Energy

# Ten most distortionary energy subsidies

September 24, 2008, 10:51 pm
Source: Encyclopedia of Earth
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## Introduction

Spiraling energy demand and rising environmental costs are growing concerns around the world. Governmental responses all too often involve issuing a torrent of energy plans, white-papers, and legislation. In an ideal world, government policies should work in tandem with market forces to achieve an adequate energy supply mix that is cleaner and more diverse than what preceded it. These synergies do not currently exist. In fact, there are thousands of government policies in place around the world that act counter to stated objectives with regard to energy security, diversification, and environmental protection.

The ten distortionary energy subsidies discussed below represent policies that, if corrected, would materially realign price signals to more effectively achieve energy market end goals. The list was generated with input from a variety of subsidy analysts around the world on distortionary subsidies and associated data.

## Absence of charges on GHG emissions

Despite the absence of perfect knowledge on the precise pathway and timing of global climate change, the state of knowledge is certainly high enough, and the risks of inaction dire enough, to begin placing constraints on emissions of greenhouse gases worldwide. The continued absence of such constraints generates a large subsidy to certain energy resources, primarily fossil fuels. The economic results are skewed price signals that slow the needed diversification of energy demand. One political result of muddled price signals and policy uncertainty is a slew of equally misguided subsidies to competing energy resources such as nuclear or biomass. These perhaps well-intentioned subsidies enable the substitutes to avoid facing any form of market test to show that they are, in reality, the quickest and cheapest ways to provide energy services with a smaller carbon footprint. Properly integrating GHG constraints into the pricing of goods and services would provide a far more neutral playing field on which the thousands of possible solutions to reduce emissions could compete.

Current estimates for global carbon markets are roughly $28 billion in 2006, more than double the$12 billion in 2005. Under reasonable scenarios for carbon prices and required reductions modeled worldwide carbon markets would be on the order of $100 to$200 billion per year larger than they are now. Not all of this would be borne by energy markets, but a sizeable percentage would be.

## Oil security

Pipelines, water transit chokepoints, and long supply lines all make global oil supplies (and increasingly natural gas as well) vulnerable to disruption. Supply disruptions and price spikes in oil markets have historically generated major economic dislocations, suggesting that public investments to reduce the impact of disruptions are likely rational and economic. Because other energy resources do not have these vulnerabilities, however, it is important that the cost of securing oil supplies be reflected in commodity prices and recovered from oil consumers. Often, it is not.

Oil stockpiling was initiated in the early 1970s as one way to provide some cushioning to the world's large importing markets, and is coordinated by the International Energy Agency. A combination of private, pooled, and public stocks are used. Government-owned public stocks are normally paid by taxpayers, and provide large subsidies (billions per year) in both the United States and Japan. Luckily, most other stockpiling approaches do seem to pass costs on to consumers.

Defense of shipping chokepoints such as the Persian Gulf and key pipelines clearly cost governments tens of billions of dollars per year. Most of these costs are borne by the United States, though the benefits accrue to consumers in other countries as well. Costs are difficult to tease out from general budgets. As a result, reasonable allocations of joint costs to oil product markets are not made. Important price signals to diversify energy resources and energy suppliers are therefore lost.

## Cap on liability for accidents in nuclear power

Civilian nuclear power producers benefit greatly from shifting a substantial portion of their liability for radioactive releases from accidents or attacks away from owners and investors and onto the taxpayer and the surrounding population. These costs, both through higher insurance premiums and higher cost of capital, would properly be reflected in the price of nuclear electricity. This subsidy has never been quantified comprehensively, but affects not only reactors, but nuclear fuel cycle facilities and nuclear materials transport as well. On a global level, the subsidy is likely to be well in excess of $10 billion per year. Legislation stipulating mandated insurance coverage varies around the world, and efforts under the 1997 Convention on Supplementary Compensation for Nuclear Damage (CSC) attempt to set a liability floor internationally. However, mandated coverage levels worldwide all appear too low to address any reasonably-sized accident. Even in the US, where coverage requirements under the Price-Anderson Act greatly exceed the CSC, total third party liability coverage is less than damages periodically caused by natural events such as large hurricanes. The situation is far worse in other countries. China, for example, has liability limits of only US$36 million.

Industry claims that caps do not constitute a subsidy because historical payouts have not exceeded them. These claims are without merit, as indicated by the direct actions of the nuclear industry. In the US, the industry regularly lobbies to prevent cap increases or expiration, a situation that would not occur if the caps really had only minimal economic value to producers. Review of US operator insurance on their own operations (plant, equipment, and business continuity) is instructive. A single firm's coverage of its own operations exceeds the entire pool of coverage within the US for offsite liability in the case of an accident.

## Coal subsidies in Germany

Over a period of nearly 50 years, Germany has propped up its domestic coal industry using a variety of state aids to the continued viability of coal production in Germany. Karl Storchmann documented nearly $200 billion in subsidies provided during this time frame through a total of nearly 60 support measures. The largest single subsidy program was the Kohlepfennig, at more than$60 billion. The "coal penny" program, as it is called in English, levied a special tax on the price of electricity that was used to subsidize generator's consumption of domestic coal. Although subsidies are well down from their highs in the mid-1990s, they remain more than \$3 billion per year today. Subsidies have exceeded 85% of the value of sales between 1989 and 2002; it is likely this pattern has continued in recent years as well.

While supports to coal mines in other countries are not as large as in Germany, government subsidies to new coal technologies, and pilot plants to try them out, run into the billions of dollars per year as well. These subsidies reduce the pressure on the industry itself to innovate, and mask the competitive advantage of alternative energy resources with a more favorable environmental profile. Development of next-generation technologies is a basic survival skill of any robust industry; coal should not be an exception.

## Acknowledgements

Thanks to the following people for sharing their views and data on the most distortionary subsidies: Bruce Biewald (Synapse Energy Economics); Nils-Axel Braathen (OECD), Anthony Froggatt (Independent Consultant); Gawain Kripke (Oxfam America); Burkhard Huckestein (European Environment Agency); Mona Hymel (University of Arizona); Masami Kojima (World Bank); Skip Laitner (ACEEE); Trevor Morgan (Menecon Consulting); Norman Myers (Independent Consultant); Shirley Neff (Columbia University); Frans Oosterhuis (Vrjie University); Geoffrey Rothwell (Stanford University); Ron Steenblik (Global Subsidies Initiative); Vangelis Vitalis (New Zealand Ministry of Foreign Affairs and Trade).