Do fossil fuels get $7 trillion in subsidies?

Thanks for downloading the More or Less podcast with a programme that takes a long hard look at some of the numbers in the news. And I'm Charlotte McDonald. World leaders have been meeting at COP 29 in Azerbaijan as part of the international effort to tackle climate change. One thing they could do, according to a stat that's repeated across the internet,

would be to stop spending a huge amount of money, $7 trillion per year, on subsidising fossil fuels. This $7 trillion subsidy figure has been used by world leaders, climate change campaigners, reported on by news outlets and repeated by the UN. But is it a good number?

Tom Coles has been having a look at this one. Hi, Tom. Hey, Charlotte. Let's start at the start. Where does the $7 trillion number come from? Right. Yeah. So this comes from a report by the IMF. That's the International Monetary Fund, a big UN finance agency. And it's an estimate of fossil fuel subsidies in 2022. Technically, it's from an IMF working paper. So it represents the view of the authors, not the IMF.

And to be clear here, $7 trillion is a really huge amount of money, maybe 7% of the entire global economy. And the IMF is saying that governments around the world are spending that huge amount of money on subsidizing the fossil fuel industry at the same time as some of those governments are saying they're committed to fight climate change.

Well, kind of sort of. I mean, this whole thing basically comes down to what you mean by the term subsidy. Okay. So let's define it. How about we say it's the money that governments are paying out in some way either to fossil fuel producers themselves or to make coal, gas, petrol and diesel cheaper for consumers. So I'm thinking of direct handouts, tax breaks, that kind of thing, like farming subsidies, but for fuel.

No, there are not $7 trillion of that. One part of the IMF report deals with what they call explicit subsidies, which are basically the kind of thing you just described. They reckon there are about $1.3 trillion of those kind of subsidies in 2022.

Right, that's quite a lot lower, but still a very big number. What kinds of subsidies are we talking about here? Huge handouts to big oil? Not directly, no. I've been talking about these numbers with Angela Piccioiello from the International Institute for Sustainable Development, which runs a tracker of fossil fuel subsidies that includes the IMF figures. She says the subsidies are almost all on the consumer side.

Yeah, so for the IMF explicit subsidies, we see that for example for 2020 to only 3% of the total explicit subsidies were producer subsidies, while the remaining 97% was what we call consumer subsidies.

By the way, consumer here includes businesses, cheaper fuel for lorry drivers and farmers and what have you, and not just individual householders, but not big oil or big coal or anything like that. And it turns out that big coal actually receives hardly any of these explicit subsidies, only 9 billion of the 1.3 trillion at less than 1%. In terms of what those subsidies are, well, the answer to that makes more sense when you know how the IMF calculate them.

The IMF numbers are worked out in what we could call top-down way. The subsidies are calculated based on this, what we call a price gap approach. So based on a difference between the, let's say, supply cost, broadly speaking, and the final end-user price.

In 2022, Russia invaded Ukraine and energy prices shot up. European governments and others paid out billions of dollars in direct payments to push household energy bills down. In the IMF calculation, the difference between the market price and the price paid by consumers is the explicit subsidy.

The same is true in places like Saudi Arabia, Iran and Russia, when their government-run oil and gas companies decide to set a price for petrol, diesel and gas way below the market rate. This happens whether there's an energy crisis or not, and so these countries are big subsidisers by this method, though China comes out way on top of the IMF analysis.

OK, but I don't really live in a petro state. And when I feel like my car, I pay tax on that fuel. It doesn't feel like it's subsidized. And it's not. In the IMF analysis, the retail price for petrol or gasoline in the UK is way above the market price, precisely because of the additional taxes. Tax is taken into account in their analysis. So 2020 was a pretty big year for subsidies because of the energy crisis. Have they gone down since then?

Yeah, this was a record year and they've come down significantly. The IMF haven't released more recent numbers, but hot off the press, another international acronymed organisation, the OECD, has just released their numbers for 2023. And their figure, which is good for a rough comparison, is down by a third.

Okay, so there's the answer. There aren't seven trillion US dollars of fossil fuel subsidies, how most people understand that term. There's maybe a trillion, but I'm still curious, that's seven trillion, but what does it actually represent? Yeah, so okay, we've been talking about what the IMF call an explicit subsidy, and you me and the OECD just call a subsidy, but the IMF add on to that number a calculation for what they call implicit subsidies.

Here's Nate Vernon at one of the co-authors of the IMF paper. We take kind of an economic perspective on what the cost of consuming fossil fuels are. So this cost is composed of kind of the traditional notion of the market price, but also the cost imposed on society of consuming the fossil fuel such as higher global temperatures and more global warming damages, local air pollution, congestion, river damage, and road accidents.

These external costs are quite hard to get your head around. For climate change, they worked it out by adding a carbon price of around $75 to every ton of carbon produced. This $75 doesn't represent the literal cost of repairing damage caused by climate change. It's an estimate of the price you'd need to charge in order to keep global temperatures from rising above two degrees.

This adds up to about a third of the total, just over two trillion dollars. Okay. Stay with me here. Another big external cost of fossil fuels is air pollution, which harms people's health and leads to earlier deaths. They put this into monetary terms, not by working out the cost to health services, but by using an estimate of how much in dollar terms people value their own health and survival.

That number adds up pretty fast to another two trillion or so. Right. Then there's a chunk for the cost of roads, congestion, accidents and maintenance, another trillion. So the IMF researchers are saying that all governments should increase the price we all pay for fossil fuels to account for these costs. And because they mostly don't, that counts as an implicit subsidy? Yes. That is what this term is talking about.

It doesn't sound very subsidy to me. I mean, it really depends how you look at it. It's definitely not money that can be easily moved around by governments from one thing to another, something like a farming subsidy. But it is a legitimate attempt to figure out what an accurate price for fossil fuels would look like if all the damage they cause is accounted for. Here's Nate again.

These external costs are just as real as the market price because they're also things that people are willing to pay to reduce. So when fossil fuel prices are below this true cost, they're accounted for as a subsidy because people that are consuming fossil fuels are not paying for the full social cost of consuming that product.

Thanks, Tom. That's it for this week, but be sure to send us an email if you've seen a number in the news you think we should take a look at. Find us at more or less at bbc.co.uk. Until next time, goodbye.