A popular talking point among green energy evangelists is that gas, oil, and coal are, in large part, successful because they are highly subsidized. Wind and solar, so the argument goes, would win in a fair fight, but, alas, the playing field is far from fair. But the supposed data they are drawing on to come to such a conclusion is misleading and geared more toward generating headlines than good policy.
A primary source used to back this claim up is a working paper presented by a group of International Monetary Fund authors titled “Still Not Getting Energy Prices Right: A Global and Country Update of Fossil Fuel Subsidies.”
The paper claims that hydrocarbon-based fuels—like gas, oil, and coal—enjoy $5.9 trillion in subsidies annually. Though often presented in the media as an IMF paper, it is specifically not an official publication of the organization but rather a working paper that is meant to, according to the IMF, “elicit comments and to encourage debate.”
Well, here is your debate, IMF.
As is often the case with so-called academic studies, the top-line number here makes for a much better headline than it does a basis for public policy. Indeed, even a cursory look into how the study came to its fanciful conclusions shows how misleading it ultimately is in general and how trivial it is for the United States.
There are three basic problems with the study.
First, it so broadly defines “subsidy” as to be completely meaningless. In fact, the study states that only 8% of its reported costs reflect actual, direct subsidies. The rest predominantly comes from the amorphous “undercharging for environmental costs” that supposedly occur from the extraction, refining, transportation, and use of fossil fuels. Such environmental costs include “underpricing for local air pollution” (42%) and “global warming costs” (29%). What’s left goes to the equally tenuous congestion and road accidents costs (15%) and forgone tax revenues (6%).
Though characterizing any of these so-called indirect subsidies as a pro-hydrocarbon bias is problematic, we will focus on the undercharging environmental costs, which are divided between global warming and local air pollution, because they represent the preponderance of their calculations.
The problems with the global warming number are many. For example, there is virtually no evidence that man-made global warming is having any costly impact on today’s world. The real costs, if one buys into global warming alarmism, come in the future—thus the study relies on the extremely tenuous and theoretical social cost of carbon calculations.
As my Heritage Foundation colleague Kevin Dayaratna has pointed out, the use of the social cost of carbon is so unreliable that it is virtually useless as a basis for public policy.
Second, the study presents its overall findings in global terms when the numbers only have meaning at local and regional levels. For example, the largest contributor to its bottom-line number is local air pollution. Putting aside the fact, as my colleague Travis Fisher points out, how easy it is to cook the books and exaggerate the assumed costs of things like small particulate matter in the air, the other problem is that regional variances for local air pollution are so immense that any broad policy conclusion, such as “tighten local air pollution standards,” would be irrelevant.
It would make no sense to apply the same policy response in the U.S.—where local air pollution levels are very low and getting lower—that you would apply to countries in the East Asia and Pacific region, where, according to the study, local air pollution levels are high. The study undermines its own credibility by presenting a cumulative, global number that serves no purpose other than to inflate its bottom line.
And third, the study provides no accounting for the massive contribution to human flourishing that has resulted directly from the use of hydrocarbons. This is perhaps the biggest problem with this study specifically, and the modern environmental movement more broadly.
The truth is that human well-being has skyrocketed in terms of wealth, health, and life expectancy since the Industrial Revolution, which was fueled by hydrocarbons. No statistic demonstrates this more clearly than the fact that climate-related deaths are down a staggering 92% since the 1920s, when the statistic was first recorded.
Nonetheless, the IMF authors took the time to give us their number on the alleged subsidy costs associated with gas, oil, and coal; so, in the spirit of fairness, a look at the benefits associated with fossil fuels seems appropriate.
Let’s break it down, and for the sake of consistency, all numbers will be adjusted to 2019 dollars. Prior to 1700, per capita gross domestic product (the sum value of all goods and services produced within a nation’s borders) in the West stagnated at around $955 per year. Today, the average North American can expect a per capita GDP of around $66,935.
While historians and economists may debate at the margins, most can agree that two things were key to this astronomical rise in economic production. First was the spread of free enterprise (thank you, Adam Smith), and second was the broad availability of affordable, scalable, and efficient energy (thank you, hydrocarbons).
For hundreds of years, people in Western nations made around $955. Then they started using coal, then oil, and then natural gas. Now, Americans make around $66,935. So, the average income, one could argue, has increased nearly $66,0000 as a direct and indirect result of hydrocarbons (using the same rationale as the study authors). That’s a big number, for sure.
Of course, the study authors took their localized numbers and globalized them. For the sake of comparing apples to apples, let’s do that for the United States.
There are approximately 331,900,000 Americans today. Had we stayed on the same GDP trajectory that we had been on for hundreds of years prior to the use of hydrocarbons, we would have a GDP today of around $316,964,500,000. Subtract that from 2022’s GDP of approximately $22.24 trillion and you get $21,926,692,686,448! That’s nearly $22 trillion in a single year in increased economic output and wealth due to free enterprise and the use of hydrocarbons.
Now, to be fair, let’s subtract the $5.9 trillion ($5.5 trillion in 2019 dollars) in alleged direct and indirect government subsidies for so-called fossil fuels that the working paper cites, which, remember, is a global number; it’s not just limited to the United States. When you subtract those alleged subsidies from the increased economic output, you still get over $16 trillion in direct and indirect benefits from hydrocarbon use. And that’s just for the United States—globally, the benefits would be immensely more!
Oh, and by the way, the environment—despite what the authors suggest—is getting better and better all the time, even with those pesky local pollutants that they pin 42% of their costs on. While some regions of the world do have work to do, the United States shows that gas, oil, and coal use and economic growth do not dictate poor air and environmental quality; and, indeed, Americans have enjoyed ever increasingly clean air for decades.
On its face, my benefits of hydrocarbons calculation could look like a version of the same screwy math used by the IMF working paper. That would be a fair critique. The point is, however, any broad assessment of the alleged costs of using coal, oil, and gas must also be paired with the immense benefits those fuels have brought all of society. When that is done, the only logical conclusion is that these fuels have made the world a better place for all of us, and any contention otherwise is about as valuable as a solar panel at midnight.
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