Money for Nothing, and your Climate for Free

According to a leaked letter, the Obama Administration is set to propose ending fossil fuel subsidies next week at the Pittsburgh G20. The letter, authored by Michael Froman who is an Obama advisor on international economic affairs, calls on the G20 to eliminate all fossil fuel and electricity subsidies, as a “logical step in combating global climate change”.

Eliminating fossil fuel subsidies is a great idea, if it’s done right.  This is certainly the right time, but the G20 is likely not the right place.

In general, it’s so obvious, you can’t really believe it hasn’t happened sooner.  With all the hoopla about cap and trade, carbon offsets, and parts per million, wouldn’t a good place to start be to stop supporting big oil and dirty coal with our tax dollars?  We can then use that money to finance a transition to clean energy – both in the US and globally.

The principle is simple and clear: You can’t really say you’re committed to the fight against climate change if you’re still funding oil and coal.  If you’re in a hole, stop digging.  Many global leaders including UN Secretary General Ban Ki Moon, Sir Nicholas Stern, Al Gore, and John Browne (the former Chief Executive of BP) have all spoken out against the ongoing practice of subsidizing fossil fuels with public funds.  Obama campaigned on the idea, and the Administration has already proposed eliminating some domestic subsidies in the 2010 budget.

But the reality, is, as usual, stickier.  In the US, calls for subsidy removal tend to be answered by the oil industry and their allies with dire predictions of rising gas prices and consumer pain thus leading to unemployed politicians.  This is because the poor oil industry couldn’t possibly have anything less than record profits, and they’ll continue to either use our tax money to do it, or they’ll jack up prices on us.  In other businesses involving addiction, this is called a protection racket.

This explains why the Obama proposal for subsidy removal in the US is only partial at best, and also why it is gathering dust, not steam, in Congress.

In Pittsburgh next week, the Obama Administration is apparently going to propose that the G20 eliminate fossil fuel subsidies.  What is a fossil fuel subsidy?   Simply put, it is any government action that lowers the cost of fossil fuel energy production, raises the price received by energy producers or lowers the price paid by energy consumers.  There are a lot of activities under this simple definition – tax breaks and giveaways, but also loans at favorable rates, price controls, purchase requirements and a whole lot of other things.

Generally, subsidies are either on the production side (making the cost of production cheaper), or the consumption side (making the price of fuel cheaper to the consumer). In the US and the rest of the industrialized world, we generally have production subsidies, which also serve as corporate welfare to the oil and coal industry who return the favor with lavish campaign contributions.  But in the developing world, consumption subsidies, which make access to energy and fuel affordable to the poor, are far more common.

It is these consumption side subsidies in the developing world that the OECD the IEA, and now perhaps the Obama Administration have been focused on as market distortions.  True, excluding the military and wars for oil, they are the largest subsidies – on the order of $200 billion annually.  However, the intent of these subsidies is generally not to increase consumption of fossil fuels per se – rather it’s usually simply to help make access to energy and transport affordable to the poor.

This is not the place to start leveling the playing field for clean energy. Like raising prices on US consumers, it’s likely to provoke a backlash in developing countries, ensuring gridlock for years to come.

A better idea would be eliminating international subsidies via institutions like the World Bank, the US Export-Import Bank, or the Overseas Private Investment Corporation – all of which are supported by US tax dollars, all of which gave billions last year to the fossil fuel industry, and all of which could be important sources of public funds for clean energy.

These institutions actually use our tax dollars to build infrastructure for fossil fuel extraction and use in the developing world. So, if we don’t end this practice first, we’re essentially saying to the rest of the world that we’ll use our public funds to support Exxon, Chevron and Shell to build carbon intensive infrastructure in the developing world, but we’d like the developing world to remove the subsidies that make use of that infrastructure affordable to its population.

Fighting climate change – and remaking the global economy to run on clean energy – is going to take money.  And the US, Europe, and others in the developed world, which have caused the problem, are going to have to ante up if we expect others to chip in. Conservative estimates of the need for public money alone from the industrialized North to pay for a global clean energy transition and the costs of adaptation to climate change run in the area of $200 billion annually.

Towards that end, Europe has put $21 billion on the table.  That, sadly, is it.  Nothing so far from the US.  Nothing from anywhere else in the developed world.  To the cry for the need for money to stop climate change globally, the answer has mostly been the sound of crickets.

Meanwhile the fossil fuel industry continues to pull in at least $67 billion in production subsidies from the rich countries around the world.  That’s more than three times more than the US and others have put up to fight climate change internationally.

What was that about market distortions?

Great, let’s end fossil fuel subsidies.  Absolutely, we must find money for international climate finance.  But if Obama and others focus first on consumption subsidies the motives look less like fiscal responsibility and a stable climate, and more like a finger pointing exercise or negotiating tactic designed to show that the developing world has plenty of funds available to adapt to climate change and invest in clean energy, if only they would stop making energy affordable for their populations.

It shifts blame for the looming potential failure in Copenhagen to China, Russia, India, and others, and away from the US and Europe.  If that’s the point, it might work well.