes with a third, making it even a better moment to buy such rights.
[8] See e.g. the website www.carbonkiller.org where one can buy CO2 emissions which will be “destroyed”.