There are many challenges to overcoming our dependency on fossil fuels. In his book, How the world really works, Vaclav Smil goes into detail how everything from the oil derived plastics used in lifesaving tools in the operating room to the coke that’s necessary for creating steel have no equivalent replacements. On the other hand, fossil fuels used in energy production and transportation do have alternatives which can yield significant decreases in greenhouse gas emissions sooner than later if readily adopted. Meanwhile, despite the many alternatives, we are instead, as taxpayers, fronting the costs to prop up the fossil fuel industries, paying for the damages and recovery of warming related weather events, and paying for the increasing health care costs from carbon extraction and processing operations all while they have raked in record profits.
In the latter half of his book, The Nutmeg’s Curse, Amitav Ghosh dives into the economics of fossil fuels, specifically oil, framing it as today’s nutmeg, which drives and props up the Anglosphere. He makes reference to the term homo economicus, as a descriptor of modern day citizens obsessed the notion that capitalism is the prime mover of the modern world and geopolitics, empires and power come into play after (Ghosh, 2021, p. 115). In the often-heated debates about climate change, sustainable economics and capitalistic friendly policy, the narrative against rapid adoption of renewables makes claims of high costs and economic burdens for taxpayers. Anti-renewable politicians, think-tanks, and other NGO organizations continually spin a narrative of the drawbacks, economic woes, and horrors of green energy. As ex-speaker McCarthy said “end the green giveaways that distort the market and waste taxpayers’ money,” back in April of 2023 during the debt ceiling limit debates (Zack Budryk, 2023).
In keeping with the idea of homo economicus, then we should explore the true cost of fossil fuels. In the free market system, the ideal is when signals from producers and consumers will play back and forth to create a sort of balance between supply and demand, an equilibrium of efficiency along a growth curve. When this balance isn’t achieved by the “invisible hand” of the market, then the market fails and requires intervention. The government has two tools for market correction, taxes, and subsidies. Taxes are used to reduce the negative impacts of externalities while subsidies are used to stabilize markets by shifting supply or demand curves to the equilibrium price point. In essence, a subsidy offsets expensive purchase prices or production costs and is usually provided by the government to stabilize the economy. We’ll come back to these definitions shortly, but first we’ll look at negative externalities in more detail.
Climate change is an externality, that is, it is a public good where the costs spill outside the market and are not captured in market prices. The most significant of all environmental externalities is global warming (Nordhaus, 2019), and the burning of fossil fuels is the largest contributor to the increase in greenhouse gasses (GHG) that drive global warming. When we say costs are not captured in market prices, it means that the money made by a producer of the goods or services causing the externality, in this case CO2 from fossil fuel burning. The profits are not used to redress the negative effects of increased hurricanes, hotter summers with longer, deadlier heatwaves, more wildfires, flooding, and the list goes on.
Each hurricane that makes landfall, atmospheric river that fuels extreme flash floods, hectares charred by wildfires, crops lost to droughts and fishery closures from heat induced die-offs all come with large price tags per event. Between 1989-2020 there have been 71 federally approved fishery disasters, events where a fishery has been deemed overfished and shutdown. To offset the estimated $3.2 billion (USD) in direct revenue losses, over $2 billion in Congressional allocations have been approved (Bellquist et al., 2021). That’s $2 billion in taxpayer dollars paying for the losses and recovery from extreme environmental events (marine heatwaves, hurricanes, harmful algal blooms). In a report by the National Resources Defense Fund, federal expenses on extreme weather events in 2012 exceeded $100 billion (Lashof & Stevenson, 2013, p. 4) with $96 billion in direct taxpayer dollars. Fast forward 10 years and the situation has only become worse.
As taxpayers continue to pay the cost of climate change related events, while also paying directly for fossil fuels to heat their homes, generate electricity and power their cars, they also pay to subsidize the fossil fuel companies. Global companies that brought in a combined $200 billion in profits for fiscal year 2022 (Grantham-Philips, n.d.). A true homo economicus, thinking rationally about what’s been discussed so far would hopefully be raising an eyebrow at the thought of subsidizing fossil fuel producers when they are already paying not only for the product, but then again to cover the negative externalities.
Despite the successful bottom line on the balance sheet, fossil fuel producers benefit from a variety of government subsidies such as (Fact Sheet | Fossil Fuel Subsidies: A Closer Look at Tax Breaks and Societal Costs (2019) | White Papers | EESI, n.d.) :
- Providing tax credits to oil producers based on the location they’re extracting or exporting to.
- Write offs for oil speculation and exploration costs.
- Consumption subsidies to reduce end user costs.
As it becomes more evident that a shift away from fossil fuels to renewable and alternative energy is the only way to secure a safe and viable future for generations to come, homo economicus would expect energy subsidies be used to further green and renewable sources. Instead, between 2010 and 2017 the U.S. Department of Energy (DOE) provided $2.66 billion (USD) towards fossil energy research and development projects. Of that total, 91% was research and development money (1.4 billion) used on coal-related research, including gasification (turning coal into gas). (Fact Sheet | Fossil Fuel Subsidies: A Closer Look at Tax Breaks and Societal Costs (2019) | White Papers | EESI, n.d.)
Artificially keeping the cost of fossil fuels low (though, with profits like above, are they as low as they can be?) through subsidies erodes incentive and motivation to invest in renewable and green energy, thus impeding innovation (Timperley, 2021). Elimination of fossil fuel subsidies would return an estimated $121 billion annually as federal revenue increases which in turn could be used to spur innovation in climate focused solutions to energy. (Fact Sheet | Proposals to Reduce Fossil Fuel Subsidies (2021) | White Papers | EESI, n.d.)
In the free-market system, rising fossil fuel prices should in turn decrease demand and spur innovation to increase the reliability, efficiency, and affordability of green and renewable sources. Instead, current policy, both domestic and globally, ensures the success of fossil fuels as an energy mainstay, with no regard for the true total cost of these policies. The first step to helping spark this correction is undoing the economic policy that is designed to benefit the producers. Easier said than done as we continually see pushback from house republicans on any attempts to promote clean energy initiatives and reduce fossil fuel production (House Republicans Pass Energy Bill to Roll Back Regulation of Fossil Fuel Production, 2023).
As U.S. direct subsidies reach an approximate $20.5 billion annually with $14.7 billion in federal subsidies and $5.8 billion in state subsidies, that’s a hefty amount of tax dollars. Now, combine that with the annual cost of negative externalities from fossil fuels, the new estimated U.S. subsidy amount is $649 billion per year (Fact Sheet | Proposals to Reduce Fossil Fuel Subsidies (2021) | White Papers | EESI, n.d.). At such a high cost, homo economicus should now really be convinced that it’s time for a policy change which makes better use of their tax dollars.
The 117th Congress has introduced a handful of legislation to help reform fossil fuel subsidies including the Ending Taxpayer Welfare for Oil and Gas Companies Act of 2021 (H.R. 1517) and the End Oil and Gas Tax Subsidies Act of 2012 (H.R. 2184). These bills were introduced in 2021 and have made little progress since. President Biden, and former President Obama have both made reforming and eliminating fossil fuel subsidies a part of their platforms, but neither have had success (“Biden Budget to Target U.S. Fossil Fuel Subsidies,” 2023).We are living on borrowed time economically, ecologically, and sociologically by continuing to use subsidies to prop up the fossil fuel sector. The continuation of fossil fuel subsidies through influence of big oil and acquiescent policy makers is a devastating setback in the progress towards large scale robust renewable energy solutions. I hope homo economicus would agree that our taxes should be put towards securing our welfare not just for today, but for our future. We need to secure the welfare of everyone, not just the CEOs of big oil and their lapdog politicians. I only hope more folks would truly adopt the homo economicus persona and take a true, rational, and academic approach to understanding these issues, in turn making well informed decisions at the polls to support those who support us.
References
Bellquist, L., Saccomanno, V., Semmens, B. X., Gleason, M., & Wilson, J. (2021). The rise in climate change-induced federal fishery disasters in the United States. PeerJ, 9, e11186. https://doi.org/10.7717/peerj.11186
Biden budget to target U.S. fossil fuel subsidies. (2023, March 9). Reuters. https://www.reuters.com/business/energy/biden-budget-target-us-fossil-fuel-subsidies-2023-03-09/
Fact Sheet | Fossil Fuel Subsidies: A Closer Look at Tax Breaks and Societal Costs (2019) | White Papers | EESI. (n.d.). Retrieved October 12, 2023, from https://www.eesi.org/papers/view/fact-sheet-fossil-fuel-subsidies-a-closer-look-at-tax-breaks-and-societal-costs
Fact Sheet | Proposals to Reduce Fossil Fuel Subsidies (2021) | White Papers | EESI. (n.d.). Retrieved October 12, 2023, from https://www.eesi.org/papers/view/fact-sheet-proposals-to-reduce-fossil-fuel-subsidies-2021
Ghosh, A. (2021). The nutmeg’s curse: Parables for a planet in crisis. University of Chicago Press.
Grantham-Philips, W. (n.d.). “Outrageous”: Big oil made almost $200 billion in 2022 as world faced energy crisis. Here’s the breakdown. USA TODAY. Retrieved October 26, 2023, from https://www.usatoday.com/story/money/at-home/2023/02/10/oil-companies-2022-profits-exxon-bp-shell/11170023002/
House Republicans pass energy bill to roll back regulation of fossil fuel production. (2023, March 30). PBS NewsHour. https://www.pbs.org/newshour/politics/house-republicans-pass-energy-bill-to-roll-back-regulation-of-fossil-fuel-production
Lashof, & Stevenson, A. (2013). Who Pays for Climate Change? (IP: 13-05A; p. 13). National Resources Defense Council (NRDC). https://www.nrdc.org/sites/default/files/taxpayer-climate-costs-IP.pdf
Nordhaus, W. (2019). Climate Change: The Ultimate Challenge for Economics. American Economic Review, 109(6), 1991–2014. https://doi.org/10.1257/aer.109.6.1991
Timperley, J. (2021). Why fossil fuel subsidies are so hard to kill. Nature, 598(7881), 403–405. https://doi.org/10.1038/d41586-021-02847-2
Zack Budryk, R. F. (2023, April 19). Republicans seek to repeal renewable tax credits, pass energy package in debt limit proposal [Text]. The Hill. https://thehill.com/policy/energy-environment/3959517-republicans-seek-to-repeal-renewable-tax-credits-pass-energy-package-in-debt-limit-proposal/