Pumped Up Prices

Fossil fuels, fooled?


Even as world governments wring their hands over global warming caused by burning fossil fuels, those same governments simultaneously promote policies that subsidize the overconsumption of the same energy sources.

In a study published by the National Bureau of Economic Research, Lucas W. Davis, a professor at UC-Berkeley's business school found that 24 countries grant calculable net subsidies for gas, and 35 for diesel. (By Davis' chosen measure, which looks for lower domestic consumer fuel prices than international spot prices, the U.S. is not among the offenders.) In 2012, Davis reports, there were $110 billion worth of such subsidies, divided about evenly between gas and diesel fuel. Saudi Arabia, Iran, and Indonesia are the top three subsidizing countries.

If all governments ended their fossil-fuel subsidies, given Davis' assumptions about demand elasticity, global consumption would decrease by 29 billion gallons a year. Given the calculable social costs of burning the excess energy, plus the deadweight loss in efficiency, Davis figures "the total economic cost of fuel subsidies is $76 billion annually."