During the break I thought it would be nice to catch up on some blogging. The first topic I want to cover is that questionable International Monetary Fund (IMF) “subsidy” survey we constantly see quoted by anti-pipeline and climate change activists. The IMF Survey (authored by Coady, Parry, Sears and Shang) was mostly ignored in Canada when it came out in 2015, but has been used as cudgel by anti-pipeline activists since the Trudeau government bought the Trans Mountain Pipeline this year. The IMF survey web page claims that worldwide energy “subsidies” were $5.3 trillion in 2015 with Canadian “subsidies” being $46.04 Billion. As I will demonstrate in this blog post, these numbers are at best questionable and at worst designed to misinform presumably for political purposes.

A quick note: a lot of people have described this document as a formal IMF Report which represents the viewpoint of the IMF. This is not the case. The document is actually a working paper and the IMF is explicit about that fact. Here is the disclaimer they put right at the top:

IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate.[bold is their emphasis not mine] The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

So the first thing to recognize is that this is not an IMF report, it is a survey produced by employees of the IMF for discussion purposes. Since the survey is about subsidies it seems obvious to first define a “subsidy“. The Google dictionary definition of a “subsidy” is:

a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive.

As you can see, traditionally subsidies are viewed as financial help from government either in the form of money or a reduced tax rate to encourage an activity. The IMF survey doesn’t use that definition of a subsidy. Here is how the IMF survey defines “subsidies” in this survey:

A key factor in estimating the magnitude of current subsidies is which definition of “subsidies” is used. Pre-tax consumer subsidies arise when the price paid by consumers (that is, firms and households) is below the cost of supplying energy. Post-tax consumer subsidies arise when the price paid by consumers is below the supply cost of energy plus an appropriate “Pigouvian” (or “corrective”) tax that reflects the environmental damage associated with energy consumption and an additional consumption tax that should be applied to all consumption goods for raising revenues. Some studies also include producer subsidies, which reflect the net subsidy given to energy producers (for example, through access to subsidized inputs, preferential tax treatment, or direct budget transfers) although these are typically much smaller than consumer subsidies (OECD 2013).

So they include traditional governmental subsidies but add what economists have traditionally referred to as “externalities” and as a bonus the “additional consumption tax” which is basically what the authors believe the tax rate should be versus the actual tax rate applied by government (a bonus fudge factor).

Externalities in Economics are social and environmental costs to the community associated with an activity. Economists spend a lot of time trying to establish the cost of externalities because those costs are not always evident (what is the cost to the community of spilling soap into a river as one example?).

Reasonably speaking we could probably end this blog post here. The report we keep reading about is not really the viewpoint of the IMF and it doesn’t address what an economist would recognize as a “subsidy”. Simply speaking we should simply ignore it when activists cite its results. But what would be the fun with that? Instead, let’s look at the choices made in this “survey”. Let’s do this by considering the Canada numbers. From the spreadsheet associated with the report we get these values (in billions of 2015 dollars). The total “subsidy” in 2015 was reported as $46.04 billion. The breakout was:

• Pre-Tax subsidies – $1.4 billion – 3% of IMF total
• Global Warming – $17.20 billion – 37.4% of IMF total
• Local air pollution – $6.05 billion – 13.1% of IMF total
• Congestion – $14.89 billion – 32.4% of IMF total
• Accidents – $2.08 billion – 4.5% of IMF total
• Road Damage – $0.88 billion – 1.9% of IMF total
• Foregone Consumption Tax Revenue – $3.53 billion – 7.7% of IMF total

According to the spreadsheet the actual 2015 “subsidy” for the entire fossil fuel industry in Canada was about $1.4 billion made up mostly of preferential tax treatments.

The remainder of the total (97% of the IMF survey “subsidy”) consists 89.3% of externalities and 7.7% of that fudge factor for taxes. I don’t have the patience to deal with the tax side so let’s look at those externalities.

The real flaw in the IMF “subsidy” evaluation is the externalities it considers as being the responsibility of fossil fuels and then how it accounts for those numbers. Unfortunately, the IMF study doesn’t actually give details in this report of how they generate their numbers. The spreadsheet provides the conclusions not how they were generated. It appears that most of the numbers are derived from other reports; the most important being Getting Energy Prices Right from Principle to Practice. Not surprisingly this report was co-authored by one of the IMF survey’s co-authors Parry (with Heine, Lis and Li).

This secondary report provides some of the meat underlying the “subsidies” and some of them are pretty odd. Let’s look at that “Congestion” and “Accidents” values ($14.89 billion and $2.08 Billion for Canada in 2015, respectively). Here is what that report says about congestion and accidents:

Traffic congestion costs imposed by one driver on other vehicle occupants are approximated by using a city-level database to estimate relationships between travel delays and various transportation indicators and extrapolating the results using country-level measures of those same indicators. Travel delays are monetized using evidence about the relationship between wages and how people value travel time. Accident costs are estimated based on country-level fatality data and assumptions about which types of risks drivers themselves might take into account versus those they do not, and extrapolations of various other costs, such as those for medical expenses, property damage, and nonfatal injury.

The easiest way to dismiss this number is to do a simple thought experiment. Imagine if magically every internal combustion engine were converted to electric engines would the congestion or accident rates change? The answer is, of course, no. This tells us that the externalities are not associated with the engine that moves the vehicles but the vehicles themselves. The subsidy has to do with our transportation infrastructure and urban design policies not fossil fuels. The same argument can be made for road damage. All these costs will occur irrespective of the type of engine in our vehicles.

Now if you didn’t think this study was flawed already then take another quick look at the spreadsheet. Do you notice anything funny about the numbers? Look at the congestion, accidents and road damage values for most European countries? Apparently British drivers don’t have accidents because their “subsidy” for road accidents is zero. The same goes for Germany, Italy and Finland. But be careful not to cross the border into France because apparently they have car accidents in France. Oddly enough the supporting reports provide values for these countries, but for reasons unknown those costs didn’t get transferred to this survey.

While I have not been able to completely go through all the underlying supporting information for this study I have also noted what I would argue is another significant flaw. To the best of my ability (and if I am wrong I would encourage my readers to direct me to the research) the authors ignore the fact that the Canadian and provincial governments actually have excise taxes, surtaxes (and carbon taxes) on our fossil fuel consumption. In 2018, total taxes on gasoline were estimated at approximately $24 billion. That number does not appear to be applied against Canada’s “subsidies” (or our Foregone Consumption Tax Revenue”) in the IMF survey math. If this is the case that represents a pretty significant oversight in my mind.

To summarize, there is a reason why economists have different words for different concepts. Because the correct language allows for a better understanding of the concepts under consideration. Economists differentiate between “subsidies” and “externalities” and have defined both for the purposes of policy discussions. To put this into language my readers can understand let’s think of this in biological terms.

In biology, dogs and cats are both mammals but they are not the same species. If I looked at a Labrador Retriever and claimed it was a Persian cat virtually every person reading this blog post would know I was making things up. If I insisted that every reader should consider a Labrador Retriever to be a Persian cat readers might ask why I was making such an obvious misstatement. They would look for some other reason why I am trying to play with language and would suspect that there was some underlying reason I was making such a clear misrepresentation.

The challenge with topics like fossil fuels and climate change is that few Canadians have studied economics. Because of this fact few will recognize the significant difference between a subsidy and an externality. The IMF survey authors calling an externality a subsidy is just as valid as the IMF survey authors calling a Labrador Retriever a Persian cat. It is not the correct use of the language and no matter how many times they choose to do so a dog is not a cat. The simple fact is that by using the correct language of economics these activist scientists would not be able to make a persuasive or effective case for the political goals they seek to achieve and so have decided to re-define the language to better sell their agenda. So no, Canada does not provide a $46 billion “subsidy” and globally we don’t provide a $5.3 trillion “subsidy” for fossil fuels. There is a reason the IMF calls this a “Working Paper” and does not stand behind its results. Perhaps the activists should consider that when citing these numbers.