Department of Corrections

Bush Misunderstands the Marketplace
A Market with Subsidies Isn't 'Free'

TomPaine.com 23jul01

Norman Myers and Jennifer Kent are the authors of Perverse Subsidies: How Tax Dollars Can Undercut the Environment and the Economy (Island Press, 2001).

"The Bush administration plans to oppose an international drive to phase out fossil fuel subsidies and increase financing for nonpolluting energy sources worldwide, administration officials said today. ... The White House says its opposition to the proposals is based on a desire to let the marketplace, rather than government, decide how quickly renewable energy sources are adopted worldwide."
--New York Times, July 14, 2001

In this excerpt from Perverse Subsidies: How Tax Dollars Can Undercut the Environment and the Economy, Myers and Kent explain that the fossil fuel industry is subsidized.

We like energy, and our appetite for it keeps on growing. Since we left our caves, we have increased our numbers roughly 1,000 times, and each of us consumes roughly 1,000 times more energy, meaning that our consumption has soared one millionfold. An American uses six times as much energy, mostly fossil fuels, as the worldwide average, and 70 times more than a Bangladeshi. That same American consumes twice as much energy as do Western Europeans and three times as much as do Japanese. But by increasing the efficiency with which the United States uses energy to Western European and Japanese levels, the country could save $100-$200 billion per year. As Amory Lovins points out, energy saving is not only a free lunch but one we are paid to eat.

Energy production and use has become the single largest enterprise of humankind, and it is central to most economies worldwide. It can bestow abundant benefits on us. During the 70-year start-up of the Industrial Revolution, when we began to use commercial energy in a big way, the average worker was enabled to become 100 times more productive. Energy also has great capacity to harm the environment through the polluting effects of fossil fuels, manifested through urban smog, acid rain, and global warming, as well as through nuclear fuels with their radioactive wastes. Urban smog leads to asthma, emphysema, and a host of other respiratory ills, while acid rain imposes extensive damage on biotas. As for global warming, this is widely regarded as the most important single problem in the environmental arena; half of global-warming processes are due to carbon dioxide (CO2) emissions, two-thirds of which come from fossil fuels. Similarly, subsidies for fossil fuels and nuclear energy can harm the economy through their markedly distortional effects. So the sector as a whole has large potential for perverse subsidies. ...

Today, we derive 85 percent of our commercial energy from fossil fuels and 7 percent from nuclear power, amounts that may well persist until 2020. Only in electricity have alternatives -- notably hydropower, geothermal energy, and wind and solar power -- made much contribution, and except for hydropower they attract little government support. It is fossil fuels and nuclear energy (including electricity) that receive the great bulk of energy subsidies. The energy sector also features many indirect and concealed subsidies in the form of environmental externalities. It generates such marked pollution that some analysts consider the environmental costs of fossil fuels to be at least equal to and possibly much greater than the more conventional and recognized costs. All this, moreover, is without counting what will surely prove to be the biggest environmental externality of all, global warming. ...

While the fossil-fuel industry is worth well over $1.4 trillion per year, it is the third most heavily subsidized of all economic sectors, after road transportation and agriculture. Yet we have only a hazy idea of how large these subsidies are. Nuclear energy, a much smaller and less diverse industry, should be accurately and precisely documented, but governments, especially those of the former Soviet Union, France, and several Asian countries, are even more loath to divulge information about nuclear energy than they are about fossil fuels. In Western Europe, nuclear-energy subsidies total around $5 billion per year, and in the United States, $7 billion. Not only are fossil-fuel subsidies large; they are unusually damaging environmentally, entraining heavy economic costs both present and prospective. But as with agriculture and other sectors with huge subsidies, many governments simply do not know (or are not saying) how much of the taxpayers' money they are directing into fossil-fuel energy. ...

The United States possesses less than 5 percent of the world's population
but consumes 26 percent of the world's commercial energy.
Hence, the following appraisal is partial at best. At least, it presents a solid picture of how far the fossil-fuel industry is being propped up by government handouts, even though its prodigious environmental externalities and other societal spillovers suggest it should be heavily taxed. Or, as a minimum, the industry should be subjected to the full rigors of the marketplace: coal and solar energy should demonstrate their prowess on a level playing field, whereas coal is effectively awarded a start of between 10 and 30 goals. Ironically, it is the communist countries of the former Soviet bloc and China that have been doing most to shed this socialistic mode of running an energy economy. One of the most energy profligate and environmentally polluting countries, the United States, has not gone nearly so far to cut its subsidies, though they are smaller in relation to the size of the U.S. economy and cutbacks would be highly beneficial in both economic and environmental terms. ...

The United States

The United States possesses less than 5 percent of the world's population but consumes 26 percent of the world's commercial energy. It consumes roughly twice as much energy per person and per unit of GNP as do Western Europe and Japan. By increasing the efficiency with which Americans utilize energy to Western European levels, the United States could save over $100 billion per year; by matching the efficiency of Japan, $200 billion per year. Overall, energy waste costs the U.S. economy over $300 billion per year -- more than the military budget. Conversely, energy conservation measures since the 1970s have saved $1 trillion.

The United States also emits one-quarter of all the carbon dioxide accumulating annually in the global atmosphere. In per capita terms, it emits roughly twice as much carbon dioxide as Germany, Russia, or Japan, almost three times as much as Italy, eight times as much as China, and 20 times as much as India. Fossil fuels contribute 90 percent of the United States' greenhouse-gas emissions (plus 90 percent of local air pollution and acid rain and the great majority of gases leading to smog). Yet by slashing fossil-fuel subsidies, the United States would cut its CO2 emissions to 16 percent below 1990 levels by 2010, thereby surpassing its Kyoto target by a sizeable margin (and reducing pollutants such as sulfur dioxide, nitrous oxide, and particulates). It would also generate energy savings of 13 percent.

U.S. energy subsidies in the mid-1990s totaled $25 billion (range $18-$32 billion), equivalent to $350 per American household. (Note, however, that certain estimates vary by an order of magnitude, depending upon definitions and criteria.) Of total energy subsidies, fossil-fuel and nuclear-energy subsidies amounted to $21 billion, or 84 percent of the total. Within the fossil-fuel category, the smallest subsidy went to natural gas, even though it is environmentally cleaner than oil or coal. Some minor subsidies also went to a miscellany of items, such as government-sponsored research and development and general investment tax credits.

U.S. subsidies, like those in Europe, are strongly weighted against nonpolluting renewable sources of energy. Among the leading biases are specialized tax benefits for mining coal, oil, and gas (including depletion allowances of them as nonrenewable resources); exemption from minimum taxation requirements for fossil fuels; public financing for nuclear reactors, among other supports for nuclear energy; and disproportionate amounts of public research and development for conventional energy sources, primarily fossil fuels. In addition, a miscellany of minor supports, such as agricultural policies, discourage crop diversification to energy crops. There is good cause to wonder why the major category of nonrenewables, fossil fuels, deserves any subsidies at all.

source: http://www.tompaine.com/opinion/2001/07/18/index.html 23jul01

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