The government says it is leading an international initiative of countries who are looking at how to cut carbon use by cutting fossil fuel subsidies. Friends of Fossil Fuel Subsidy Reform includes a number of governments, commercial companies, including many from New Zealand, as well as some international environmental organisations*.
The idea that there is no point in putting a ‘price on carbon’ through a tax or trading regime while there are subsidies in place is a reasonable one. There is solid research by the IMF in this area demonstrating the negative impact of fossil fuel subsidies and the potential gains from their removal. That seems fair enough then. The proposal from the Friends is that the money released by cutting subsidies could be reinvested in renewable energy projects. That makes sense as well.
However there is a big credibility problem for New Zealand’s government. An article on the Friends website speaks of 3 areas for fossil fuel subsidy reform. These are subsidies to producers (oil and coal companies), generators (the electricity companies) and consumers (private individuals and businesses). This is where it gets tricky for New Zealand. According to the Prime Minister the NZ government is proposing to target only 1 strand of subsidies – those to consumers. Subsidies to fossil fuel exploration and drilling in NZ the Prime Minister says, are “not subsidisation in terms of what the world is talking about” . So the NZ government’s approach is an interesting one. In MBIE’s own research on subsidies for fossil fuels seven subsidies of eight identified are producer subsidies. Since subsidies to LPG and CNG as vehicle fuel were withdrawn the sole consumer fossil fuel subsidy is a tax rebate to farmers and vessel owners on the basis that their use of fuel does not take place on roads. On the other hand the examples of producer subsidies include allowing Solid Energy not to pay the costs of remediating mining sites and providing government funded support (such as providing geological survey information to prospectors) and tax incentives for oil exploration.
So the $500bn per annum that the Friends website identifies as global fossil fuel subsidies are actually only the subsidies to consumers (and which is supported in other research) are made mainly to address fuel poverty and are barely relevant in New Zealand **. IMF research says they also make up only 6% of the $5.3 trillion a year of subsidies to fossil fuels internationally. (Overall these subsidies are equivalent to 6.5% of global GDP and are several orders of magnitude more than subsidies to renewables which are running at $120bn/year).
It would be very easy to stop subsidizing oil exploration, drilling and fracking. A pricing regime to differentiate between renewable and fossil fuel power generation is trickier but still possible***. These subsidies are made to a small number of readily identifiable extraction and power generation companies and would be easy to cut.
The focus on consumer subsidies in preference to the much larger, real, identifiable and measurable subsidies made to fossil fuel companies gives the impression that the government is determined to pull it’s policy paddles through the air, rather than dipping them in the water where they might actually make a difference.
*There is limited information about why the companies have signed up – just a set of company logos and many of the other ‘friends’ countries make no statement about what their commitment to cutting subsidies consists of.
** The argument being made is that NZ stopped subsidising consumer fossil fuel use when support to installing LPG and CNG happened decades ago. If there are minimal consumer fossil fuel subsidies in NZ then it follows that they cannot be targetted as an effective means of cutting emissions.
In other overseas jurisdictions switching consumer fuel subsidies (often for cooking and heating fuel) from fossil fuels to renewable energy would be beneficial to the environment and several poorer countries have already achieved this even though consumer side subsidies are dwarfed by extractor subsidies.
*** The MBIE research doesn’t include the uniform pricing of electricity, which is also effectively a subsidy to fossil fuel generation. Unit for unit renewable energy is always cheaper (and less polluting) than fossil fuel electricity generation. The absence of any analysis of this easily spotted issue begs the question of how thorough the thinking has been about identifying subsidies to NZ fossil fuel use.