About Those Fossil Fuel “Subsidies”

Is failure to tax a subsidy?

In a comment on Bryan Caplan’s recent blog post titled “I Win My Climate Shock Bet,” November 9, 2021, better Daniel Reeves writes:

They [Wagner and Weitzman] do spend a lot of time in the book on the absurdity of the current fossil fuel subsidies, which I’m sure you also despise.

Reeves is right that they do spent a lot of time on it. What the authors don’t do, though, is tell the reader how their huge estimates were reached. They state on p. 22, “The world subsidizes fossil fuels at a rate of over $500 billion per year.” If you look at the notes at the back, you see a long discussion of this number on pp. 171-172. But the discussion doesn’t tell you how the number was reached. Instead, it gives a source. In the Bibliography, on p. 212, you can find the source and, fortunately, accompanying the source is a link.

I went to the link and started reading. What I noticed right away was that the authors, Clements et al, didn’t define a subsidy the way we normally define a subsidy. You can check that for yourself on pp. 5-8.

Here’s a highlight from pp. 5-6:

Consumer subsidies include two components: a pretax subsidy, if the price paid by firms and households is below supply and distribution costs, and a tax subsidy, if taxes are below their efficient level. Box 2.1 describes the calculation of these two components. Most economies impose consumption taxes to raise revenue to help finance public expenditures. Efficient taxation requires that all consumption, including that of energy products, be subject to this taxation. The efficient taxation of energy further requires corrective taxes to capture negative environmental and other externalities owing to energy use, such as global warming and local pollution.

In other words, failing to tax energy at the level that the authors think is needed to internalize the externalities that fossil fuels create amounts to subsidizing these fuels.

Clements et al could make a case for this. But there are two problems.

First, it’s classic question-begging. Clements et al take as given that fossil fuels should be stiffly taxed. But in the discussion between Caplan and Reeves, that’s one of the major items at issue.

Second, even if you think, as Scott Sumner does, that taxing carbon is low-hanging fruit, if you use the Wagner/Weitzman estimate to make your case, you’re misleading almost everyone. (I’m not saying that Scott is misleading everyone: he argues independent of the current level of subsidy.) Nowhere in Climate Shock could I find any hint that the authors count failure to tax as a subsidy. That’s not what most people mean and it’s not what 99 out of 100 readers would take way from Wagner’s and Weitzman’s discussion.

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