Monday, 6 October 2014

The myth of subsidised carbon fuels

The myth that fossil fuels are subsidised by government has become common sense in recent years. It's based upon a deliberate confusion between subsidy and tax. A tax is money taken from person A and given to person B. It's most commonly understood in terms of taxes we pay the government: VAT, NI, Income tax, fuel duty, ... Another way to understand tax is in terms of the rentier concept. A rentier is a person collecting tax. In this 2nd definition, a landlord can be seen as taxing his tenants. A subsidy is more complex than tax. Subsidies may be a direct payment made from government to industry. An example of such may be loan guarantees, to the extent that the guarantee lowers the rate at which capital is borrowed, or reduces insurance that may have to be taken out. A subsidy can also result when government regulations mandate that one industry makes payments to another. Such examples happen in electricity generation. Wind and solar electricity having preferential access to the grid at guaranteed prices. This forces higher costs other generators. For example CCGT (gas) plants must be frequently turned on and off as wind generation rises and falls. It takes 50 minutes or so for such a gas plant to warm up before it is generating electricity. CCGT owners pay additional costs in reduced efficiency of fuel, labour and capital.

Let's compare actual taxes on fossil fuel with supposed subsidies

With rough calculations I calculate the UK taxing carbon fuels, at least, 3 times more than it subsidises them.

These are UK estimates.

Various UK taxes on fossil fuel

£ bn
Fuel duty (2009):25.89
VAT on duty (2009):3.88
Carbon tax (2013):2.28
VAT on electricity (2012):0.75
Total tax32.81
Subsidies (2013):11.25
Tax - subsidy21.56

Some assumptions:

  • 27.30% = percentage of carbon in CO2
  • UK carbon tax = £18/tonne of carbon.
  • Fossil fuel subsidies represent 0.45% of GDP (BBC)
  • UK GDP ~ £2500 bn.
  • 75% of UK electricity is generated from fossil fuels
  • VAT on electricity is 5%, payable only by domestic users.

2013 UK Greenhouse Gas Emissions & estimated carbon taxes

(MtCO2)C tax (bn)
Other solid fuel10.20.050
PS: I have little idea how the BBC work out that fossil fuels are subsidised to the tune of 0.45% of GDP. A big part of the subsidy seems to be for taxes which we don't pay! What will the bureaucratic newspeak machine tell us next: that the UK subsidise the labour market by X% because British workers don't pay 100% income tax?
In the UK, for example, value added tax (VAT) on gas and electricity is 5% rather than the 20% charged on most other goods
Let's remember that energy is both the master commodity, and a major factor in determining labour productivity. Energy taxes are a direct tax on the whole economy and upon future productivity increases. [see: How did we British get our empire?]


1 comment:

  1. Hey I really appreciate your comments and genuinely do value your knowledge.

    You have a reference there to James Delingpole which is a worry and close connections with Nigel Lawson.