Money, Power and Rebellion

On a recent December morning in Washington DC a large number of climate change activists blocked traffic in Washington DC. They were protesting in front of the World Bank and International Monetary Fund headquarters. Most of the protesters, largely young people but with a generous sprinkling of elders, were associated with a group called Extinction Rebellion. Many DC commuters were late for work, and let their ire show, but perhaps they were moved to wonder about what was being protested. 

At its heart, the protests were driven by a concern that the continued use of fossil fuels is leading to disastrous changes in Earth’s climate. Whereas we should be working to eliminate fossil fuels as an energy source, global emissions of greenhouse gases continue to climb. All the global climate models point to climate changes that will threaten the lives of billions and threaten the social order.  We’ve got to wake people up!  But why demonstrate in front of these world banks? Why not protest at the front gates of a large fossil fuel power plant instead? The answer lies in the response by the famous Willie Sutton to the question, “Why do you rob banks? He replied, “That's where the money is”. 

These protesters were aware of something that many people don't know about global economics: The International Monetary Fund and the World Bank subsidize fossil fuels in one way or another to the tune of about $1.9 trillion per year. That's a massive amount of money, equal to about four times the total annual budget of the United States of America. These protesters know that replacing those subsidies with carbon taxes or other means of reducing fossil fuel use would result in a very substantial decrease in greenhouse gas emissions.

In an economic policy article written for the Washington Post a few years ago, Brad Plumer dissected the main strands of these fossil fuel subsidies. About $480 billion dollars are direct subsidies to developing nations, mostly in the Middle East and Africa. They are a form of assistance, by helping these nations lower the cost of petroleum, natural gas, coal and electricity for their citizens. The trouble is, the banks are paying the nations to pollute the planet with greenhouse gases!  The subsidies crowd out other expenditures in developing nations and depress private investment in renewable energies. Energy subsidies are often a huge portion of the budget. For example, Egypt, the most populous nation in the Mideast, spends up to 8% of its GDP in subsidizing fossil fuels--more than it spends on education and public health combined. Egypt runs budget deficits of about 8% of GDP.

So why not just stop with the direct subsidies? It's not easy in countries where the standard of living is pretty low and the subsidies impact strongly on people’s survival. When they are removed or lessened, considerable social unrest generally follows. The government of Iran recently raised the price of gasoline from about $0.15 per gallon to $0.50 per gallon, a price very low in comparison with most nations.  The move was met with rioting in the major cities. Over time, subsidies take on a legacy status; people believe they’re entitled to them.

Then there are the even larger indirect subsidies that run to about $1.4 trillion annually. These are found mainly in industrial nations.  They've existed in the United States for a long time. They typically come into place when new industries are being developed and the government wants to stimulate their growth. Subsidies to oil and gas producing corporations have been in place for many years, the products of lobbying and influence peddling.  They're tucked away in all sorts of places in the tax code. The rationales for many of them no longer exist, yet they continue to live on. Corporate influence is such that many new subsidies are created where there is no need for them. The federal government leases land at very low rates to corporations for the development of or extraction of fossil fuels. The Environmental and Energy Study Institute estimates that conservatively  U.S. subsidies to the fossil fuel industry are about $20 billion per year; 80 percent to natural gas and crude oil enterprises that are currently generating massive surplus supplies. Similarly, European Union subsidies are estimated to total 55 billion euros annually.

Aside from these subsidies, fossil fuel industries produce many external costs arising from their production and uses. Think of the high price paid in terms of human health and welfare involved in the mining of coal and of the environmental destruction that accompanies the mining process itself. Add to that the environmental damages and adverse human health effects accompanying the use of fossil fuels: air pollution, contamination of rivers, streams and water sources drawn upon for human consumption. Society pays a high price to address these problems. If the costs of remediating those external effects were charged to coal producers, coal would be much more expensive. Coal is obviously a bad choice of fuel, and it’s uses are declining rapidly, but Robert Murray, former CEO of the bankrupt Murray Coal Company, continues to spend hundreds of thousands of dollars to spread misinformation about climate change and to influence legislation in critical states such as Ohio.  Oil, and especially natural gas, have their own sets of subsidies. No one is charging those industries for the special brands of environmental disasters they are producing: contaminated water systems, unstable geological structures leading to earthquakes, massive flaring of excess natural gas that adds greenhouse gases to the atmosphere, and thousands of depleted wells, unplugged, still seeping, abandoned across the Permian basin. 

Inefficiencies in the markets magnify the environmental damages accompanying the development and production of fossil fuels.  Only a decade ago natural gas was being heralded as the fuel of the future and the making of US bragging rights to being the world’s leading producer of fossil fuels.  Now the industry is in decline, forcing refinancing of earlier operations as the current ones lose profitability.  Smaller companies are going out of business or seeking bankruptcy.  One might suppose that’s good riddance, but the surplus of natural gas is actually impeding the work of clamping down on the losses of methane, the principal component of natural gas. A New York Times report tells a tale of horrific levels of methane emissions from production at all levels, from storage, pipelines and especially venting. The Trump administration took the lid off all caps on the ability of fossil fuel producers to vent methane into the atmosphere. The replacement of coal by natural gas as the major fuel for electricity generation was acclaimed as a means of lowering the amounts of greenhouse gas for a given amount of power produced, but the wastage of methane from wellheads and in stages of production may completely erase the purported advantage of natural gas. We can’t be sure, though, because the Trump administration wants to eliminate the requirement that companies even estimate methane loss. This is a modern version of the creation of chemical dump sites in the era when chemical companies weren’t regulated.  The dump in this case consists of odorless, invisible molecules that just happen to be heating earth’s atmosphere and will be at their work for decades as the planet heats up.

The natural gas example I’ve just described is an example of an indirect subsidy to the producers in the sense that they are not being charged for the inevitable future costs to society of adding greenhouse gases to the atmosphere. It might be argued that we don’t know just what those costs are likely to be, so we can’t charge the producer for them. But there are many smart economists and scientists in this world who know how to create models, draw up scenarios and look a bit into the future to come up with estimates of the costs of remediating the damage that will be done.  That damage is likely to be so overwhelming that a proper tax on it would be so large as to put the producers out of business.  What we might hope for, though, are taxes on enterprises contributing to global warming and the destruction of irreplaceable ecosystems that are sufficiently large to serve as powerful disincentives.

There is a lot of talk about carbon taxes, but they may be a nightmare to establish, and people are not likely to see their value.   Something about taxation doesn’t sit right with many people, even when they’re not directly in the line of fire, which in fact they generally are. You really have to look closely when the plan is fostered by corporations. A business-driven organization, the Climate Leadership Council has an advocacy arm called Americans for Carbon Dividends that supports an economy-wide carbon fee, with a provision that the proceeds would be returned to the citizens in the form of a check. As Ellen Wald wrote in Forbes magazine when this plan was first announced, it looks like a sleight of hand to make to make the average American think he’s getting something for free.

About a decade ago my beloved son, Ian Ayres, Professor of Law at Yale University, wrote a book entitled Carrots and Sticks: unlock the power of incentives to get things done., in which he touches on the subject of conservation commitments.  Applied to the current topic, the general idea is that rather than punish the bad behavior of those emitting greenhouse gases with a tax, we should incentivize them to stop emitting, with funding that would be paid in proportion to their success in doing better. Governments do that now by providing subsidies for renewable energy development and deployment. We want money spent now to obviate in some measure future costs of coping with the adverse consequences of planetary heating. 

This is a big, difficult subject.  For now, I would be happy just to see reforms in the rule-making philosophies embraced by the Trump administration’s executive agencies, which so shamelessly encourage profligate waste of energy, and careless despoiling of the environment.   As I post this, we're coming up on a new year. If we can't begin to stop this in 2020, maybe beginning in 2021?