The Truth About Energy Subsidies

Is the Australian Government subsidising the fossil fuel industry?

So said the Climate Institute, when they heard Julia Gillard was scrapping solar schemes to pay the flood bill.

This claim shouldn’t be casually dismissed.

Because it’s one thing for fossil fuels to be cheaper and more efficient when all energy technologies are competing on a level playing field.

But it’s quite another if government policy is artificially boosting the competitiveness of fossil fuels. If, in other words, taxpayers’ money is being used to boost the dirtiest technologies and suppress the cleanest.

Would it be unfair to describe this argument as typically “neo-liberal”? The Climate Institute’s claim suggests a free market in energy, where the Government treats all forms of energy production neutrally, would be a more environmentally friendly one than what we have today.

One writer on Greenpeace Australia’s website condemned “taxpayer handouts” being used to “line the pockets of the wealthy fossil fuel industries”. Remove corporatist government subsidies – instantly get a greener Australia.

It’s a shame these claims don’t really hold up.

The definitive version of the subsidy argument is contained in a 2007 Greenpeace paper written by a researcher at the University of Sydney’s Institute of Sustainable Futures.

And the Institute of Sustainable Futures’ definition of what constitutes a subsidy to the energy industry is broad, to say the least.

Take, for instance, what the paper describes as the largest subsidy to the energy industry – roads. In the author’s view, roads are a government subsidy to private transport, therefore a subsidy to petrol, therefore a subsidy to fossil fuels.

Never mind buses use roads too, or bike lanes are being built into roads across the country – two climate-friendly modes of transport which would struggle without roads.

But, on the facts, this subsidy claim is wrong. The Department of Infrastructure’s own figures show the money raised by road and vehicle-specific taxes ($16.2 billion in 2006-07) is much more than is spent by all levels of government on roads ($12.1 billion the same year).

Anyway, it’s hardly reasonable to describe government investment in roads as a direct subsidy to the energy industry. Unless you are happy to describe government investment in health as a subsidy to the pharmaceutical industry. Or government investment in schools as a subsidy to the whiteboard industry.

Certainly, other subsidies exist, but it’s unclear why they would be of deep concern to environmentalists.

The Greenhouse Gas Abatement Program, for one. Or the Low Emissions Technology Demonstration Fund, which supports a range of carbon capture projects. There are more.

These are programs specifically designed to make energy more environmentally friendly. It’s a bit rich to insist, on the one hand, the Government should encourage cleaner energy, and, on the other hand, criticize the Government for implementing projects which try to.

It’s hard to see many environmentalists congratulating a government which eliminated those sorts of programs. Sure, Greenpeace would like those programs to be replaced with fully renewable energy programs. But subsidies are either bad or good. It seems Greenpeace would like their elimination to be contingent on introducing other subsidies. Hardly the most principled anti-subsidy position.

Complicated tax arrangements for company cars are often cited as subsidies, without the proviso that those arrangements are designed to ensure company cars are treated exactly the same as all other forms of income.

Similarly, some environmentalists are also upset about fuel tax concessions for primary producers being available to miners. But, like it or lump it, miners are primary producers too. The fuel tax concession is not an energy subsidy. Quite the opposite. It’s a measure to ensure the tax office treats all forms of production the same.

Instead, the environmentalists just want to penalise miners for existing.

Nor does Australia’s lack of a carbon tax constitute a subsidy for energy. Well: any more than our lack of an idiot tax constitutes a subsidy for idiots. The Gillard Government argues the externality of carbon pollution should be internalised through some sort of price mechanism. But the absence of that mechanism is not a “subsidy” in any useful sense of the word.

This is not to say that, globally, subsidies to fossil fuels aren’t a problem. The 20th century’s mania for central planning left its mark on the energy sector.

Electricity and petrol was as subject to misguided industry policy as any other industry. The global energy landscape is a mesh of tax breaks, tariffs, quotas, preferential planning and regulatory controls price controls, grants, government investments, rebates, and outright subsidies.

Government support for fossil fuels in the last century was as fashionable as government support for renewable energy is today.

If we were smart, we would approach this modern fashion much more cautiously, keeping in mind the perverse consequences of the fashions of past.

According to the OECD, eliminating global fossil fuel subsidies would reduce energy-related carbon dioxide emissions 5.8 per cent by 2020 compared to the baseline scenario. Because subsidies to favoured industries are inefficient, the world economy would be richer to boot.

The OECD is very careful defining what constitutes a subsidy.

The Climate Institute and Greenpeace aren’t. They want to make a political point: that free marketeers, so diligent finding government programs to cut, deliberately ignore taxpayers’ money being handed to their fossil fuel mates.

Cutting those subsidies would be the lowest possible hanging fruit of emissions reduction. If they existed, doing so would have bipartisan support.

But apart from a few emissions reduction programs – which most environmentalists would oppose eliminating – they are nothing more than green mythology.