In a new paper the IMF estimates

global subsidies for fossil fuel energy implied by the underpricing of supply and environmental costs at a staggering $5.2 trillion in 2017, or 6.5 percent of world GDP

$5,200,000,000,000

What they mean by underpricing is our failure to include in the price of fossil fuels the costs of the damage we know that burning them is doing to our country and to the world. When we buy fossil fuels, or when we buy electricity generated by burning fossil fuels, or products made using that electricity, we’re not really paying the full price. The costs, known as negative externalities, are being borne by others, largely those in the poorest regions of the world whose own carbon footprints are tiny compared with ours. They’ll also be borne by those who are yet to be born who don’t yet have carbon footprints.

You could object to this use of the term subsidy, and many people do. When we think of a subsidy we think of a government directly paying money to a company or an industry. The dictionary defines a subsidy as

a sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low

These are explicit subsidies, but there are also implicit ones.

there are myriad implicit subsidies principally in the form of environmental externalities. These subsidies include anything that is omitted but not accounted for and thus is an externality. These include things such as car drivers who pollute everyone’s atmosphere without compensating everyone, farmers who use pesticides which can pollute everyone’s ecosystems again without compensating everyone, or Britain’s electricity production which results in additional acid rain in Scandinavia. In these examples the polluter is effectively gaining a net benefit but not compensating those affected. Although they are not subsidies in the form of direct economic support from the Government, they are no less economically, socially and environmentally harmful.

Wikipedia

With fossil fuel burning, the externalities are not only the impact on our climate, there is also the impact of local air pollution which the World Health Organization estimates causes 4.2 million deaths a year, and in 7.6% of all deaths in 2016, air pollution was a contributory factor. As a recent article in The Atlantic puts it

Every year, 70,000 to 107,000 Americans subsidize air pollution with their life.

How do we get out of this mess?

Clearly, if you’re trying to get off of something, you shouldn’t be subsidising it. Imagine if we’d subsidised cigarettes instead of taxing them. Still putting government health warnings on the packets and banning advertising, but subsidising them so that you could buy a packet of 20 for 50p or something. That would be like torture for anyone trying to quit, and yet it’s pretty much what we’re doing now with fossil fuels. We’re telling people how bad they are and yet as soon as we try to change our ways and do the right thing, like say by taking the train rather than flying or driving, we find that the cleaner alternatives are more expensive.

It’s almost as if our governments don’t want us to quit our fossil fuel addiction. If they did, surely they’d help us by putting an end to these ridiculous subsidies.

It’s not quite that simple though. Things never are. In their paper, the IMF notes that though a number of countries have carbon taxes or emissions trading schemes, in practice these have fallen well short of what is required. The prices being set are too low.

The key to getting carbon prices that are high enough to drive the required emissions reductions lies it seems in what you do with the revenue. As we’ve seen with the Gilets Jaunes in France.

If you bring that tax back, petrol prices will go up and you’re taxing people who need their cars. It’s that tax that made us turn up at the roundabouts and we’ll be back there again

Pricing carbon means, in a carbon-based economy, that the prices of just about everything are going to rise, and particularly the prices of electricity and gas. People are going to feel that. The IMF compare the relative effectiveness of different policies to spend the revenue:

  • reducing other taxes such as income and corporation taxes, which can have a positive economic effect
  • giving the revenue back in the form of lump sum dividends, as proposed by Citizens’ Climate Lobby
  • investment in clean energy and energy efficiency etc.

Whilst the fee and dividend model is not the most economically efficient, they note its political advantages: its transparency means that people see what they’re getting from the carbon price, and everyone gets the same, whereas income tax reductions are less visible, and also income tax reductions aren’t going to benefit those who don’t pay income tax so if you’re going down that route you’re going to need to consider increasing benefits to ensure the poorest are not left in a state of energy poverty.

Which policies or which range of policies are best for a country is going to depend very much on the political and economic situation of that country.

Border carbon adjustments

Also known as carbon tariffs, these involve countries charging their carbon price on imports, or more specifically, charging the difference between their carbon price and that of the country the product is being imported from. This ensures that a country does not penalise its own businesses with its carbon price and (to a limited extent according to the IMF) reduces emissions leakage – but it’s not as simple as that. Things never are.

measuring embodied carbon in traded goods can be contentious

With there being so many ways in which a country can price carbon, and the carbon price can be very different for different goods, it becomes difficult to determine what the correct border tariff is. Take a toy imported from China. What carbon emissions were produced in making that toy and what price, if any, has already been paid on those emissions? China is bringing in an Emissions Trading Scheme, so a price may already have been paid and any border adjustment ought to take that into account, but to get agreement between China and the UK (or the EU) on what that price ought to be is likely to be fraught.

Voluntary carbon price floor arrangements

A possible alternative to border carbon adjustments is for a number of high-emitting nations to agree on a minimum carbon price and in doing so avoid imposing carbon tariffs on one another. This would give some reassurance over competitiveness concerns, addressing objections that increasing its carbon price will disadvantage that country’s businesses in relation to those of its competitors.

The global mitigation challenge

To have any chance of saying within 1.5 degrees emissions have to pretty much fall off a cliff over the next decade, and to stay within 2 degrees they also have to decline sharply. If countries meet their Paris commitments we’re on track for 3 degrees of warming by the end of the century, a level that would be extremely costly, in terms of lives as well as money.

It is difficult to understate the urgency of this task as the window for containing global warming to manageable levels is closing rapidly. Action is required by everyone, every institution, every country. Everyone can make a difference!

Christine Lagarde and Vitor Gaspar

Photo: Christine Lagarde

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