Distortions in energy markets

Energy markets are highly distorted by subsidies for nuclear power and fossil fuels:

  • Subsidies for fossil fuels:

    • Campaigners demand an end to $1tn fossil fuel subsidies (The Guardian, 2012-06-18). "... one thing seems abundantly clear: the sooner we get the money out of politics, the sooner we can get the carbon out of our energy system." See also Report – low Hanging fruit: fossil fuel subsidies, climate finance, and sustainable development (Oil Change, 2012-06-14). Our latest report (Low Hanging Fruit, PDF) provides updated estimates of global fossil fuel subsidies and the result is staggering! The figure for production and consumption subsidies is at least $775 billion annually and could be as high as $1 trillion; Activists hail success of Twitter storm against fossil fuel subsidies (The Guardian, 2012-06-18).
    • North Sea oil wins subsidies (City AM, 2012-03-22).

    • Wind power still gets lower public subsidies than fossil fuel tax breaks (The Guardian, 2012-02-27).
    • In a report published in 2004, the New Economics Foundation made a conservative estimate that worldwide subsidies for fossil fuels amounted to about $235bn a year (see Fossil fuel subsidies 'must end', BBC News, 2004-06-21).

    • The continuation of those subsidies is confirmed by a report by Bloomberg New Energy Finance (PDF, 2010-07-29) that fossil fuels were still receiving about 12 times as much subsidy as renewables:

      • Fossil fuel subsidies are twelve times renewables support, Bloomberg New Energy Finance, 2010-07-29. See also Subsidies for renewables, biofuels dwarfed by supports for fossil fuels (Bloomberg New Energy Finance, 2010-07-29).

      • Fossil fuel subsidies are 10 times those of renewables, figures show, The Guardian, 2010-08-03.

    • The International Energy Agency's World Energy Outlook for 2011 states that worldwide subsidies to fossil fuels in 2010 totalled $409 billion. By comparison, renewable energy systems received just $66 billion. See also Phasing out fossil fuel subsidies 'could provide half of global carbon target' (The Guardian, 2012-01-19).

    • A report by the European Environment Agency ("Revealing the costs of air pollution from industrial facilities in Europe") estimates that the damage to human health and the environment from air pollution released in the European Union in 2009, mainly from burning fossil fuels, amounted to € 102–169 billion.

    • A study, led by scientists from Harvard University Medical School ("Full cost accounting for the life cycle of coal"), concluded that the price of electricity generated from burning coal would have to be at least doubled if it took account of the environmental and health damage it caused. Once these “external costs” are included, renewable energy systems gain a significant economic advantage.
    • Other relevant sources of information include:

      • Calculating the true cost of electricity (Deutsche Welle, 2012-09-13). Taking into account health and environmental damage, wind and solar power from new plants in Europe is actually cheaper than energy from coal and nuclear power plants, according to a new report. The report, in German, is here: Was Strom Wirklich Kostet: Vergleich der staatlichen Förderungen und gesamtgesellschaftlichen Kosten von konventionellen und erneuerbaren Energien (PDF, Bundesverband WindEnergie (BWE), August 2012). See also Studie Stromgestehungskosten Erneuerbare Energien (PDF, Fraunhofer-Institutfur Solare Energiesysteme ISE, May 2012). 

      • Inventory of estimated budgetary support and tax expenditures forfossil fuels (OECD, October 2011). Includes chapters on individual countries. See also Wind power still gets lower public subsidies than fossil fuel tax breaks (Business Green, 2012-02-28) Gas, oil and coal prices were subsidised by £3.63bn in 2010, according to data from the Organisation for Economic Co-operation and Development, whereas offshore and onshore wind received £0.7bn in the year from April 2010. All renewables in the UK benefited from £1.4bn over the same period, according to data from the Department of Energy and Climate Change (DECC). ... Almost 90 per cent of the fossil fuel subsidy comes from the reduced rate of VAT paid by households. See United Kingdom: inventory of estimated budgetary support and tax expenditures for fossil fuels (OECD).

      • G20 on subsidies for fossil fuels:

        • Report: G20 fossil fuel subsidy phase out (Oil Change International & Earth Track, November 2010).

        • Green view: How to save $300 billion (The Economist, 2010-11-12).

        • The real G20 subsidies news (Council on Foreign Relations, 2010-06-28).

        • G20 fossil fuel subsidy push may aid climate talks, Reuters, 2009-09-25.

        • Barack Obama plays down the need to finalise a deal on climate change (The Guardian, 2009-09-25).

      • Energy subsidies favor fossil fuels over renewables, Environmental Law Institute, 2008.

      • More than $5 fossil fuel subsidies for every $1 of support for renewables, RenewableEnergyWorld.com, 2010-11-09.

  • Whose subsidies trump whose? (New York Times, 2011-09-22). Renewable energy deserves subsidies, its partisans say, because conventional energy sources have enjoyed bigger subsidies for decades. The latter is a hard proposition to quantify, but a new report by a venture capital firm that specializes in renewables takes a stab at it.
    • There is still no global cap on emissions and schemes such as the EU ETS are not working properly. For those kinds of reasons, the price of CO2 emissions is far too low (more below). This is a major subsidy to fossil fuels.
  • Nuclear power is heavily subsidised as described in the Nuclear Subsidies report (PDF). The UK government is introducing new subsidies as described in Subsidies for nuclear power in the UK government’s proposals for electricity market reform (PDF). See also:

    • Research by Versicherungsforen Leipzig GmbH, a company that specialises in actuarial calculations, shows that full insurance against nuclear disasters would increase the price of nuclear electricity by a range of values -- € 0.14 per kWh up to € 2.36 per kWh -- depending on assumptions made. See Calculating a risk-appropriate insurance premium to cover third-party liability risks that result from operation of nuclear power plants (PDF, Versicherungsforen Leipzig, 2011-04-01).
    • There are several other subsidies for nuclear power described in Nuclear Subsidies. Although their sizes are difficult to quantify, it is likely that most of them are substantial.

    • In addition to the subsidies which nuclear power receives already, it has been estimated by Citibank that a further subsidy of £115 pounds per megawatt hour would be needed to make nuclear power commercially viable (see UK nuclear build requires taxpayer rescue -Citi, Reuters, 2012-05-08).
    • Some relevant comments:

      • "Government subsidies to the nuclear power industry over the past fifty years have been so large in proportion to the value of the energy produced that in some cases it would have cost taxpayers less to simply buy kilowatts on the open market and give them away." From After 50 years, nuclear power is still not viable without subsidies, new report finds (Union of Concerned Scientists, 2011-02-23). See also Nuclear power: still not viable without subsidies (PDF, Union of Concerned Scientists, February 2011).
      • "More than half of the subsidies (in real terms) ever lavished on energy by OECD governments have gone to the nuclear industry." From "Nuclear power out of Chernobyl's shadow", The Economist, print edition, May 6th 2004.

Without subsidies for nuclear power and fossil fuels, it is likely that most renewable sources of power -- with the possible exception of those that have still not reached the bottom of their cost-reduction curves and are still finding their feet commercially -- would be commercially viable without subsidies.

The Stern report said that climate change is the greatest market failure the world has seen, and that actions will be needed to compensate for that failure. Removing the subsidies for nuclear power and fossil fuels are the main actions that are needed.

Winding down the arms race of subsidies

Rather that piling subsidy upon subsidy, we should be aiming to wind down the arms race of subsidies, reserving them for where they are really needed:

  • Ensure that a proper price is paid for CO2 emissions. This can be done most effectively via 'Upstream' reform of the EU Emissions Trading System (PDF, 69 KB). Less satisfactory options are discussed briefly below.
  • Remove all subsidies from oil, gas and coal, as the G20 say they will do. There may be a case for providing support for carbon-capture and storage (CCS) until it is established.
  • Remove subsidies from nuclear power following procedures outlined in Section 4 of the Nuclear Subsidies report.Retain support for renewables that have not yet reached the bottom of their cost-reduction curves or where there are special reasons for providing support. Regarding the latter point, if, for example, the majority of people feel that onshore wind farms spoil the landscape (and that is by no means clear) there may be a case for providing a subsidy to cover the extra cost of putting wind turbines out at sea.

  • Remove support from renewable sources of power that have reached the bottom of their cost-reduction curves

See also: High-carbon fuel companies should pay their way too (Financial Times, 2012-09-21). Letter from Julian Scola, Communication Director, The European Wind Energy Association, Brussels, Belgium. "The fact is that governments across Europe could save themselves a lot of money, and hasten the phasing out of support for increasingly mature renewable technologies such as onshore wind, if they first removed longer-standing subsidies for more established technologies like nuclear and coal." And  Creating the Internal Energy Market in Europe (PDF, European Wind Energy Association): the report includes a recommendation to remove subsidies for coal, gas and nuclear power.

Raising the price of CO2 emissions

Given the need to decarbonise the world's economies, there is certainly a need to raise the price of CO2 emissions from the burning of fossil fuels. This could be of some help to the nuclear industry and some people in the industry have been pressing for a higher price for CO2 emissions. But a lot depends on exactly how the price of CO2 emissions is raised. Some relevant issues are discussed in the following subsections.

What happens when there is excess power?

If wind farms and nuclear power stations are, together, producing more power than people need, a lot depends on which of those two sources of power get paid. Unless consumers have full control over which source of power they will use and pay for, there is potential to create unfair subsidies.

Forms of support

A lot depends on the way in which the price of CO2 emissions is raised, see Raising the price of carbon: a back-door subsidy for nuclear power?.

Taking account of emissions from the nuclear cycle

In raising the price of CO2 emissions, it is important to ensure that emissions from the nuclear cycle are properly accounted for. In her book "Nuclear power is not the answer", Helen Caldicott says "The use of nuclear power causes, at the end of the road and under the most favourable conditions, approximately one-third as much carbon dioxide (CO2) emission as gas-fired electricity production." But this is only with the highest grades of ore. The use of poorer ores as a source of fuel for nuclear reactors "would produce more CO2 emissions than burning fossil fuels directly." In other words, "nuclear reactors are best understood as complicated, expensive, and inefficient gas burners." (p. 6).

Conclusion

Raising the price of CO2 emissions may be of some help to nuclear power but it would be even more helpful to renewables. With the changes outlined in 'Winding down the arms race of subsidies', it is unlikely that nuclear power would be commercially viable.