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The IMF Tells a Half-Truth

May 20, 2015

On May 18 the International Monetary Fund (IMF) published a report titled “How Large are Global Energy Subsidies?” The question is a bit misleading: most readers, when they see the word subsidy, probably tend to think of tax breaks or cash gifts to specific industries. The report, however, uses the term mostly to refer to environmental externalities—and not ones tied to all energy use, but ones related to fossil fuel combustion in particular.

An economic externality is an impact of a commercial activity that is not reflected in the prices of goods or services traded. There can be positive externalities: if I buy organic, responsibly farmed food, I usually expect to pay more—thus the beneficial impact of my food choice upon the environment isn’t reflected in a price that would reinforce my behavior; just the opposite is true. But far and away most externalities are negative: companies are always looking for ways to make society as a whole clean up after them so that they don’t have to pay the full costs incurred by their activities. Indeed, John Michael Greer has convincingly argued that industrial capitalism is, in effect, a negative externality-generating machine: the faster it goes and the bigger it grows, the more externalities it spews out for society as a whole to try to mitigate.

It’s certainly helpful to have an accounting of the externalities of our collective fossil fuel consumption. But the choice of the word “subsidies” over the more precise “externalities” makes a difference: governments can cancel subsidies in the forms of tax breaks and gifts, but they can’t so easily cancel fossil fuel externalities without curtailing fossil fuel consumption—and that’s a big job, if they’re to do it in a way that doesn’t entail the rapid, uncontrolled collapse of society.

The take-away message of the IMF report for most readers would seem to be, “It costs us so much to burn fossil fuels ($10 million per minute, according to authors David Coady et al.) that we would save enormous sums by transitioning to alternative energy sources.” But there is a lot of long, hard work involved in actually doing that. An across-the-board energy transition can’t be accomplished with a simple policy declaration (the way a tax break can be rescinded, for example). The report notes that, of all nations, China has the highest externalized energy costs as a result of burning so much coal. But how else could China produce half the world’s steel and cement—with solar-powered blast furnaces and cement kilns? In reality, China can substantially reduce its energy-related environmental externalities only by shrinking its industrial output. It can nibble around the edges of the problem by shifting to more renewable electricity, but electricity is only about one-fifth of all energy consumed globally. And building massive numbers of solar panels and wind turbines would require a ramping up of high-temperature industrial processes (production of glass, steel, aluminum, cement, and silicon wafers) that currently rely on fossil fuels.

The IMF evidently wants policy makers to think fossil fuels are harmful and costly. Good: that’s true, and it’s helpful to know. It would be even better if this prestigious economic organization were to admit that eliminating the local pollution and global climate impacts of our current energy regime will require policy makers to do the very thing they least want to do: curtail and reverse economic growth. This in turn would probably entail redesigning financial and monetary systems so they do not require growth, supplementing GDP with quality-of-life indicators, rationing energy with a tradable quota system, enacting policies to gradually reduce population, and directing an ever-increasing share of continuing fossil fuel consumption to the industrial processes necessary to build the slower, more localized, renewable energy infrastructure of the future.

Evidently the IMF wants to spoon-feed its audience a little truth at a time. Only the easy bits are suitable now. It will save the hard truths for . . . when, exactly?

Air pollution image via shutterstock.

  • EVHappy

    Well put! Thank you for including the part about slowly decreasing population. That is the number one parameter when it comes to living in balance with what nature can provide. Seven billion people, even living several times less extravagantly than the “modern” Westerner, require massive amounts of fossil fuels to drive all the other critical resources into deep overshoot. It is only a question of time.

  • Murray Duffin

    The argument about curtailing and reversing economic growth as the only way to reduce fossil fuel consumption is a dog that just won’t hunt. The present USA economy could operate on less than 1/3rd of the energy it now uses if energy efficiency were set as a primary goal, and transitioning to an energy efficient economy would also create jobs and improve the economy. Europe is already much more efficient, so has less to gain. China OTOH is seriously less efficient and has great opportunity. The needed efficiencies could be realized fairly rapidly, easily over a 30 to 40 year time horizon. The argument about having to burn fossil fuel to create the renewable energy systems we need also needs to be examined. As an example, use fossil fuel to build and run one solar cell factory. Use the output of that factory for the first n months to supply the energy to build and operate the second factory, etc. By cascading the use of the renewable energy, fossil fuel only has to initiate the conversion. It can then be made self sustaining.

  • Fred_Unger

    Those externalities are indeed direct subsidies for the fossil fuel industries. There is an alternative to curtailing the use of fossil fuels that virtually all economists support – tax those externalities to reflect their true cost to society and level the energy playing field.

  • Shodo

    Truth is truth. Being unpopular does not make it false. We will not survive (due to climate change) without reversing “economic growth.” However, you are right about the cascading effect.