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Subsidies to Fossil Fuels

Dr John Constable: GWPF Energy Editor

The Daily Telegraph recently published a claim by Aviva that subsidies to fossil fuels in the United Kingdom amounted to $6.5 billion dollars a year. Examination of the source behind this claim, data from the Overseas Development Institute (ODI), reveals that it consists of $1 billion of tax relief and $5.5 billion of public finance to international aid projects. Neither of these are “subsidies” in any meaningful sense.

In a recent op. ed. for the Daily Telegraph (11 August 2017), Maurice Tulloch, the chief executive of international insurance at Aviva, demanded that subsidies to fossil fuels be brought to an end, terming them “a relic of the past”.

As a general rule, subsidies are undesirable, so Mr Tulloch would seem to be making an entirely reasonable suggestion, except that on closer examination the things he refers to as “subsidies” are only so on an extremely questionable definition.

In his reference to the United Kingdom and such subsidies he writes:

Just recently, the Health and Environment Alliance launched a report that laid out the costs of the health impacts that come from fossil fuel subsidies. In the UK, health costs arising from fossil fuel driven air pollution are almost five times higher than the subsidies paid. Over $6bn of public money is spent on the industry, and the health costs from premature deaths linked to air pollution run to over $30bn.

Six billion dollars per year is a lot of money, and very surprising in the UK context. That alone should have set off an alarm bell somewhere in Mr Tulloch’s office. As we shall see, it was not wise to rely on the HEAL study for information, and one wonders if Aviva made any inquiries into the methodology and criteria behind that striking number.

Investigation would have revealed that the data in the Health and Environment Alliance paper, Hidden Price Tags: How ending fossil fuel subsidies would benefit our health was not generated by HEAL itself, but was instead drawn from work by the Overseas Development Institute (ODI) in London. The ODI’s main publication on this subject, Empty promises: G20 subsidies to oil, gas and coal production is the source for many of the principles used in the ODI’s work, and there is an important page on the UK (p. 80), but the data actually cited by HEAL seems to come from the ODI website: “G20 subsidies to oil, gas and coal production: United Kingdom”.

Putting this all together, it would not have taken Mr Tulloch’s researchers long to find out that the rather striking claim of $6.5bn subsidy to fossil fuels in the UK consists of $1bn of tax relief, mostly for the decommissioning of oil rigs, and $5.5 bn of public finance for overseas development of fossil fuel related projects, in other words development aid to extend energy access to the world’s poor. Neither of these are subsidies.

Tax relief is a perfectly justified business related exemption of a general kind extended not only to the fossil fuel industry, but to all sorts of companies, including, one imagines, international insurance companies. To call it a “subsidy” is to stretch the definition beyond breaking point.

Bad though that is, it is still more absurd to classify as a subsidy the public finance provided as overseas aid to support energy access projects. This aid happens to be spent on fossil fuels, because they are fundamentally economic, and bring the vast welfare benefits of low cost energy to as many people as possible. Judging from other parts of the ODI’s study, they would irrationally prefer such money to be spent on renewable energy that is uneconomic (and unaffordable even in the developed world), and would benefit far fewer people and probably benefit them much less.

The Overseas Development Institute approach to fossil fuel subsidy is childish and tendentious, not to say plain silly. Neither the Health and Environment Alliance, nor Mr Tulloch and Aviva, should have touched it with a barge pole.