The Real Price We Pay for Fossil Fuel Energy

Did 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 urge 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. 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.

You 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 get more than 80 percent of their revenue from two sources: income taxes and consumption taxes (source: StatsCan). Who pay the government those incomes 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.

According the IMF study and the additional data they provided to me, Canada used $26 billions to subsidize energy 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.

Derek Wong is a Toronto based sustainability consultant. See contact info and more posts like this at Special thanks to the International Monetary Fund for providing additional data for these calculations.

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