https://blogs.scientificamerican.com/observations/fossil-fuel-subsidies-must-end/
[links in online article]
Fossil-Fuel Subsidies Must End
Despite claims to the contrary, eliminating them would have a
significant effect in addressing the climate crisis
By Geoffrey Supran, Peter Erickson, Doug Koplow, Michael Lazarus, Peter
Newell, Naomi Oreskes, Harro van Asselt
on February 24, 2020
When it comes to tackling the climate crisis, ending $400 billion of
annual subsidies to the fossil-fuel industry worldwide seems like a
no-brainer. For the past decade, world leaders have been resolving and
reaffirming the need to phase them out. All of the 2020 Democratic
presidential candidates have committed to eliminating fossil-fuel
subsidies, and the vast majority of the American public supports doing
so. International financial institutions such as the World Bank and
International Monetary Fund have joined the chorus, pointing to the
benefits of reform.
In 2018, however, a group of researchers questioned the magnitude of the
climate benefits of subsidy reform, reporting that their simulations
showed its effect would be “limited” and “small.” Stories in the press
began asking whether such subsidies are such a big deal after all.
We think this is wrong. In a new paper in the journal Nature, we make
the case that they do matter—a lot. In the 2018 study, emissions
reductions from subsidy removal were calculated by the researchers to be
five hundred million to two billion metric tons of carbon dioxide per
year by 2030. This figure is by no means “small.” It amounts to roughly
one quarter of the energy-related emission reductions pledged by all of
the countries participating in the Paris Agreement (four to eight
billion tons). Hundreds of millions of metric tons of CO2 reductions is
nothing to sneeze at, particularly when it can be achieved by a single
policy approach that also brings strong fiscal, environmental and health
benefits.
Moreover previous work has likely underestimated the emissions
reductions that would occur, because commonly used techniques do not
accurately capture the investment dynamics of fossil fuels. But these
dynamics can greatly affect what oil and gas companies do.
In our analysis of the issue, we take the example of one specific
subsidy: a federal tax break that allows U.S. oil producers to
immediately deduct from their taxes most of the costs of constructing
and drilling new wells. Conventional models assume that subsidies such
as this are uniformly distributed across all oil fields, whereas in
reality, governments often preferentially target new—rather than
existing—capital investments. The result is a lowering of producers’
up-front cash-flow requirements, leading them to drill more new wells
than they otherwise would. This process locks in and accelerates
fossil-fuel production and, in turn, greenhouse gas emissions. We
estimate that true emissions reductions from eliminating this tax-break
subsidy could be more than an order of magnitude greater than was
predicted using the conventional modeling approach.
And this tax break is just one subsidy. A separate, peer-reviewed
analysis by some of us in 2017 demonstrated that without a dozen key
subsidies, nearly half of the U.S.’s future oil production could be
unprofitable at $50-per-barrel oil prices—the level at which prices may
hover in a low-carbon future.
In other countries, the forms of subsidies can, of course, vary. But
around the world, fossil-fuel production and consumption are supported
in hundreds of ways. Indeed, the most troubling impact and legacy of
fossil-fuel subsidies may be the political barriers—rather than
financial ones—that fossil-fuel producers have erected against
decarbonization efforts over a period of decades. Revenue boosts from
subsidies can support not only more drilling but also product promotion,
political activities and other efforts that reinforce the industry’s
incumbent status. Subsidies also have a symbolic effect, signaling that
this industry and its activities are beneficial for society as a whole
and that they therefore should be encouraged.
In another paper, published just last month, experts studying the social
tipping points for climate stabilization concluded that “redirecting
national subsidy programs to renewables ... or removing the subsidies
for fossil-fuel technologies are the tipping interventions that are
needed for the take-off and diffusion of fossil-fuel–free energy systems.”
Economic models provide useful guidance to policy makers. But as we show
in our article, most have a blind spot, failing to capture key ways in
which subsidies send signals to markets and people. Overreliance on
these models can create a false sense of certainty that misses the big
picture: Of course subsidies matter to the fossil fuel industry and help
to prop it up. That is why they were introduced in the first place and
why the industry and its allies continue to defend them. As the
Department of Energy itself concluded 40 years ago, federal subsidies
have had a “large effect” on capital formation and oil production in the
U.S. And more oil infrastructure and more production mean more
greenhouse gas emissions.
The public and policy makers should be under no illusions about the
basic realities at stake: Holding back catastrophic global warming
requires dramatically reducing fossil-fuel production. And subsidies to
fossil-fuel companies undermine that goal. Once upon a time, it made
sense for countries to support their fossil fuel industries. But that
time is over.
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