It is absolutely urgent that we begin calculating the cost of climate change

Nearly everywhere in the world oil and coal are heavily subsidised by governments. There is no economic justification for the subsidies. Repeated attempts to hike costs to reflect the real cost of fossil fuels has been stymied by governments. But the burden of climate change will force governments to remove the subsidies, says Norman Myers, a Visiting Fellow at Green College, Oxford University

GSI: You have argued that certain government subsidies are making the problem of climate change worse. What is the connection?
Norman Myers (NM): We know that about 50 percent of climate change is due to the burning of fossil fuels, and the problem is we have long been encouraged to burn these fuels, almost with abandon, because of subsidies. This made sense when oil was first being exploited at the beginning of the 20th Century, when oil was proving to be a very fine lubricant for the expansion of economies. Without these subsidies to fossil fuels, the growth of industry and transportation would not have been nearly so great. But for a long time, I’d say at least 80 years, there has been no economic reason why oil and coal industries should be subsidised.
If governments were to slowly ratchet up the cost of fossil fuels, so that the cost reflected the full price, including the cost to the environment, we would see much more conservation. This is why I argue that it is absolutely urgent that we begin calculating the cost of climate change, and pass the cost on to the people who are doing the burning and emitting.

GSI: If fossil fuel subsidies made sense when countries were at an early stage of industrialisation, does that mean that you make a special case for developing countries?
NM: You could make a special case for very impoverished countries, like Bangladesh. But India and China have a lot of coal, and I don’t see any reason to make an exception for them, even if they are at an earlier stage of development. We can see on our television screens as we watch the Olympics the huge smog clouds over Beijing. The number of people who die each year in China because of air pollution is in the order of 400,000. That’s a huge mortality rate, and the cost should be built into the price of fossil fuels.

GSI: Your argument is that eliminating fossil fuel subsidies would be a win-win situation. Not only would we encourage conservation, but we would also free up public money. Why, then, do government’s persist in maintaining subsidies for fossil fuels?

NM: That’s a good question. It really is crazy that we subsidise the burning of fossil fuels, even though this leads to trashing the environment and undercutting our economies. Reducing fossil fuel subsidies, for example, would help boost the technology for more efficient, cleaner car engines. So why do we tolerate this kind of nonsense? Well, it’s partially inertia. Fossil fuels play a very large role in our economies, and to phase them out would cause a lot of disruptions. However, it will not be nearly as difficult as living in a world that has been subject to climate change.
The other reason is the influence of lobbyists. In Washington, for example, there are large numbers of lobbyists who whisper in the ear of Congress in order to keep subsidies to fossil fuels in place. I believe that lobbyists are spending as much as 250 million dollars a month in the United States, much of which goes to lobbying on behalf of the fossil fuels.

GSI: In your latest book, you describe “institutional roadblocks” to tackling problems such as perverse subsidies. In short, you say that our institutions – whether governmental, legal, media, or citizens’ groups - are not up to the task of addressing the world’s most pressing challenges. How does this concept apply to subsidies, and what types of institutional reform could help us deal with perverse subsidies?
When I go to the gas station to fill up my car, I’m told to pay 4 dollars per gallon. But when I put my economist’s hat on, I know I should be paying another 4 dollars to cover the cost of environmental harm and the other negative externalities associated with burning gasoline. Yet I can’t say to the attendant at the gas station, here is your 4 dollars, but I want to pay you another 4 dollars. I suppose I could go home and write a cheque to the British Treasury, but that doesn’t really work either. What we have to do is engage in institutional reform. Until the public as a whole says that they don’t want artificially low prices for gasoline, but rather want a fair price, meaning a price that will look after the climate as well, we are not going to get very far. We need institutions that are powerful enough to persuade governments to increase the cost of gasoline.

GSI: The recent collapse of the WTO’s Doha round talks reveals just how hard it is to achieve positive subsidy reform, even at a relatively modest scale. Do you see any reason to be optimistic that we will see reform of those subsidies that are frustrating attempts to mitigate climate change?
NM: I do see reason for optimism. In the United States, for instance, it used to be nearly impossible for the government to raise the price of gasoline. But during the last six months gasoline has increased in price, and while people have grumbled and complained, they haven’t marched in the streets, they haven’t demonstrated on Capitol Hill. On the whole, there seems to be a quiet message coming out from the American people that yes, they will put up with a steady, slow increase in the price of gasoline. How far that will go, however, I’m not sure. I don’t know what the tipping point will be. But I believe that as energy prices rise, and we become more conscious of the problems associated with climate change, the more the public will be willing to accept an increase in fuel prices, provided that it is phased in over a lengthy period of time.
Keep in mind that the money saved by not subsidising fossil fuels can be spread to other parts of the economy, so citizens do not need to lose out. Were these subsidies to be phased out, that would open up huge markets for super-efficient cars, for public transportation, for anti-pollution measures of many a sort, and for additional actions to curb climate change. Moreover, the government savings would enable major slashing of budget deficits, big increases in funding for health and education, and lots of other fine initiatives.

Norman Myers has served as an adviser to many governments, international agencies and academic bodies, including the United Nations, the World Bank, and the White House. In 2001 he published Perverse Subsidies, one of the most comprehensive accounts of subsidies and the harm they can cause. He is currently completing a new book called How Institutions Block Our Road to Sustainability.