What is the cost of government support for fossil fuel subsidies to our economy and our environment?


What would the world look like if all government subsidies supporting fossil fuel companies suddenly ended?

For Ian Parry, that’s an easy answer.

“It would certainly help level the playing field between fossil fuel technologies, which have significant environmental costs, and renewable technologies, which don’t,” he told ABC RN’s Future Tense.

Indeed, without subsidies, fossil fuel companies would lose their competitive edge and investors would look elsewhere.

But they would still be guilty of all the emissions they release into the environment.

Parry is not an environmentalist. He is a senior financial analyst at the International Monetary Fund (IMF) and according to his estimates the global fossil fuel industry is currently subsidized to the tune of around US$5.9 trillion each year.

For context, that’s bigger than the annual budgets of Japan and Italy combined.

“We estimate that if fossil fuel prices were fully reformed – so that prices reflect both the costs of producing the fuel and all of its environmental costs – then by 2025 global carbon dioxide emissions would be reduced by 36 %”.

According to Ian Parry, the global fossil fuel industry is subsidized to the tune of approximately US$5.9 trillion each year. (Shutterstock: Kip Scott)

This, he argues, would put the world on track to meet its climate stabilization goals. Emissions would decline rapidly as coal and gas operations become too expensive to operate and are forced to close.

“It would speed up the transition,” he says.

It would also have a significant impact on global health, reducing air pollution-related deaths by an estimated one million worldwide.

Then there are the economic benefits: Removing fossil fuel subsidies would free up more money for innovation, generating around 3.8 percentage points of GDP in additional revenue, according to IMF calculations.

But for all the problems they cause, fossil fuel donations should not be viewed in isolation, critics say.

Many point to business subsidies in general.

They argue that financing for-profit private sector operations from the public purse is the real problem – not only does it support unsustainable environment, but also leads to inequality and bad business practices.

Attitude sink or swim

One of the latest scourges of corporate welfare is Tesla founder and CEO Elon Musk.

Musk, the world’s richest man with an estimated personal wealth of around $218 billion, recently spoke out against tax breaks and corporate loans, proclaiming on Twitter: “It’s raining money on fools for too long”.

“Some bankruptcies have to happen,” he said, “companies that are inherently cash flow negative (i.e. value destroyers) have to die, so they stop consuming Resource.”

American columnist Andrew Lawrence says Musk’s swim-or-sink attitude is true to form.

“He just feels that the current economy is supported by a COVID-assisted relief bubble and that we need this depression [or] recession to get things back to normal, so badly run companies can roll back and stronger companies can prevail. »

It’s an interesting position for Musk to take given the mega-billionaire’s track record, Lawrence says.

“He frowns on other companies taking corporate welfare, but over the decades he’s shown he’s more than happy to take it himself.

“We forget how much [his success] was made possible by the largesse and relationships that Elon Musk had with state and local governments in the United States who poured all kinds of money into the expansion of this company, even as it burned the investors’ money.

A dark-haired man stands in front of four spotlights
In May, Elon Musk said on Twitter that some bankruptcies “had to happen”.(PA: Susan Walsh)

Lawrence estimates total government support for Tesla and Musk’s other operations at around $5 billion.

And he says it’s worth remembering that the premium electric vehicle maker only reported a profit in 2021, after 18 straight years of losses.

That means Musk’s flagship company was exactly the kind of “value destroyer” he now mocks.

“Bloomberg had a meter on its website to show how much money Tesla was burning per minute,” Lawrence explains, “because it was doing it much faster than any other company.

“And a lot of that, again, comes down not only to the tremendous support he had among investors … but also because of the state and federal grants to help offset their losses.

“So yeah, it’s kind of ‘do as I say, not as I did’…deal with him.”

Shopping for alms

For Matthew Mitchell, a senior fellow at George Mason University, Musk’s contradictory stance on corporate welfare follows form.

Dr. Mitchell has followed the rise of what he calls “targeted grants for economic development”. It’s an economic gift system that has tripled in size over the past two or three decades, he says.

“Every state in the United States distributes grants. The best estimate is that it is now [worth] somewhere around $90 billion a year, so it’s a pretty big industry, unfortunately.”

Worse still, according to Dr. Mitchell, governments often compete to entice big business to relocate to their jurisdiction.

It’s a process, he says, that can have disastrous consequences for national and regional economies.

“To a lot of people it seems pretty intuitive – if you subsidize a business to come here, maybe it will create new economic growth. The benefits seem obvious. The costs are more hidden.”

He cites the Taiwanese giant of the semiconductor manufacturer Foxconn as an example.

Two women in white overalls and yellow gloves work inside a factory, standing behind a sign that says Foxconn
In 2017, Taiwanese company Foxconn received $3.6 billion in grants from the US state of Wisconsin. A broader trend, some say, is damaging regional economies. (Getty Images: Qilai Shen/Bloomberg)

In 2017, the company received US$3.6 billion in tax relief and other grants from the state of Wisconsin.

As part of the deal, Foxconn was also exempted from specific environmental regulations. But almost as soon as the deal was signed, it began to unravel.

“Foxconn kept backtracking on what they promised, backtracking on what they were going to do,” says Dr Mitchell.

And then there were the missed opportunity costs, which he puts in the hundreds of millions of dollars.

“Wisconsin has one of the highest corporate taxes in the United States. Without the subsidy, they could have lowered their corporate tax rate and benefited thousands of other small new businesses. local.

“That could have been a source of growth,” he says.

“You really have to look at both sides of the ledger: what are the benefits to the business, but also consider the costs the community is paying.”

A global phenomenon

Although Dr. Mitchell’s research focuses specifically on the United States, he asserts that the rapid growth of corporate wellbeing is not just an American phenomenon.

In Australia, a wide range of for-profit businesses, including casinos, airlines, elite private schools and mining operators, all benefit from ongoing state and federal funding.

Adam Bandt reaches out while speaking in the House of Representatives
In September, Greens leader Adam Bandt said public money “shouldn’t fund coal and gas”.(ABC News: Matt Roberts)

Greens leader Adam Bandt recently called on the federal government to cut more than $1.9 billion in “zombie fossil fuel subsidies” — subsidies that had been announced by the previous government, but not yet officially committed.

“Public money should not fund coal and gas,” he told Guardian Australia. “If money is as tight as the treasurer says, then Morrison-era coal and gas donations should be the first to get a boost.”

But if excessive corporate welfare is ultimately negative for the environment, for societies and their economies, why does it continue?

Ian Parry thinks governments find it politically difficult to say no to corporations because of the widely held but misguided belief that ending subsidies will hurt industries and households.

And he rejects claims that the poor would be disproportionately harmed by any reduction in subsidies to the fossil fuel sector.

“Keeping fossil fuel prices below their effective levels is actually a very inefficient way to help low-income households, because most of the benefits accrue to non-poor, non-poor households. bottom fifth of the income distribution.”

Dr Mitchell says corporate welfare has become “the normal state of nature” in politics. And, he says, politicians — not just corporate lobbyists — must accept their share of the blame.

“A targeted subsidy offers a politician the opportunity to stand in front of a specific factory, often with a gold shovel in hand, and claim that economic activity,” he says.

“What is not seen is the fact that in the absence of subsidy, the taxes of all businesses could be reduced or, in the absence of subsidy, the provision of public goods and services audience could be increased.

“That kind of thing is just more hidden.”

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