The Impactful Modesty of Energy Subsidy Reform: Seriousness of COP21 Negotiations Will Be in the Details

[This piece was originally published with Thee Westerner in October of 2015]

One of the most basic tenants of economics is that if something is taxed, there will be less of it, with the converse being true when something subsidized. To choose an easy example, the additional “sin” taxes on tobacco and alcohol product sales are, in addition to making up for the impacts of such products on the health care system, designed with the intent of discouraging their use. Of course, there are critiques of such approaches to be made. Sin taxes tend to be formulated in regressive ways, and black markets in the involved products can grow if taxes push prices too high. Nevertheless, it is generally accepted as a matter of course that when something poses a negative externality which will affect government spending by proxy, the government is in the right to explicit tax it to make up for this. But, perhaps more fundamental than the taxation/subsidy principle of economics is an iron law of public policy: loss aversion as determining force. When the two principles collide with urgency, threading the needle towards a productive policy outcome is a feat much more often spoken of than performed. No more clearly can this knot be seen than in the tangled case of energy subsides, which is likely to provoke some of the strongest clashes on the road to sustainability.

At bottom, direct subsidization of fossil fuel usage flips the above examples of alcohol and tobacco taxes on their head, as if the government were paying you to glug down Jack Daniels. Lest this be considered too daft an analogy, consider the wide swath of negative effects, ranging from smog-induced respiratory diseases to desertification of farmland, known to be linked to energy emissions. Even setting aside catastrophic climate change at the global level, the local impacts on health and environment alone should be reason enough to encourage prudent fuel use to the extent possible. Yes, there are a number of complex arguments surrounding the use of fossils fuels in the development cycles of nations such as India and China and the public health trade-offs therein. It is easy to forget how many of the improvements in health indicators throughout the world have ultimately come from fossil fuels to one degree or another. I’m not dying of hypothermia right now as I type this, even despite doing so in Northern Ontario, due to central heating, for instance. The First World’s finger-wagging at heavy emitters on their way up ultimately betrays both a rank hypocrisy about our own history and a sense of moral abdication. We do need to ask crucial questions about technological shifts and effective assistance to ensure that bringing millions out of abject poverty doesn’t also cook the planet in the process.

However, this does not give any sort of excuse to provide heavy subsidization of fuel for personal use. Rather, these are essentially highly visible buy-offs to the populace to keep them placated, it being no coincidence that the nations most heavily involved in these policies are usually authoritarian in nature. Though ostensibly designed to help the poorest by making basic heating and cooking costs cheaper, the end effect is to make costs of fuel artificially low for all citizens, regardless of income. Unsurprisingly, this encourages fuel use in deeply irresponsible ways, which push up emissions, leading to more adverse health and other outcomes, and more government spending to address these effects. It’s a vicious cycle that only ends when a nation knuckles under and shuts the taps off.

There is a responsibility to do the wind-down on energy subsides in a balanced way, rather than simply cutting them, though. Though over-cited, it is true that many low-income households rely on artificially low fuel prices to keep the lights on or for basic cooking gas. To this extent, countries should look at the model of Brazil’s Bolsa Familia program, which rolled an existing subsidy for cooking gas into a grant for low-income families, whilst ending the subsidy for higher incomes. Transforming broad-based subsidies into targeted social protection both allows for greater autonomy for the poor and makes sure help is going where it is needed most. On a broader level, states should be making the transition to greener forms of energy, recognizing that this is a complicated process involving a variety of tools to achieve. To that extent, carbon taxes, properly designed so as to not punish the poor, make sense, as would specifically attaching sustainability criteria to development aid or other assistance projects. At the very least, restrictive fuel subsidy reform would quit shoveling further into the hole, though it is far from a panacea and should not be thought of as such.

Getting serious about climate change requires global cooperation and broadly-based buy-in, from all parties. As we roll through the Paris Climate Conference, commitments from nations of all sorts regarding emissions have been rolling in. Though doubtless important for establishing mutually-agreed targets, such statements also often suffer from a lack of detail or clear policy proposals, leaving the crucial fine print for a later date. A bold, but concrete, commitment that should be demanded at this conference is a global plan to end broad-based fuel subsides on a global basis over a short-term time window (let’s say ten years for simplicity), as opposed to the merely notional support for their phase-out expressed at the 2009 G20 conference. Though doubtless a political and policy lift, such a plan would demonstrate a seriousness from all parties which has heretofore been lacking and would work to assuage fears about lack of mutual commitment. Even that aside, on basic logical principle, it makes sense. We certainly wouldn’t encourage citizens to give themselves a black lung by paying them to smoke, and we shouldn’t do the equivalent when it comes to the planet we all have to share.