Citizen of the Week Special Contest

The Climate Community Citizen of the Week Awards program is featuring a special contest!

Based on the success of December’s Citizen of the Week contest with the Anderson School of Management, this week we’ll travel to the University of Chicago, where students in the joint undergraduate/graduate course in Environmental Economics (page 11) will have the opportunity to respond to the question below. The best answer will be featured as a Citizen of the Week on Thursday March 11th in recognition of their thoughtful, academic approach to environmental issues. Students will be posting their thoughts in the comment field over the next week, so come back and follow their discussion!

And now to the contest:

Last year, the Group of 20 (G20) major economy nations committed

To phase out and rationalize over the medium term inefficient fossil fuel subsidies.*

The U.S. is a member of the G20.

Agree or Disagree: The United States should end ALL fossil fuel subsidies.

There is no “correct” answer. The winning response,  regardless of what side it takes, will have the best combination of:

  • reasoned opinion
  • nuanced answer beyond simply Agree or Disagree
  • correct use of economic principles covered in class
  • support from additional research outside of that provided in class lectures.

There is no minimum or maximum length, but quality is more likely to win than quantity.

Please respond in the comment section of this post by March 5th, and be sure to put your name.

*http://www.pittsburghsummit.gov/mediacenter/129639.htm,  para. 24

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  • 8 Comments

Comments

  1. Hannah says:

    Agree – Negative externalities of fossil fuel production and consumption have not been considered in the decision to subsidize the industry previously. These subsidies – either in the form of tax breaks or direct dollars – result in greater production of fossil fuels (leading to Increased greenhouse gas emission, decimation of environments and reliance on politically unstable governments) than is socially efficient. Eliminating subsidies would make fossil fuels more comparably priced with respect to their true social cost, and enable renewable energy technologies to be relatively more affordable. Redirecting dollars towards subsidizing renewables would be more socially optimal because of positive externalities associated with these sources.

  2. Brendan Cook says:

    Disagree – While I do fully believe that the ceasing of subsidies on inefficient fossil fuel technologies would make equate the price of fossil fuels to their true cost (social cost + private cost), and enable renewable energy technologies to become more competitive, I don’t think the current time is right for such a movement. Currently, coal, oil, and natural gas (the three most prominent fossil fuels) provide more than 85% of the United States consumed energy, more than two-thirds of electricity demand, and nearly all transportation fuels. A removal of subsidies for these fossil fuels producers would decrease profit margins of fossil fuel related energy companies significantly. The only likely result would be for the affected companies to raise prices significantly, which would be great in that the higher price (along with the higher cost of production) would reflect more on the true cost of fossil fuels, United States citizens don’t necessarily act rationally to price hikes in fossil fuels. Theoretically, the higher prices of inefficient fossil fuels should lead to increased reliance on and investment in alternative technologies; however, this isn’t always the case. US reliance on fossil fuels for energy is so strong and diversified (over many uses) that demand for “fossil fuels” as a source of energy is relatively inelastic. For example, during the year of 2008, retail gasoline prices (in cents per gallon) were at all time highs: in July, the price per gallon was $4.11. In July 2009, that figure fell to $2.58. If higher prices were effective in trimming demand for fossil fuels, we would expect that demand should have been depressed in 2008. However, demand for gasoline (in thousands of gallons per day) was 54,802.5 in 2008, and only 49,691.7 in 2009 (http://tonto.eia.doe.gov). While it could be believable that if prices were kept high for an extended period of time, then consumer demand behavior would shift, such an action would still be treating the consumer as a bit “too” rational. I am not suggesting that US demand fossil fuel demand is completely inelastic, just an increase in prices for fossil fuels doesn’t always have the anticipated affect. Although some may argue that with higher prices, more money can be invested into alternative technologies, the fact is that if consumers still show a strong willingness to pay for higher prices, then there isn’t much reason for producers to change their behavior much. The conclusion of this discussion would be to not cease fossil fuel subsidies on inefficient technologies. Instead, keep subsidies as they are, but I would suggest increasing subsidies for companies that have invested and produced more in alternative technology fuel, or have developed more environmentally friendly ways of producing their fossil fuels. Thus, research in “green” energy fuels would be greatly discounted, and instead of placing a cost on producers, you are offering a way for producers to make even more money.

  3. Samra says:

    There is not any solid theoretical or practical reason why those subsidies should be given.

    In the last ten years, energy demand in the developed world has grown very slowly, 1% per year. In the same period, energy demand in emerging markets, led by China and India, exploded with annual average growth rates in individual countries approaching 10 percent. This way three quarters of incrimental world demand for energy was generated by emerging markets. The world demand for commercial energy increased slightly more than 3 per cent, almost the same as the world GDP, ending 20-years uninterrupted decoupling of the the world economic growth from energy consumption. As a consequence, high crude oil prices put strong pressure on trade balances of many developed countries with the US, for example, paying annually hundreds of billions for imported crude oil.

    However , in most of those emerging markets consumption of crude oil and natural gas is heavily subsidized mainly for social reasons. At the G20 meeting and also International Energy Agency called on emerging markets, in particular China and India, to terminate subsides to energy consumption, in particular to crude oil, hoping that it would moderate the future increases in the world energy demand and reduce the upward pressure on crude oil and natural gas prices. The calculations of leading world energy agencies indicate that the world governments provide annually around $550 billion in subsidies to fossil fuels consumption with distorted price signals and certainly artificially high crude oil and natural gas consumption.

    For the US to have a credible position to force China, India and others to increase fossil fuel prices to economic levels, the US itself would need to eliminate subsidies which it gives to energy companies that by the way are not always passed on to consumers. Normally, even without any subsidies vast majority of the world and the US fossil fuel business is profitable. Keeping in operation a number of inefficient and high cost crude oil and natural gas producers or projects, the US subsidies ultimately increase short and long-term world fossil fuel prices with a wide-spread damage to its economy and trade position.

    Given that the US is the world largest crude oil consumer and importer, the termination of its and as result, even with a delay, of the emerging markets’ fossil fuel subsidies would produce a strong downwards pressure on prices and demand with great economic, social and environmental benefits.

  4. Agree: Fossil fuels create negative externalities in production and consumption, with this cost coming in a range of forms, from greenhouse gases that exacerbate the problem of climate change to air pollution in urban areas that have health implications. Between 2002 and 2008, $72.5 billion was spent on fossil fuel subsidies, over double the $29 billion spent on renewable energy subsidies. Ending subsidies would allow the total cost of energy to the individual, and society as a whole, equate (or at least more closely reflect) to the actual price. It is established economic fact that by subsidizing fossil fuels more heavily, they become relatively cheaper as a source of energy than renewables. By banning all fossil fuel subsidies, the relative cost of renewable energy will decrease, increasing its consumption while not having the negative externalities associated with fossil fuels.

    Yet, the environment is not the only concern that should be considered in this discussion. If we are to assume that the overall goal is to maximize the benefit to American (or world) society, then we must weigh fossil fuels’ negative externalities against the benefits of cheaper electricity and the aid that provides to the economy as a whole, particularly manufacturing, as well as the benefits to the individual realized by lower energy bills. Fossil fuels are integral to the U.S. economy, forming 71% of the electricity production and 97% of the transport sector’s consumption, and so the removal of subsidies would have a powerful impact on the U.S. economy. Yet, if the payments that account for fossil fuel subsidies were instead transferred to subsidizing renewable sources, then the economic consequences can be somewhat ameliorated, although there would most likely be an increase in costs in the transport sector (although arguably this would be a good thing as true cost would reflect price, and thus people would travel less and produce less emissions, for example).

    Since the essence of this debate revolves around what makes most economic sense in the long term, we must consider the economic cost of inaction, with fossil fuel subsidies maintained. The U.S., as the second largest emitter of greenhouse gases behind China, while also providing international leadership should factor the long-term economic cost of emissions from within the U.S., and from the world as a whole. By eliminating fossil fuel subsidies, the U.S. would both reduce national greenhouse gas emissions as consumption decreases, while also making political discussions on emission reduction agreements more likely. The potential economic cost in GDP terms, by 2100, is expected to be 3.6% if no action is taken against climate change (National Resources Defense Council). Thus in the context of long term horizons, the economic costs incurred by removing fossil fuel subsidies will likely be dwarfed by the long term costs of failure to act against climate change. Therefore, although the U.S. is currently navigating turbulent economic waters, and the removal of fossil fuel subsidies will apply economic costs across the U.S. economy as energy prices, transportation prices, etc increase, the short-term economic cost borne is a price worth paying to help steer the U.S. economy away from a more dramatic decline caused by the impact of climate change in the long-term.

    To conclude, the impact of climate change in the long-term is huge – 3.6% of GDP. Removing fossil fuel subsidies is a key step to reduce the impact of climate change, while also producing benefits in the form of lower health costs, greater energy independence, reduction of acid rain, etc. as consumption of energy from fossil fuels decrease. If we, as Americans, want to seek the least-cost solution to ensuring long-term economic growth in this nation, a repeal of fossil fuel subsidies is an important, and necessary step; who knows, it may even spur more international action in reducing greenhouse gas emissions.

  5. dan says:

    Thanks for your comments! Please check back on Thursday….

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  1. [...] The United States should end ALL fossil fuel subsidies. The entire question can be found at Citizen of the Week Special Contest and was posted by another one of our winners Kyle Gracey who is a teaching assistant to Professor [...]

  2. [...] The United States should end ALL fossil fuel subsidies. The entire question can be found at Citizen of the Week Special Contest and was posted by another one of our winners Kyle Gracey who is a teaching assistant to Professor [...]

  3. [...] The United States should end ALL fossil fuel subsidies. The entire question can be found at Citizen of the Week Special Contest and was posted by another one of our winners Kyle Gracey who is a teaching assistant to Professor [...]