Subsidizing Fossil Fuels Costs Governments $2 Trillion Annually: Report

Oil Pumps

By Justin Bull

May 8, 2014

A new international report has found that global subsidies to the fossil fuel industry have reached $500 billion per year. When the cost of pollution associated with fossil fuels is included, the figure balloons to $2 trillion. According to experts from the International Monetary Fund, United Nations Environment Programme and other international organizations, this massive subsidy undermines governments’ ability to cope with climate change, while also contributing to fiscal instability.

At least 2.9 percent of global GDP – 8.5 percent of government revenues – is spent on subsidizing fossil fuels. Meanwhile, climate change experts have found that 78 percent of the increase in greenhouse gas emissions between 1970 and 2010 can be attributed to fossil fuels. Eliminating fossil fuel subsidies could reduce carbon emissions by as much as 13 percent.

Spending enormous sums to fund environmentally destructive industries while simultaneously negotiating climate change treaties is nothing short of lunacy. At least experts are aggressively lobbying governments to trim subsidies, easing environmental and fiscal burdens. Governments in the developing world often subsidize energy to reduce the costs of transportation. But these subsidies have gotten out of hand. African nations on average spend 3 percent of their GDP subsidizing fossil fuels, equivalent to the continent’s entire health care budget.

Such subsidies are by no means limited to the developing world. The IMF estimates that Canada spends almost $26 billion a year on subsidies to the fossil fuel industry, or around $787 per Canadian. (Then again, this estimate includes such costs as avoided taxation and unallocated costs of pollution, undermining its accuracy.)

A more conservative estimate comes from the Auditor General of Canada, who reviewed the federal government's fossil fuel subsidies in 2012. The AG found that from 2007 to 2011 $508 million was spent on direct subsidies to the fossil fuel industry. Using data from Finance Canada, the AG calculated that tax breaks to the fossil fuel industry totalled almost $1.47 billion over the same period. But it should be noted that the majority of direct subsidies (97 percent) was for research and development, half of which was related to clean technology (a generous use of the word “clean").

The renewable energy industry is a spendthrift by comparison. The International Energy Agency (IEA) estimatesthat in 2011 renewables received around $88 billion in subsidies, and even this figure excludes the positive externalities (e.g., pollution avoided) that clean energy provides.

Nonetheless, there is chorus of critics who attack subsidies to renewable energy while remaining conveniently silent about the true costs of fossil fuel. Nowhere is this more evident than the United States, where the Obama Administration's efforts to support renewable energy are a constant source of scorn. The Solyndra bankruptcy, for example, morphed into a scandal around government subsidies to the solar industry.

But sober analysis tells a very different story. A historical review of subsidies to all energy sectors – fossil fuels, nuclear and renewables – found that over the past century every sector received hefty government handouts. In fact, when analysts calculated the historical cost of subsidies on an inflation-adjusted basis, they discovered that fossil fuel subsidies produced just one-tenth the energy per dollar spent when compared to subsidies for renewables.