The Hidden Subsidy of Fossil Fuels

A new report says that the world subsidized fossil fuels by $5.2 trillion in just one year. But that calculation is less tidy than it seems.

Hazir Reka / Reuters

Governments around the world spend an enormous amount of money every year making it cheaper for fossil-fuel companies to exhaust the planet. But they’re not spending nearly as much as a recent report may make it seem.

The International Monetary Fund recently updated its comprehensive report on global fossil-fuel subsidies. It arrives at a staggering conclusion: In 2017, the world subsidized fossil fuels by $5.2 trillion, equal to roughly 6.5 percent of global GDP. That’s up half a trillion dollars from 2015, when global subsidies stood at $4.7 trillion, according to the IMF. If governments had only accounted for these subsidies and priced fossil fuels at their “fully efficient levels” in 2015, then worldwide carbon emissions would have been 28 percent lower, and deaths due to toxic air pollution 46 percent lower.

The report suggests a morally grim situation: As the planet careens toward climate catastrophe, governments are forking over trillions of dollars—one-fifteenth of the global economy!—directly to oil, coal, and gas companies. But the challenge of combatting climate change through politics is much more difficult than some tidy math can make it seem. This calculation suggests that recalibration would be simple. If we only cut those subsidies, then carbon pollution would plunge, and we’d be much further along in addressing the climate challenge.

Alas, such a clean fix is impossible, because the $5.2 trillion figure includes much more than a cash transfer from government to businesses. By the commonsense definition of the term, governments actually subsidized fossil fuels by $296 billion in 2017, according to the report.

I’m not going to say that represents a more or less grim situation than the alternative. But it is undoubtedly a much smaller number, and it can misstate the overall problem of climate change. It’s not that someone is already paying the huge costs of fossil fuels; it’s that everyone and no one is.

Why does the IMF seem to overstate subsidies 17-fold? It comes back to its definition of subsidies. The report says they come in two flavors. First, there are pre-tax subsidies, which reflect the difference between what people pay for a fuel and what it cost to produce. This is what we usually mean when we say subsidy: Exxon might only be able to break even selling a gallon of gas for $3.50, but the government might decide that the best price for gasoline is actually $2.50. If it provisions public funds to pay this discount, then we would call the resulting $1 a subsidy.

But wait! Then the report adds that there is actually another kind of subsidy, which it calls a post-tax subsidy. This subsidy reflects the difference between “actual consumer fuel prices” and the full societal and environmental costs of a fuel.

These costs are very large: The burning of fossil fuels releases deadly air pollution, hastens the destruction of the climate, and (sometimes) increases traffic fatalities. And since all of those things kill people, they also depress a country’s tax base. Account for both the harms and the smaller tax base, says the IMF, and you produce an overwhelming number. In 2017, post-tax subsidies came to $4.9 trillion, or 94 percent of the total.

Those costs are very real. And they represent a subsidy of sorts: They are a grant of something valuable (our lungs, our home planet, our lives) to assist an enterprise deemed advantageous (the burning of fossil fuels). But they’re not entirely a grant of money to the oil companies.

They’re sort of like a grant of something valuable exchanged among ourselves: If the air pollution from my gas stove causes you to have a fatal heart attack, then I reaped most of the excess benefits of that arrangement (I didn’t have to go chop wood to cook dinner), my gas company earned a smaller share (collected via my monthly bill), and you paid for the difference. Every year, 70,000 to 107,000 Americans subsidize air pollution with their life. Of course, before you were stricken, you were on the “winning” side of that deal many times—the exact number dependent on how often you burned fossil fuels during your life.

Which sharpens the point: The burning of fossil fuels demands the grant of something valuable not from one equal to another, but from the poor to the rich, from the weak to the powerful. The wealthy can and do burn more fuels, after all. A remarkable study published this year in Proceedings of the National Academy of Sciences found that black and Hispanic Americans experience about 55 percent more air pollution than they cause. White Americans, meanwhile, suffer 17 percent less air pollution than they cause. No wonder black children are four times as likely to die from asthma as white children.

Does that represent a subsidy? The IMF report hopes to treat it like one. So it assigns a dollar amount to every harm inflicted by fossil fuels. The cost of air pollution varies by country—poorer countries are more willing than rich countries to accept dirty air—but it comes out to $2.3 trillion worldwide. Then the report reviews three different ways of calculating the future cost of climate change, before deciding (somewhat arbitrarily) that each additional ton of carbon in the atmosphere imposes $40 of global costs. That comes to $1.1 trillion in costs overall. Another $735 billion comes from the estimated costs of traffic, of road upkeep, and of car fatalities.

These are the post-tax subsidies that dominate the IMF’s math. Note that they can’t be fixed by the removal of anything. They can be remedied only by the imposition of new policies, such as a carbon tax, an air-pollution tax, or a congestion tax. That is what the IMF means when it says that setting “fully efficient” prices could cut greenhouse-gas emissions by 28 percent.

Meanwhile, the pre-tax subsidies—the ones we can remove—are much smaller. They have “declined substantially” over the past decade, the IMF says, and in many cases, they are getting removed. In 2017, they stood at $296 billion, almost half of their 2012 levels of $572 billion. What’s more, nearly all of these subsidies (96 percent of them) help people buy fossil fuels, not companies extract them. As I wrote last year, this makes the situation even harder to predict. It’s not easy to say what will happen when those subsidies, especially in countries like the United States, go away.

Yet some subsidies are going away, according to the IMF. Several countries, including Brazil and Malaysia, have recently contemplated increasing subsidies. But at least seven oil-producing countries in the Middle East recently slashed their subsidies. At the end of 2015, Saudi Arabia increased regular gas prices by 67 percent and electricity tariffs by 35 percent, according to the report. Jessica Jewell, a political-economy researcher, told me last year that activists would do the most good by targeting subsidies like these in oil-producing countries.

And what about that $4.9 trillion? Is that a subsidy? I suppose you can see it that way—but I’m not sure who the framing helps. Activists who target that $4.9 trillion will soon discover that it doesn’t exist. Nor do I think it captures the insidiousness or ubiquity of fossil fuels. A subsidy sounds like a simple grant. But that $4.9 trillion represents something much weirder. Fossil fuels ensnare all of us in the same invisible network of consequence: They feed wildfires and acidify the ocean; they reward wealthy adults and punish powerless children; they punish the adults, too, by stopping their heart. They bind our decisions to the lives of strangers who haven’t yet been born.

Fossil fuels also produce an enormous amount of energy at a fairly low cost—that’s why we use them in the first place. We depend on them because rich countries, such as the United States, have failed to invest in any other arrangement. But the fossil-fuel companies that have plotted and lobbied and coddled to prevent that investment aren’t doing so to preserve their trillions in subsidies. They want to keep us using their product, without thinking too hard about the cost.