Free Markets

Free Markets Save the Planet

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A startling new report from the International Energy Agency (IEA) reveals a free-market way to thwart climate change: Create a free market in energy. Fatih Birol, chief economist at the IEA, estimates that 37 nations spent $409 billion on fossil fuel subsidies in 2010. (By comparison, renewables received $66 billion in that same year.) Impressively, if fossil fuel subsidies were eliminated, this would avoid 750 million tons of CO2 by 2015, and could potentially save over 2.5 gigatons of carbon by 2035. The latter is 70 percent of what the European Union currently emits. In total, by ending these distortions in the energy market, the world could reduce half of the carbon emissions necessary to stop a 2°C (3.6°F) rise in global temperatures.

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Writing in Slate, Matthew Yglesias expands on what this means for climate policy:

If roughly half of what needs to be done can be achieved simply by eliminating economic distortions—economic distortions that would be unwise even if there were no concern about pollution—then the whole framework of a trade-off between prosperity and sustainability is largely misguided.

With that in mind, here's a simple proposal to fix those UN climate confabs that meet every year and do precious little. Rather than focus on vague, trumped-up emission targets, how about international agreements to phase out energy subsidies? The other half of carbon reductions could be attained by more market-based approaches, like cap-and-dividend or a carbon tax that was guaranteed to be revenue-neutral. In addition, switching from dirtier fuels (e.g. coal) to energy sources with a low-carbon footprint, like renewables, nuclear, and natural gas, would also slow emissions.

Unfortunately, ending these subsidies would be quite difficult. According to the IEA report, most of these fossil fuel subsidies are in non-Western nations, and thus are less inclined to care about global warming. The top energy subsidizer is Iran, which spends over $80 billion each year, half for oil. Meanwhile, Saudi Arabia, Russia, India, and China round out the rest of the top five.

The most common justification for maintaining these subsidies is that they reduce energy costs for the poor. But like so many other government programs, fossil fuel subsidies are socialism for the rich. Only 8 percent of these subsidies actually goes to the poorest 20 percent, with the vast majority benefiting the middle and upper classes. Even if global warming isn't a super serial problem (as this recent Wall Street Journal op/ed argues), ending these subsidies would restore some fairness and fiscal sanity for these nations' budgets.

However, the main, unspoken reason for these subsidies is that artificially cheap energy pacifies the masses. This allows regimes to entrench their power. It's unsurprising that dictatorships like Venezuela and Saudi Arabia have some of the lowest gas prices in the world. Unfortunately, market-minded reformers who try to eliminate subsidies usually must face an angry public. For example, Nigeria was recently racked with nationwide riots after Nigerian President Goodluck Jonathan ended fuel subsidies. While prices doubled for Nigerians, this move is expected to save $8 billion and significantly reduce corruption and cronyism within the Nigerian government.

Reason on global warming.