Why your taxes pay to make climate change worse: Don Pittis

If you are a climate change skeptic, stop reading now because this will make no sense.

But for everybody else, there is another thing that won't make sense: while talking of cutting back on greenhouse gases, we're giving tax money to the people who produce them.

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Just as the biggest carbon producers China and the United States announce a joint commitment to battle climate change, a new report shows governments around the world are actually spending billions in taxpayer cash that effectively makes the problem worse.

In the run-up to this week's G20 meeting in Brisbane, Australia, the London-based Overseas Development Institute has released a report showing that G20 countries spend $88 billion US a year subsidizing fossil fuel exploration.

That's just the G20. And that's just the subsidy for exploration.

There are many ways of calculating greenhouse gas subsidies. And the organizations that try to track down those figures say that they are often stonewalled by governments embarrassed about spending all that tax money to do the exact opposite of what they claim to be doing.

In a report last year, the IMF put global subsidies at a staggering $2 trillion US and said that without those subsidies, greenhouse gas production would plunge 13 per cent.

The IMF figures include costs of burning fossil fuels that governments don't, such as the impact of road congestion, the health effects of (non-carbon) pollution and traffic accidents. So it is easy to say that the IMF's $2 trillion figure is wildly inflated by normal accounting methods.

Subverting the market

By the IMF's calculation, Canada is spending $34 billion on subsidies.

However, even more conservative estimates show that the subsidies are in the hundreds of millions of dollars. And that is while Joe Oliver is complaining that falling oil prices are cutting into his budget.

Despite saying one thing while doing another, the annoying part for people like me — who believe that the forces of economics are beneficial — is that these multibillion-dollar global subsidies subvert the market. They give false signals about how much we as a society should invest in an industry that many say is endangering the health of our planet.

By way of explanation, it might help to look at the two main justifications for fossil fuel subsidies.

The most common kind in poor countries is sometimes seen as a vote-getter — or perhaps as a genuine attempt to lighten the load on citizens.

It is a subsidy on the price of fuel at the pump. According to a report this year in the Washington Post, gasoline was selling in Venezuela at five cents per U.S.gallon, which converts to something near a penny a litre.

Oil-producing countries like Venezuela, Iran (47 cents/gallon) and Kuwait (88 cents/gallon) might be seen as using low fuel prices to share the national oil wealth.

But for others like Egypt and Pakistan, it is a pure transfer of cash from taxpayers in general to consumers of fuel.

Trying to be better off

For consumers, the ideal economic scenario is being able to spend their limited amounts of money in the wisest ways possible. The various prices of things they can choose from help them select the basket of goods that leave them best off.

With a subsidy of about $5 a gallon, Venezuelans are making choices that might not be in their best interests.

You get into the absurd situation where it is cheaper to drive kilometres to someone's house than to call them on a payphone.

In Egypt, a country that spends a fortune importing oil, people will still be filling gasoline generators when it is far cheaper to use the country's intense sun to make electricity with solar panels.

In richer countries, including the U.S. and Canada, subsidies tend to go to the companies producing the fuel. Thus the reference to the $88 billion spent by the G20 countries on exploration.

The tradition in those countries is that governments often give handouts or tax breaks to businesses to encourage them to keep jobs at home or develop facilities in underdeveloped areas.

But the distorting effect on prices is ultimately similar to the consumer subsidies in poor countries. More oil is produced than current prices would demand. Companies invest money that would better be invested elsewhere. Both tend to drive prices down, encouraging people to buy more than they would have otherwise.

'Bad economics'

Even without climate change, both price and exploration subsidies make for bad economics. But while governments insist they are trying to get greenhouse gases under control, subsidies "marry bad economics with potentially disastrous consequences for climate change," says the ODI.

Not only that, they say the same money invested in renewable energy gives governments a bigger bang for the taxpayers' buck. 

"Every U.S. dollar in renewable energy subsidies attracts $2.50 in investment, whilst a dollar in fossil fuels subsidies only draws $1.30 of investment," says the ODI in a summary of their report.

By itself, ending fossil fuel subsidies will not end the climate change crisis.

But taxing us and spending the money to distort markets in favour of fossil fuels only aggravates the problem.

It is worse than doing nothing.