Defining 'Subsidy': The Difficulties in Rolling Back Fossil Fuel Aid

One of the most important steps in transitioning the world away from a fossil fuel-based energy system is to scale back government subsidies for the oil and coal industries around the globe. This is easier said than done, and not only because the dirty energy lobbies are good at what they do. Before the world can roll back the half trillion dollars of fossil fuel subsidies, we need to be able to find them.

A recent series of reports from the Global Subsidies Initiative — a part of the International Institute for Sustainable Development — shines a spotlight on the nebulous nature of fossil fuel subsidies and just how difficult it will be to reform them. The reports were released in a week when the G20 leaders met behind closed doors in Washington, a reminder that at the group’s meeting in Pittsburgh last September an agreement was reached to begin phasing out fossil fuel subsidies.

“The G20 is suggesting that we should cut subsidies that encourage ‘wasteful consumption,’ so it is deflecting the massive role that fossil fuel production subsidies have in our system,” said Michelle Chan, a senior policy analyst at Friends of the Earth who provided some guidance to the GSI report authors.

The Obvious: Tax Incentives

In the developing world, those consumption-based subsidies are largely intended to help people pay for electricity and fuel. Iran, for example, is the world’s largest subsidizer of fuel, with $55 billion a year going to make gasoline remarkably cheap for its citizens; they pay only 10 cents per liter, compared to 56 cents in the United States.

Developed countries like the U.S. tend to focus their fossil fuel subsidies on the production side; these often take the form of tax incentives for coal and oil companies.

David Victor, a professor at the University of California, San Diego, who wrote one of the fossil fuel subsidy reports, said that, “arguably we under-tax fossil fuels, especially in light of concerns about emissions of CO2,” but that the country’s consumption-oriented subsidies actually peak in the renewable energy sector with biofuels and wind power.

On the production side, President Obama is now trying to follow-up last year’s G20 statement with action by starting to repeal some of the tax breaks given to fossil fuel industries. The 2011 budget proposal includes rollbacks of an enhanced oil recovery credit, as well as rules that allow oil and coal companies to deduct as much as 25 percent of income from fossil fuel deposits. In a hearing earlier this month, Republican members of the House Ways and Means Committee showed that there will be stiff opposition to removing some of those subsidies.

As difficult as removing those types of subsidies might be, those are only the obvious ones.

“It is important to take a look at the guise under which a lot of these subsidies occur,” Chan said.

• 1
• 2
• 3
• next page »