In addition to their toll on the environment, fossil fuels may be much more expensive than they appear at first glance.
A new study, published in the journal World Development, shows that a staggering 5 trillion dollars each year goes toward subsidizing dirty fossil fuels that lead to climate change. The figure amounts to 6.5 percent of global GDP. The subsidies are costly, harmful to the environment, and discourage investment in renewable energy sources that compete with fossil fuels.
The authors, David Coady, Ian Parry, Louis Sears, and Baoping Shang, emphasize that subsidies are properly defined as “not only supply costs but also (most importantly) environmental costs like global warming and deaths from air pollution and taxes applied to consumer goods in general.” They argue that this definition of subsidies more accurately reflects “the gap between consumer prices and economically efficient prices.”
The authors discuss both consumer subsidies, when prices for consumers are below a benchmark price, as well as producer subsidies, when producers are given support to increase their profitability.
They suggest a need for reform when it comes to fossil fuel subsidies. While the pre-tax, narrower definition of subsidies would only represent 0.7 percent of global GDP in 2011 and 2013, the broader definition shows they amounted to 5.8 percent in 2011, and rose to 6.5 in 2013. Breaking the results down into fossil fuel type and usage, they found that petroleum and coal receive much larger subsidies than natural gas and electricity.
The authors emphasize some key points to take away from the study. For one, the subsidies and costs associated with fossil fuels are larger than the public may realize. Also, these subsidies continue because most people do not realize their full scope. Together, these points emphasize the need to transition to clean and renewable energy.
Speaking to The Guardian, Dr. Coady explained the importance of their work:
“A key motivation for the paper was to increase awareness among policy makers and the public of the large subsidies that arise from pricing fossil fuels below their true social costs—this broader definition of subsidies accounts for the many negative side effects associated with the consumption of these fuels. By estimating these costs on a global scale, we hope to stimulate an informed policy debate and provide renewed impetus for policy reforms to reap the large potential benefits from more efficient pricing of fossil fuels in terms of improved public finances, improved population health and lower carbon emissions.”
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