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Negative carbon pricing: a shadow price we need to know?

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Photo Scott Butler on Flickr

Putting a price on carbon, either through taxation or emissions trading, is a way to reduce the greenhouse gas emissions causing climate change.  

With UN climate negotiations taking place this week at COP23, the UN Secretary-General has called on more governments to put a price on carbon.  Far less attention is, however, being paid to the negative carbon price – where subsidies from government actively encourage the use of and production of fossil fuels. 

This year, Nobel Laureate Joseph Stiglitz and ex-World Bank Chief Economist Lord Stern chaired a new High-Level Commission on Carbon Pricing. The Commission’s report shows carbon pollution leads to costs for society - a “social cost of carbon” –  whether from the health impacts of pollution or the impacts of climate change, which are often not factored into decision making.

There also another ‘shadow’ or ‘hidden’ price we know little about – the ‘negative carbon price’.

As recognised by the Commission, tax breaks and public subsidies for fossil fuels effectively act as a negative price on carbon.  Not all these subsidies are distorting – but some of these subsidies are because they increase consumption and emissions, counteracting government efforts to tackle climate change.

Contradicting with climate policies and actions 

Every year since 2009, the G20 group of countries has pledged to phase out fossil fuel subsidies but there is currently no plan of action to do this. A range of budget transfers and tax expenditures still encourage production and use of fossil fuels,  often conflicting with and contradicting carbon pricing policies by skewing the market.  Instead of the polluter paying the costs of pollution damages, they are being paid to pollute.

ODI has found that 11 European countries and the EU provided at least €112 billion in subsidies per year between 2014 and 2016 to production and consumption of fossil fuels. Since those same governments have also made commitments to cut emissions and support clean energy, continued support for fossil fuels is contradictory and detrimental to the public purse.

One way to calculate the global ‘negative carbon price’ is to calculate the impact of all fossil subsidies on emissions, then estimate the carbon price required to mitigate that impact.  A 1992 World Bank study (quoted here) showed that the impact of global fossil fuel subsidies are equivalent to a global negative carbon tax of $50-90 dollars per ton.  Clearly, this study needs updating. We do not have a current global estimate of the negative carbon price caused by fossil fuel subsidies.

The problem can be demonstrated with kerosene subsidies in India.  In 2014, kerosene was being subsidised by a subsidy of around 35 rupees ($0.57)/litre (approximately 70% of the cost). While these subsidies are now being reformed, the example shows there was effectively a high and hidden ‘negative carbon price’ in the kerosene market.

Fossil fuel subsidies, as well as burdening taxpayers, are an incentive for pollution that leads to health costs. In India, using kerosene lamps for lighting causes indoor air pollution with negative impacts on child health. This ‘social cost’ is an implicit subsidy on top of the actual subsidy. Kerosene subsidies in India also hold back solar power, a cleaner alternative for household lighting. 

Kerosene lamp in Bangladesh. Solar panels offer a brighter and cleaner alternative.  Source: Flickr. 

IMF found that in 2010, motor fuel subsidies in Indonesia, Saudi Arabia and Iran were equivalent to a subsidy of between $92 and $193 per ton of carbon dioxide, meaning the carbon price was extremely negative. In Canada, it’s been found that oil and gas companies effectively get $19 for every tonne of carbon emissions they produce.  Meanwhile, Germany, Spain and Poland were still subsidising coal in 2010 leading to a negative price.

The IMF estimates that removing global fossil fuel subsidies would cut global CO2 emissions by around 20% and raise global welfare. There are also fiscal benefits, promoting the efficiency of capital across the economy.

Millions to trillions

Other non-energy subsidies are likely causing a ‘negative carbon price’ effect.  For example, subsidies to carbon-intensive food production or agricultural fuels.  In both the US and EU, the beef sector receives public subsidies despite the fact beef is one of the most carbon-intensive food products.

Carbon pricing is already being factored in by some organisations into decision-making, with more than 1200 companies putting a price on carbon emissions or planning to do so, according to CDP.  The European Investment Bank (EIB) incorporates the economic price of carbon into appraisal of all projects.  However, the EIB is still subsidising fossil fuels. Between 2014- 2016, EIB provided financing for 27 gas infrastructure projects worth €1.6 billion/year.  The Big Shift is calling for the development banks, starting with the World Bank, to stop funding fossil fuels.

Fossil fuel subsidies act as an incentive in the opposite direction to carbon prices - incentivising fossil fuel-dependence. To meet climate goals, it is vital we get these incentives right and consider price signals in the market to support private investment in the low carbon transition.  

By focusing on carbon pricing, it’s possible we have only been looking at half of the equation - not identifying the subsidies acting as an incentive in the opposite direction.   More research could be done to identify ‘negative carbon prices’. This could help governments make better decisions about energy and climate policies. It could also make the impact of subsidies more visible, providing information about the effect of different policy levers.

Further research could also help investors - identifying unsustainable investments which are reliant on subsidies that need reforming in future, for example, investments in diesel irrigation where diesel is being subsidised. When those subsidies are removed, fossil-dependent assets will be uneconomic, demonstrating an investment risk.  Identifying ‘negative carbon prices’ would benefit everyone.