EPIBuilding a Sustainable Future
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February 01, 2007
Subsidizing Climate Change
Lester R. Brown

Each year the world’s taxpayers provide an estimated $700 billion of subsidies for environmentally destructive activities, such as fossil fuel burning, overpumping aquifers, clearcutting forests, and overfishing. An Earth Council study, Subsidizing Unsustainable Development, observes that “there is something unbelievable about the world spending hundreds of billions of dollars annually to subsidize its own destruction.”

Iran provides a classic example of extreme subsidies when it prices oil for internal use at one tenth the world price, strongly encouraging car ownership and gas consumption. The World Bank reports that if this $3.6-billion annual subsidy were phased out, it would reduce Iran’s carbon emissions by a staggering 49 percent. It would also strengthen the economy by freeing up public revenues for investment in the country’s economic development. Iran is not alone. The Bank reports that removing energy subsidies would reduce carbon emissions in Venezuela by 26 percent, in Russia by 17 percent, in India by 14 percent, and in Indonesia by 11 percent.

Some countries are eliminating or reducing these climate-disrupting subsidies. Belgium, France, and Japan have phased out all subsidies for coal. Germany reduced its coal subsidy from $5.4 billion in 1989 to $2.8 billion in 2002, meanwhile lowering its coal use by 46 percent. It plans to phase out this support entirely by 2010. China cut its coal subsidy from $750 million in 1993 to $240 million in 1995. More recently, it has imposed a tax on high-sulfur coals.

A study by the U.K. Green Party, “Aviation’s Economic Downside,” describes the extent of subsidies currently given to the U.K. airline industry. The giveaway begins with $17 billion in tax breaks, including a total exemption from the federal tax. External or indirect costs that are not paid, such as treating illness from breathing the air polluted by planes, the costs of climate change, and so forth, add nearly $7 billion to the tab. The subsidy in the United Kingdom totals $391 per resident. This is also an inherently regressive tax policy simply because a substantial share of the U.K. population cannot afford to fly very often if at all, yet they help subsidize this high-cost mode of transportation for their more affluent compatriots.

While some leading industrial countries have been reducing subsidies to fossil fuels—notably coal, the most climate disrupting of all fuels—the United States has been increasing its support for the fossil fuel and nuclear industries. A Green Scissors report from 2002, a study supported by a coalition of environmental groups, calculated that over the preceding 10 years subsidies for the energy industry totaled $33 billion. Of that, the oil and gas industry got $26 billion, coal $3 billion, and nuclear $4 billion. At a time when there is a need to conserve oil resources, U.S. taxpayers are subsidizing their depletion.

Subsidies are not inherently bad. Many technologies and industries were born of government subsidies. Jet aircraft developed with military R&D expenditures led to modern commercial airliners. The Internet was the result of publicly funded links among computers in government laboratories and research institutes. And the combination of the federal tax deduction and a robust state tax deduction in California gave birth to the modern wind power industry.

There is an urgent need for subsidy shifting. Eliminating environmentally destructive subsidies reduces both the burden on taxpayers and the destructive activities themselves. A world facing the prospect of economically disruptive climate change, for example, can no longer justify subsidies to expand the burning of coal and oil. Shifting these subsidies to the development of climate-benign energy sources such as wind, solar, biomass, and geothermal power is the key to stabilizing the earth’s climate. Shifting subsidies from road construction to rail construction could increase mobility in many situations while reducing carbon emissions.

In a troubled world economy facing fiscal deficits at all levels of government, exploiting these subsidy shifts, as well as tax shifts, can help balance the books and save the economy’s environmental support systems. Subsidy and tax shifting promise both gains in economic efficiency and reductions in environmental destruction, a win-win situation.

At a time of mounting public concern about climate change driven by the burning of fossil fuels, the world fossil fuel industry is still being subsidized by taxpayers at more than $210 billion per year. Fossil fuel subsidies belong to another age, a time when development of the oil and coal industries was seen as a key to economic progress—not as a threat to our twenty-first century civilization. Once in place, subsidies lead to special interest lobbies that fight tooth and nail against eliminating them, even those that were not appropriate in the first place.

In the United States, oil and gas companies are now perhaps the most powerful lobbyists in Washington. Between 1990 and 2004, they amassed $181 million in campaign contributions in an effort to protect special tax deductions worth billions. In testimony before the House Ways and Means Committee in 1999, Donald Lubick, U.S. Treasury Assistant Secretary for Tax Policy, said in reference to oil and gas companies: “This is an industry that probably has a larger tax incentive relative to its size than any other industry in the country.” That such profitable investments are possible is a measure of the corruption of the U.S. political system, particularly the capacity of those with money to shape the economy to their advantage.

Subsidies permeate and distort every corner of the global economy. Germany’s coal mining subsidy was initially justified in part as a job protection measure, for example. At its peak, the government was subsidizing the industry to the tune of nearly $90,000 per year for each worker. In purely economic terms, it would have made more sense to close the mines and pay miners not to work.

Many subsidies are largely hidden from taxpayers. This is especially true of the fossil fuel industry, whose subsidies include such things as a depletion allowance for oil pumping in the United States. Even more dramatic are the routine U.S. military expenditures to protect access to Middle Eastern oil, which were calculated by analysts at the Rand Corporation before the most recent Iraq war to fall between $30 billion and $60 billion a year, while the oil imported from the region was worth only $20 billion.

A 2001 study by Redefining Progress shows U.S. taxpayers subsidizing automobile use at $257 billion a year, or roughly $2,000 per taxpayer. In addition to subsidizing carbon emissions, this also means that taxpayers who do not own automobiles, including those too poor to afford them, are subsidizing those who do.

One of the bright spots about this subsidization of fossil fuels is that it provides a reservoir of tax deductions that can be diverted to climate-benign, renewable sources of energy, such as wind, solar, and geothermal energy. To subsidize the use of fossil fuels is to subsidize crop-withering heat waves, melting ice, rising seas, and more destructive storms. Perhaps it is time for the world’s taxpayers to ask if this is how they want their hard-earned money to be spent.

Adapted from Chapters 4 and 12 in Lester R. Brown, Plan B 2.0: Rescuing a Planet Under Stress and a Civilization in Trouble (New York: W.W. Norton & Company, 2006), available for free downloading and purchase at www.earth-policy.org/books/pb2.

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