Sovereign Debts in a Fossil-Fueled World

Transition away from fossil fuels toward new alternatives is not going smoothly. Proponents of alternatives confront a powerful industry with longstanding incentives and favorable tax policies, suggests analyst Will Hickey. Around the globe, economic struggles and immediate profits take priority over development of alternative energies. Emerging economies are in a race to catch up with the living standards of developed economies. Advanced economies – steeped in debt, with infrastructure and tax policies built around fossil fuels – resist innovation on new fuels or efforts to stem climate change and pollution. Hickey suggests that “Most world governments are so compromised with the fossil-fuel industry they cannot easily walk away without leaving their financial coffers worse off as the true costs of energy are hidden in a producer and consumer subsidy labyrinth that promotes the addiction.” Eliminating subsidies for the fossil-fuel industry, highlighting the true costs, would speed up the development of alternative energies. – YaleGlobal

Sovereign Debts in a Fossil-Fueled World

Governments refuse to tally true costs of fossil fuels and fail to escape industry dependence
Will Hickey
Tuesday, April 8, 2014

Clean fuel retreat? German Chancellor Angela Merkel faces pushback on clean energy (top); India counts on coal power for growth

DAEJEON: The obvious switch to alternative energy – solar, wind, geothermal, hydro – in a carbon-intensive world is not as straightforward as one might think. The fossil-fuel industry is powerful, its oil and coal companies generating revenue of several trillion dollars a year. Downstream energy producers, including refineries and power generation plants, are also heavily levered to the fossil-fuel industry, adding to the difficulty of changing over to alternatives. Government incentives, infrastructure building and tax policies have largely been built on facilitating fossil fuels well into the future.

Around the world, cheap, dirty fossil fuels are making a comeback after the economic crisis. Recently, for example, Exxon-Mobil has disclosed a risk assessment noting climate change, but is not altering growing production demand.

In numerous countries, issues such as peak oil, hazardous pipelines, climate change and smog have become afterthoughts, not seriously addressed once the tax breaks, producer incentives and government backstops have been ensured to this industry to keep the energy and profits flowing. The UN Intergovernmental Panel on Climate Change predicts dire consequences for the planet if fossil-fuel usage continues to grow unmitigated.

The fledgling solar industry has threatened the old guard of fossil fuels in both Arizona and Spain, both areas that receive considerable sunshine each year measured in cloudless days per year.

In Arizona, photovoltaic solar panelusers were recently asked to pay a special tax on installation to offset financial guarantees long ago made to traditional electricity generators by the Arizona state legislature to connect remote rural areas to the grid. Namely, the success of solar panels in this desert state was crimping the investment paybacks of the utility generators due to diminishing demand of coal and gas-fired power, leaving the real possibility of “stranded assets” if citizens did not pay back the initial investment outlays, or what may be called energy “producer subsidies.”

Similarly in Spain, the government is reneging on guarantees made before the economic crisis to encourage people to invest in solar panels with electricity net generation plans – buying home-produced solar energy at a pre-determined price. Spain, with outrageously high unemployment and bloated social spending deficits, cannot now ensure the buyback promised for clean energy and is throwing the efforts of alternative energy production under the bus due to pressing economic needs.

Japan, with huge public outcry over Fukushima nuclear power plant meltdown in March 2011, is now being forced to return to a fossil-fuel model of coal and gas-fired electricity generation that for years was being replaced by nuclear power. Japan’s reversal on nuclear to fossil fuels sends a strong message: Nuclear energy is too dangerous to be a reliable power supply.

In the last German election, climate-change laws such as Klimaschutzgesetz were largely absent in the debate. Yet pragmatic German Chancellor Angela Merkel is being forced by regional states such as Schleswig-Holstein under a policy of Energiewende, or “energy transition,” to increase offshore windpower to 7.7 Gw from the 6.5 Gw applied for using subsidies. Previous clean energy gains made using subsidies are proving costly, whereby rollbacks to fossil fuels are seen by businesses as a cheaper way to facilitate the export machine.

Likewise, the 2013 election of South Korea's Geun-Hye Park was ensured by her promises to labor unions to invigorate infrastructure projects including airport expansions, wider roads and bigger ports, all of which are fossil-fuel intensive.

China’s heavy addiction to fossil fuels, mostly coal for electricity generation, is proving to be an environmental albatross that’s out of control. The over-reliance on sulfur-heavy coal creates jobs but allows wasteful, inefficient, subsidized state-owned heavy industry to maintain the status quo without adapting structural changes. Switching to alternatives such as solar and wind is expensive and unproven. While China has scuttled most of its photovoltaic energy subsidies in the anticipation that consolidation of the solar industry will lead to more efficiency, they have not done so accordingly with oil and coal mining companies, which would represent a monumental sea change in energy. It’s too early to tell if solar panel production in China is really about increasing its own footprint with alternative energy or disrupting western solar-panel markets with product dumping. Decisions made about Chinese energy policy in Beijing are more about immediate political stability and not long-term energy changes, though leaders are aware uncontrolled smog may lop some percentage points off economic growth.

In the United States, Obama’s “all of the above” energy approach tends to give bigger impetus to more utilization of fossil fuels, not to alternatives. The issue of shale gas and fracking to produce cheap methane is arguably highly damaging to large swaths of the environment and long-term groundwater contamination. However, the return-on-investment produced generates much larger profits than wind, hydro or solar, which have longer payback timelines. While natural gas is touted as “fossil-fuel light,” it is still a carbon-based energy source and, if kept artificially cheap due to polluting production policies, runs the risk of becoming a permanent transition energy against alternative-energy adaptation.

If Obama approves the Keystone XL tarsands oil pipeline this year, transporting some of the most toxic oil on earth from Canada to Texas, the message will be that the world is beyond any hope of change to alternatives. Already the US, especially California, is suffering from long term drought and extreme weather conditions.  

The list goes on and on. Indonesia is increasing electricity production by bringing up to 15 coal-fired power plants online this year and seeks better technology to extract coal-bed methane gas from existing oil projects in its surrounding deep seas. Yet, Indonesia as an island archipelago risks much with global warming.

Brazil and India are also bringing more coal-fired projects online. If the World Bank refuses to fund these polluting projects, other countries, particularly in Africa, can find a willing partner in an emerging China that has money to invest and technology to transfer without social or environmental strings attached in exchange for long-term natural resources.

In fact, China is one of the world’s largest exporters of turnkey coal-fired plants for electric power generation. Practically every country’s national growth plan today, from Angola to Vietnam is predicated on continued and exponentially growing demand for fossil fuels. As the former Dean of MIT Sloane School Lester Thurow once said about economics policy: “singularly, this would make sense if one country were doing it but the problem arises in aggregate, when ALL countries are doing it.” And all countries are indeed pursuing fossil-fuel energy production, with the idea that cheap energy stimulates and underpins economic activity, especially export-led activity.

Most world governments are so compromised with the fossil-fuel industry they cannot easily walk away without leaving their financial coffers worse off as the true costs of energy are hidden in a producer and consumer subsidy labyrinth that promotes the addiction. Reducing subsidies would begin to reflect the true costs of fossil-fuels, forcing a switch to alternative energy.

Yet, the social spending of sovereign debt issues and mass unemployment are so problematic in many developed and developing economies that a default to cheap, polluting fossil fuels is a no-brainer.

The symbiotic relationship then between sovereign state and fossil-fuel producer is only drawn closer during uncertain economic times. The excuse is to keep economies competitive, but at what cost? More than ever before, politicians refuse to make hard decisions that are unfavorable to public finances.

 

Will Hickey is associate professor at Linton Global College in Daejeon. 

Copyright © 2014 The Whitney and Betty MacMillan Center for International and Area Studies at Yale

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