Apr 042013

GasStationPricesDid you know our government spends money subsidizing fossil fuel energy to keep prices artificially low? A new International Monetary Fund study uncovers just how much these subsidies are and urges our governments to stop these market distortion practices. I calculate the real price we pay for fossil fuel energy and the results are astonishing.

The release of the study by the International Monetary Fund (IMF) is widely covered by mainstream media around the world in the New York Times, Washington Post, Financial Times, and in a particularly good analysis from the Wall Street Journal. But it was strangely almost untouched by the Canadian media. I looked at the data in the full report (PDF), focusing on the Canadian portion. With additional data provided to me by the IMF Washington office, I was able to do some further calculations. The energy subsidies are higher than I expected. In fact, far higher.

What the general public is mostly unaware of is the prices we pay for energy are subsidized prices. When we pay $50 at the gas pump, the gas we got is actually worth more than $50. When we pay $100 for our hydro bill, the energy we used is actually worth more than $100. Why’s that? It’s because the government financially subsidizes the energy we use. They have been doing this for years. But most of the general public are not aware of this. The energy prices we consumers see are below market levels.

GasPumpingYou might think: Isn’t that great? The government is paying for part of my gas! Let’s trace it backward, where does the government get their money to subsidize your gas? That’s from government revenues. Where does the government get their revenues? Mostly from taxes. The federal government of Canada gets more than 80 percent of their revenue from two sources: income taxes and consumption taxes (source: StatsCan). Who pay the government those income taxes and consumption taxes? That’s the taxpayers. You get the picture … it’s you. The gas you get from the pump is paid partly by you at the gas station. The other part of the cost is also paid by you, but indirectly through the withholding tax from your paycheque and through the GST you pay when you go shopping.

And this is the part I’ve always wondered: What’s the real price of the energy we use? Are the energy subsidies large or small? What’s the fully loaded energy price compared to the ‘sticker price’? This is a very complicated calculation as multiple levels of federal, provincial, and commercial players are involved. But thanks to the economists at the International Monetary Fund who did an extensive study on this subject, we now have some good data.

IMFReportAccording to the IMF study and the additional data they provided to me, Canada spent $26 billion on energy subsidies in 2011. The Canadian government’s revenues were $665 billion in that year. In other words, 4% of the government revenues were spent on energy subsidies. (Note that the IMF calculation uses U.S. dollar, but the Canadian dollar was at virtual parity with the U.S. dollar over the year of 2011, with $1 USD equalled $0.989 CAD).

Let’s put these numbers into more relatable context. How much energy subsidies were made for each person? According to StatsCan the Canadian population was 33,476,688 in 2011. That works out to be a whopping $787 of energy subsidies for each Canadian for the year. This is a far higher number than I expected. On average each Canadian paid $787, mostly through our income tax and GST, for our energy in 2011 and probably a similar amount year after year. Remember, this is on top of the payments we make at the gas pumps and through our hydro bills. For a family of four, this amounts to over three thousand dollars per year spent invisibly on energy.

With this in mind, are fossil fuels really that much cheaper than renewable energies? The IMF cites many downsides to putting so much public money into subsidies and keeping energy prices—at least the ‘sticker prices’—artificially low, not least of which is giving the false impression to the general public that fossil fuels are much cheaper than renewable energy. Subsidies distort resource allocation by encouraging excessive energy consumption, artificially promoting capital-intensive industries, reducing incentives for investment in renewable energy, and accelerating the depletion of natural resources.

According IMF First Deputy Managing Director David Lipton, removing these subsidies worldwide could lead to a 13 percent decline in CO2 emissions and generate positive spillover effects by reducing global energy demand. It would also strengthen incentives for research and development in energy-saving and alternative technologies. That’s the reason the IMF is urging governments the world over to reform subsidies for products from coal to gasoline, arguing that this could translate into major gains both for economic growth and the environment.

So next time you hear someone say they prefer fossil fuel to renewable energy because they are cheaper, tell them they have been paying $787 a year on top of their bills for those fossil fuels without knowing it.

Special thanks to the International Monetary Fund for providing additional data for these calculations.

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Derek Wong is a recognized expert at ShareGreen by Walmart, panel judge for Earth Day Canada, keynote speaker at Skills for the Green Economy, and guest speaker at University of Toronto. His innovative approach to employee engagement has led to case studies. Reach him by email or LinkedIn.

  25 Responses to “The Real Price We Pay for Fossil Fuel Energy”

  1. The real price we now pay is what has happened in Mayflower AR. This oil spill is just the beginning.

  2. Indeed, pollution is a factor taken into account by the IMF in calculating the amount of subsidies on energy. Governments do spend money (using tax revenues) dealing with pollutions caused by fossil fuel energy. The public pay for this. The non-financial damage from oil spill, however, is not covered in IMF’s calculation, to my knowledge. Thanks for your comment, Iain.

  3. Uncovering the true cost of energy in Canada http://t.co/jyiLUX2i5J @Carbon49

  4. […] 2013/04/04: C49: The Real Price We Pay for Fossil Fuel Energy […]

  5. Canadians pay $787 each for energy without knowing it: IMF #renewable #environment #sustainability #energy http://t.co/Eo66lewlXa

  6. What really is the true price we pay for fossil fuel energy? Check out this article to learn more! http://t.co/e2ar1Glkaf

  7. Ok so this works out to $65 per month for me. Lets get rid of the energy subsidies. My gas bill goes up, my electriuctiy bill goes up, food costs go up, costs of all consummables goes up, unemployment increases, EI and welfare costs go up……..maybe $65 per month isn’t that bad a deal.

  8. “How much would electricity cost in the US if the retail price reflected the health impacts of burning fossil fuels? A paper recently published by researchers at the Environmental Protection Agency finds that accounting for such costs would add an average of 14 to 35 cents per kilowatt-hour to the retail cost of electricity. Nationwide, these hidden health costs add up to as much as $886.5 billion annually, or 6% of GDP.” (source: http://is.gd/klUS1Z)

  9. RT @Carbon49: Canadians pay $787 each for energy without knowing it: IMF #renewable #environment #sustainability #energy http://t.co/Eo66lewlXa

  10. As much as I’d like the government to reduce interfering with the markets, it is not quite as simple as the math done here. According to the data, the Canadian government received $665B in revenues. These revenues did not come solely from income and sales taxes. A significant portion comes from places such as corporate taxes and import duties, or “business” in general. As such, one cannot simply divide the $26B in energy subsidies by the total tax revenue and say that every Canadian pays 787$. The number is likely significantly smaller than that.
    Now, that is not to say that those energy subsidies significantly distort the market: they do. The argument that you should be making instead is that those $26B should be spent on other things, whether that is alternative energy research, poverty reduction or direct subsidies to households to offset the increased cost of everything.

  11. Andrew, please check your math and re-read the article. The $26B in subsidies is divided by 33M Canadian’s to come up with $787 per person. I would agree that $787 this is a distorted number. For comparison, there are more cell phones on the planet than there are people. This makes sense when you consider business cell phones. Same can be said for $787. The energy consumed at the pump, I presume this is what the $26B is based on. The consumption at the pump is not just domestic or personal use. The pump data includes taxis, small business vans and trucks, delivery vans, even lawnmowers. However, none of this matters since we still pay for the subsidies in other methods, HST, income tax etc., whether it is $787 or $387. And that is the point of the article.

  12. Oh shoot, you’re right, my sentence should say “one cannot simply divide the $26B in energy subsidies by the POPULATION” and say that that is how much each person pays, because a large chunk of that $26B actually comes from business.
    The math isn’t as simple as dividing the amount by the population, because so many parts of the economy benefit from those fuel subsidies. That aside, what I was trying to get at was that these subsidies should be eliminated, so that personal and business decisions can be made based on the true costs of things, be they gasoline or green energy.

  13. Hi Derek,
    I’d be interested to see the more detailed Canada-specific workings through which you arrived at the $26bn/$787 pcpy – there’s only a link to the IMF broader report. Interesting to note that the IMF report only allows $25/tonne for CO2 costs which, while being an accepted number by the IMF and one department of the US government, is never going to cut it if we’re going to actually be able to address the challenge of climate change in any meaningful way. If we put that up to $100, $150 per tonne, then looked at those numbers again, I think we might see certain economies look even worse. Furthermore, the IMF calculations do not appear to account for the true life-cycle costs of nuclear waste disposal or storage, plant decommissioning, etc. – and I’m not really talking about the health externalities of nuclear power, such as they may be (the IMF report does at least allude to these in saying it’s too hard to figure out). With these factors and values rolled in, if we were under $2000/person/year in Canada, I’d be stunned.

  14. The $26B number of Canadian subsidies comes straight from the IMF. I simply divide this number by Canada’s population to come up with $787 per person per year. I did this to get a sense of the magnitude of the subsidies. It’s a significant number compared to the energy bills each of us pay per year, therefore it’s a big market distortion. Much bigger than I expected. That’s the main point of the article.

  15. @Andrew I included a link in the article to StatsCan on the sources of government revenue. Two sources, “income taxes” and “consumption taxes”, made up over 80% of their revenue. When you said “a large chunk of that $26B actually comes from business”, I don’t know what your source is. Having said that, I didn’t look deeply into StatsCan’s definition of “income taxes” and it may include corporate income tax.

    Not every Canadian pays $787. It depends on a person’s income tax payment (e.g. a portion of Canadian pay no income tax), the person’s energy mix of diesel vs kerosene vs gasoline vs natural gas vs coal vs electricity (different energy receives different amount of subsidy), which province the person resides in, among many other factors. Some pay more, some less. $787 is an average figure.

    What you and I both agree on is that our subsidies are far higher than what it should be and the general public mistakenly thinks fossil fuels are much cheaper than renewables because of these invisible subsidies. Thanks for your comment.

  16. @Ian Rowberry You are right that the actual subsidy per Canadian may be much high because IMF only used $25/tonne of CO2 in thier calculations. The Stern study, a highly authoritative study, came up with $80/tonne. Had IMF used that figure, subsidy per Canadian would come close to $2,500 per Canadian per year.

    When IMF calculated the $26B of subsidies in Canada, they did say this is quite a conservative estimate. For example, when IMF couldn’t get data for certain item, they didn’t just use a ‘best guess’ number, they used zero. That’s how conservative their approach is. They said the actual subsidies is most likely higher, could be far higher. Thanks for your comment.

    I am hoping to find time to do a follow up article to clarify certain points.

  17. Thanks Derek – yes, I was interested to know what other data had been provided in order to arrive at $26bn. The influence of the carbon externality costing can be inferred by the estimated figure of $2,500/person. I look forward to any such updates as you’re able to share. A look at how the $787 (or $2,500) compares with a person’s or household’s average income and energy consumption would also be interesting, to show how much the poor are (I suspect) effectively subsidising the energy consumption of the rich through this process.

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