Toward a Separation of Oil and State

Global fossil fuel subsidies most likely total between US$750 billion and $1 trillion per year—significantly more than the widely publicized estimate of $500 billion, according to Steve Kretzmann, founder and Executive Director of Oil Change International.

Kretzmann, who has been an advocate for environmental, social, and corporate responsibility for 25 years, sat down with Worldwatch last week to discuss fossil fuel subsidy reform efforts in the United States and around the globe. He founded Oil Change International in 2005 to educate the public about the true impacts of fossil fuels, expose troublesome oil industry practices, change patterns of public and private finance around the energy industry, and “separate oil and state.” [Below, watch a brief interview featuring Kretzmann and Worldwatch Climate and Energy Director Alexander Ochs.]

One goal of Oil Change International is to reduce fossil fuel subsidies in order to make renewable energy resources more competitive, based on the belief that climate change is best tackled through structural change rather than by focusing simply on emissions output. The International Energy Agency (IEA) estimates that if global fossil fuel consumption subsidies were phased out by 2020, carbon dioxide emissions could be reduced by as much as 4.7 percent.

The World Trade Organization (WTO) has defined subsidies as any financial contribution from a government or public body that confers a benefit, but the G20 and other organizations have yet to use the WTO’s definition for fossil fuel subsidies, choosing a more narrow definition. Most of the focus on fossil fuel subsidies has been on consumption subsidies, which reduce the cost to consumers, rather than production subsidies, which either lower costs or raise revenue for producers. Kretzmann and Oil Change International are seeking to move the focus to production subsidies, which they view as the greater problem.

The IEA estimates that global consumption subsidies for fossil fuels were $409 billion in 2010, up roughly $100 billion from the previous year. This change, however, is mostly explained by fluctuations in oil prices. Officially, the IEA estimates that global production subsidies were between $45 billion and $75 billion in 2010, based on data from 36 countries. But production subsidies are very difficult to calculate due to a lack of governmental transparency.

Moreover, there is disagreement about whether to define production subsidies as the amount received by corporations or as the cost to taxpayers. Kretzmann suggests that production subsides total at least $100 billion (and may exceed $150 billion) and argues that, on a per capita basis, they are higher in developed countries than consumption subsidies are in developing countries. Moreover, production subsidies in developing countries are growing rapidly and are largely invisible due to a lack of transparency.

Yet “official” statistics on fossil fuel subsidies tend to be narrowly focused and fail to take into account other costs to society. According to the National Academy of Sciences, U.S. fossil fuel use has led to $120 billion in health care and pollution costs annually. One study suggests that the United States spends at least $1.6 trillion annually on maintaining infrastructure for its current fossil fuel transportation regime, money that could otherwise be invested in cleaner transportation options such as high-speed rail.

Independent sources estimate that the U.S. federal government provides roughly $10 billion in subsidies to fossil fuel producers annually, with two-thirds to three-quarters of this going to extraction. The Organisation for Economic Co-operation and Development (OECD) found that the governments of Alaska, Texas, and West Virginia provide an additional $5 billion in production subsidies annually. Doug Koplow of Earth Track estimates that annual U.S. production subsidies to fossil fuels are between $52 billion and $100 billion.

So far, there has been little progress in reducing these subsidies in the United States, as this has become a partisan issue. President Obama has advocated for a $4 billion cut in fossil fuel subsidies, and Senator Robert Menendez of New Jersey recently proposed a bill seeking to end $2.4 billion in subsidies to the five largest U.S. oil companies, but the measure was voted down in Congress. So far, the only subsidy that has been reduced successfully is the Low Income Home Energy Assistance Program, one of the few U.S. consumption subsidies, and one that benefits low-income consumers rather than oil companies.

Kretzmann notes that many prominent Republicans receive major contributions from fossil fuel producers, contributing to the highly partisan nature of subsidy reduction. To bring attention to this issue, Kretzmann helped create the Dirty Energy Money campaign, which aims to expose the amount of money that members of Congress receive from fossil fuel interests. He hopes this information will help to turn U.S. public opinion against fossil fuel subsidies.

Worldwide, subsidy reduction efforts have experienced minimal success as well. In 2009, the G20 agreed to reduce global fossil fuel subsidies, a commitment that also was adopted by the Asia-Pacific Economic Cooperation (APEC). However, as of 2010, Earth Track found that no country had reduced subsidies in response to the agreement. The language of the G20 statement remains weak, and many participating countries have under-reported the amount of subsidies they provide.

Nevertheless, some countries have demonstrated success in reducing consumption subsidies. Iran, which until 2009 spent the most on consumption subsidies of any individual nation, reduced subsidies significantly and used the money it saved to distribute cash handouts to the poorest 80 percent of the population, significantly reducing the national income gap. Nigeria also successfully reduced subsidies, although in a more controversial manner. The government completely eliminated subsidies, which resulted in widespread protests and violence, and then re-implemented two-thirds of the supports. Kretzmann suggests that this method of complete elimination, followed by widespread protest and then concession, may have been the government’s strategy from the beginning.

Oil Change International is pushing for stronger language of reform in the draft agreement developed for the upcoming United Nations Conference on Sustainable Development (UNCSD, also known as Rio+20), including a firm date and the creation of an intergovernmental support center for coordination of subsidy reform between UNCSD forums. Kretzmann suggests that the U.N. Framework Convention on Climate Change could help with subsidy reporting and providing incentives for subsidy reform. Production subsidy reform remains difficult because of a perceived first-mover disadvantage.

Fossil fuel subsidy reform faces many challenges both in the United States and globally. Kretzmann stresses that the best way to bring about reform is to increase transparency in terms of both what subsidies exist and who benefits from these subsidies. In the long term, fossil fuel subsidy reduction could play a significant role in reducing greenhouse gas emissions, helping to limit both climate change and health costs from pollution.

Eric Anderson is a member of the Climate and Energy team at the Worldwatch Institute.

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