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The IMF Just Destroyed the Best Argument Against Clean Energy

clean energy and the IMF

For more than a decade, fossil fuel supporters have insisted that new clean energy technologies like wind and solar are far “too expensive” to replace our traditional fossil fuel dominated energy industries.  A recent report published by the International Monetary Fund (IMF) has put a price on the direct and indirect subsidies that support fossil fuels as a counter argument to the renewables are “too expensive” message.

The numbers are staggering.  The expected subsidy for fossil fuels during 2015 is projected to be $5.3 TRILLION – for one year!  This means that approximately 6.5% of global gross domestic product (GDP) will be dedicated in 2015 to just subsidizing our use of fossil fuels.  Or as The Guardian pointed out in its summary of the IMF report, taxpayers are paying $10 MILLION per minute globally in subsidies for fossil fuels.

The idea that fossil fuels benefit from both direct and indirect subsidies has been around for years, but analysis has generally been done in pieces (some of it done very well – Nancy Pfund and Ben Healy at DBL Investors published an excellent analysis of direct subsidies in the U.S. a couple years back) or without complete data robust enough to stand up to critique.  The IMF report looks at direct incentives, local pollution and public health effects, climate changes, and a host of other costs to arrive at its projected subsidy number.

IMF’s numbers are already being attacked. UK climate economist Nicholas Stern questioned the report for vastly underpricing the cost of climate change, and Brad Plummer at Vox outlined some of the odd items that arguably shouldn’t have been included in the calculation. Regardless of whether the IMF report gets to exactly the right number, the report provides a very credible starting point to argue over the right value to place on fossil fuel subsidies, and will be a baseline to begin rethinking the right pace for our global transition to clean energy.

According to the report, the largest subsidy will be for coal, largely because of the enormously underpriced effects of emissions and other environmental costs on public health and local resources – although the global climate impact is very significant as well.  A real world demonstration of these costs can be seen in China right now with its massive build-out of coal generation rapidly coming to a close and the nation making a hard pivot towards clean energy in the face of deteriorating air quality and spiraling health costs from pollution.

The vast portion of the remaining fossil fuel subsidies will be to support petroleum.  More petroleum subsidies will be in the form of direct supports, especially among oil producing countries, but the indirect costs were again significant (and curiously the report seems to leave out military costs dedicated to maintaining regular supply of crude to global markets, which have been long identified as a very significant subsidy).

Governments around the globe are struggling with the practical and economic realities of an accelerating energy transition away from fossil fuels, as well as the incredibly challenging politics surrounding these markets.  The presence of a well respected financial institution, like the IMF, measuring the enormously ignored, but very real, costs of fossil fuel use will be important in shaping these discussions.

This report alone won’t end the constant claims that clean energy is “too expensive.”  There have been remarkable declines in the cost of wind and solar power over the past decade. Add the breakthroughs in storage, electrification of vehicles, and promises of economically competitive new nuclear technologies (which will accelerate when investors have a clear and accurate price target for these alternatives) and the pace of global change could be revolutionary.

By putting hard data on the real price of the energy status quo (a lesson being lived in real time by Chinese authorities facing massive new costs from its overzealous coal fleet expansion), the report allows us to seriously consider the economic reality of the currently distorted and inaccurate marketplace.  A better baseline, even a remotely accurate one, combined with the economic reality that clean energy has become stunningly more economic over the past decade, should re-write the fundamentals of the discussion about our energy future.

This article originally appeared in the Energy Finance Report.

Photo Credit: IMF and Clean Energy Support/shutterstock

Elias Hinckley's picture

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Schalk Cloete's picture
Schalk Cloete on Jun 6, 2015 6:21 pm GMT

There is no doubt that fossil fuel combustion has large negative impacts on the environment, but this report pulls things quite badly out of proportion. 

For example, the IMF reports the external costs of coal to be $78/ton for climate change and $239/ton for local air pollution. When considering a coal power plant operating at 35% efficiency and a coal heating value of 23 GJ/ton, this is equivalent to costs of $35/MWh for climate change and $107/MWh for local air pollution. Details on these numbers are referred to another IMF report which is not open access or included in the extensive scientific literature database to which I have access.

A search of the scientific literature on the subject revealed the following estimates for developing nations to which the bulk of coal damages are attributed. CC = climate change, LAP = local air pollution.

India (2012) – CC: $35/MWh, LAP: $15/MWh

China (2015) – CC: $18/MWh, LAP: $54/MWh

Poland (2012) – LAP: $26/MWh

Chile (2013) – CC: $13/MWh, LAP: $5/MWh

Bosnia (2011) – LAP: $5-10/MWh

China (2007) – CC: $54/MWh, LAP: $36/MWh

Global (2007) – LAP: $16-30/MWh

On average, these peer-reviewed studies report $29/MWh for climate change and $24/MWh for local air pollution. The climate change estimate is in line with that of the IMF, but the local air pollution estimate is 4.5 times lower. It would be interesting to get some explanation of this very large disparity. 

Schalk Cloete's picture
Schalk Cloete on Jun 6, 2015 6:24 pm GMT

Tying to my comment below, it can also be a valuable thought exercise to imagine what might have happened if China inflated the price of its abundant local coal reserves by several hundred percent 25 years ago in order to account for the large external costs estimated by the IMF.  Even though coal would probably still have been the primary driver of growth (see a comparison of coal scaling to other options in this article), the clear incentives to build more complex and costly state of the art coal plants and industries would have retarded Chinese growth significantly. The very  rapid Chinese energy buildout would have been greatly hampered, as would their very successful export driven growth model.

All-in-all, even a conservatively estimated reduction from 10% growth to (a still very rapid) 7% growth rate would have cost them half of their GDP today – much more than the 15% of GDP pollution-related estimate of the IMF. 

Luckily, this was not the case. As a result, China is now a true industrial superpower capable of rapidly cleaning up its coal fleet with desulpherization technology, successfully completing  truly gargantuan hydropower projects, easily leading the world in terms of nuclear power deployment, and also leading the way in terms of clean energy investment. This would simply not have been possible without decades of unchecked coal-driven economic development.

Hops Gegangen's picture
Hops Gegangen on Jun 7, 2015 11:13 am GMT

 

That would all be great if we had an extra planet for China to consume.

 

Elias Hinckley's picture
Elias Hinckley on Jun 7, 2015 12:57 pm GMT

As I noted in the article – there is plenty of room to quibble with the exact numbers from the report – both specific values and what was included/excluded.  That said the fact of the subsidies, and therefore the need to address as part of the “expensive” discussion was the point.

Taking the average of your numbers (including some fairly low outliers, but not the IMF amounts) you have a blended number of $53/MWh, plus any direct subsidies.  If we take the US as an example (a good one, since we have sharpened the “clean energy is too expensive” rhetoric better than anyone else), the offensively high subsidy that gave wind power an unfair advantage, the Production Tax Credit was $23/MWh.  The  Investment Credit impact on solar is even less than that per MWh for ground mount PV and even some rooftop installations now.  

That isn’t over-subsidization. The existing “too expensive subsidies” didn’t even get the non-emitting sources to even in terms of taxpayer burden, using consevative estimates of the external costs.  And that should be the discussion, agreeing on appropriate numbers for fossil fuel subsidies so that we can actually structure a market that can operate fairly and freely.

 

Schalk Cloete's picture
Schalk Cloete on Jun 7, 2015 8:03 pm GMT

Trying to set a price on things like local air pollution appears to me like a rather inefficient exercise. Since the people who benefit from cheap and practical fossil energy are mostly the same ones who experience the drawbacks, the economy will take care of this all by itself with reasonable efficiency. The US offers a good example. People now demand clean air above rapid economic growth, hence coal plants have become very expensive and are not being built at all. Emissions from existing plants have also fallen dramatically following stringent policies. 

The long-term global externality of climate change is something different though. Peolple benefitting from cheap and practical fossil energy can be separated by tens of years and thousands of miles from those who experience the worst negative effects. A price on carbon is therefore sorely needed. 

I wrote an article about this some time ago where these issues are explored in more detail. 

donough shanahan's picture
donough shanahan on Jun 9, 2015 12:06 pm GMT

Elias

My problem with this dataset is that ok, it is fine to say that fossil fuels are potentially more expensive and most of this is due to externalities. However that does not mean that renewables are cheaper. 

By really is cost the issue. Yes but not really. Take China. It embarked on a masiive grid upgrade program that relies a lot on coal. Its rate of expansion is impressive and probably far outstrips similar rates of expansion in other ocuntries for other technologies. It was able to do this as the technology is known.

Now take say somewhere like Inida. Sure renewable energy technologies are more known but coal is still dominating capacity additions. Will we see somewhere like Nigeria take a different approach. Probably not because of the ability to provide the technology.

You see electricity is so valuable that nearly all other concerns are secondary compared to quick roll out due to the massive increase in standards. Slowing this down by using another technology is in itself, a huge cost. Even so with these numbers, the market still does not really want to pay for the additional CO2 costs yet. Otherwise we would see a more agressive EU ETS (well probably a different and better scheme). 

Elias Hinckley's picture
Elias Hinckley on Jun 8, 2015 1:26 pm GMT

If there were transparency and educated consumers that might work, the problem is we have neither (and there is a time lag as well, even if it is shorter than climate effects) and so the fact that the costs roughly overlay the same population doesn’t really address the market distortion that supports embracing the status quo. Not suggesting any of this is easy – but difficult isn’t a good excuse for not doing the right thing. 

Joris van Dorp's picture
Joris van Dorp on Jun 9, 2015 10:18 am GMT

A recent report published by the International Monetary Fund (IMF) …”

Actually, the IMF published a disclaimer stating that the report does not represent the views of the IMF.

“… has put a price on the direct and indirect subsidies that support fossil fuels …”

Actually, the price is put on subsidies for all forms of energy, not just fossil fuels.

“… as a counter argument to the renewables are “too expensive” message.”

Hardly. Since most global energy consumed is fossil fuels, most of the energy subsidies and external costs identified by the IMF are for fossil fuels. This should be no surprise. Hence, it does not necessarily follow that fossil fuels are subsidised more than renewables on a per kWh basis. To determine that, the results in the report need to be carefully parsed and categorised, which the authors of the report did not do.

What should concern us is whether the subsidies and external costs calculated by the IMF are in fact tied in principle to fossil fuel consumption, as opposed to renewable energy consumption. And on that point, there are major issues with the report which cannot be overlooked.

I’ll list the main ones:

– The report includes the cost of traffic congestion, traffic accidents and road maintenance as an external cost of fossil fuels. But will switching to electric cars or biofuel cars eliminate these cost? Obviously not.

– The report assign the external cost of air polution to fossil fuels, but burning biomass or biofuels also causes air polution. So switching from coal to bioenergy doesn’t necessarily eliminate these external costs. Similarly, the air pollution caused by burning fossil fuels to power solar PV factories – for example – should be assigned to the solar PV, not to the fossil fuels per se. Such details are all ignored in this report.

– The report includes energy tax exemptions (for industrial energy consumers in most countries) as a subsidy for fossil fuels, while in fact industry gets these tax exemptions whether they consume fossil fuels or renewable energy. So switching to renewable energy does not eliminate these ‘subsidies’.

– The report includes the price difference between oil sold for domestic consumption in oil exporting countries and oil sold on the international oil market, as a subsidy for fossil fuels, while in reality this is no subsidy at all. Oil exporting countries are free to sell oil to their own citizens at the cost of production if they want. Just like they are free to sell domestic hydro-, bio-, wind energy or solar energy at cost of production, if they want. There are no subsidies involved here. Yet the authors include this as a subsidy.

All in all, the only external cost identified in this report necessarily tied to fossil fuel consumption is the cost of climate change impacts. All the other costs included in this report as being ‘subsidies for fossil fuels’ are no such thing and merely cause confusion and misunderstanding of energy- and environmental economics, in my opinion.



Grace Adams's picture
Grace Adams on Jun 9, 2015 7:51 pm GMT

US has high cost of local air pollution because it has very expensive health care. 

Grace Adams's picture
Grace Adams on Jun 11, 2015 5:54 pm GMT

If Environmental Defense Fund is anywhere near right, between water pollution and air pollution, coal is costing USA at least $345billion/year up to over $500billion/year in added health care costs alone.  Michael Bloomberg and hedge fund pals claim that spending $200billion/year on replacing fossil fuel can save US $150billion/year average on weather-related disaster relief. It might take a while for those savings to kick in.  But it might be a very good idea for US to divert $100billion/year from military pork our military leaders no longer want anyhow to giving our too big to fail military industrial complex firms contracts to produce weapons for a fight against catastrophic climate change due to global warming due to fossil fuel emissions supplemented by deficit spending until those two sources of savings kick in. With all the money spent on buying stuff from too big to fail military industrial complex firms, it will be over-priced and only stuff our too big to fail industrial complex firms can make in their factories. I figure 20% for upgrades to our electric grid including hydrogen fuel cells for energy storage, 80% for wind and solar, and hope private investors can deal with geothermal and waste-to-energy our two main dispatchable renewable energy sources until enough savings kick in to first replace and then start to pay back the deficit spending. Wind and solar equipment will have to be placed with utilities with directions that 20% of generation charge to be kept by utility for maintenance and operation and 80% given to fossil fuel (coal at first, later natural gas) firm affected for loss of sales–and also that the energy storage is to be paid for by giving the federal government half of what the utility saves with it — and furthermore coal-fired generators are to be turned off for a thorough cleaning and other maintenance once a year (either fall or spring) and left off until really needed again (winter for those turned off in fall, summer for those turned off in spring). 

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