Are Cheap Fossil Fuels Really a Such a Boon to the World’s Poor?
How can we make life better for the world’s poor? Environmentalists often tell us that one way would be to slow climate change by cutting fossil fuel use. They warn that the poorest people in the poorest countries are likely to bear the brunt of rising sea levels, droughts, and storms. Carbon taxes or other policies that would raise the prices of fossil fuels would help by reducing demand for coal and oil, spurring investment in green alternatives.
Skeptical environmentalist Bjørn Lomborg seems to think otherwise. Writing recently in The New York Times, he argues that people who care about the world’s poor should work to lower the price of fossil fuels, not raise them. He points out that 3.5 million people around the world die from indoor air pollution caused when they burn wood, dung, and other traditional fuels in open fires or leaky stoves to cook and heat their homes — more than die from outdoor air pollution. “There’s no question that burning fossil fuels is leading to a warmer climate and that addressing this problem is important,” he writes, “but doing so is a question of timing and priority. For many parts of the world, fossil fuels are still vital and will be for the next few decades, because they are the only means to lift people out of the smoke and darkness of energy poverty.”
Is Lomborg right? Although we should not dismiss the problem of indoor air pollution lightly, I think that much of what he says fails to stand up to scrutiny.
Many of the poor already have cheap fossil fuels — to their detriment
The first flaw in Lomborg’s argument is his disingenuous failure to mention that many of the world’s poorest countries already keep fossil fuel prices low with heavy subsidies. Indonesia, Pakistan, Egypt, Yemen, and Venezuela are just a few examples. Far from being a boon for the poor, a recent International Monetary Fund report sees these subsidies as an unmitigated disaster.
Part of the problem with fuel subsidies is that most of their benefit accrues to non-poor households. According to IMF data, households in the top quintile of the income distribution, on average, get 61 percent of the benefit of gasoline subsidies, compared to just 3 percent for the poor. The imbalance is almost as great for subsidies to propane and diesel fuel. Only in the case of kerosene, which many poor households use in place of electricity for light and cooking, do fuel subsidies come close to hitting their target. Even for kerosene, households in the lowest income quintile get just 19 percent of total benefits.
Moreover, the IMF points out, fuel subsidies are a huge burden on the already strained budgets of many poor countries. They eat up 14 percent of government revenues in Indonesia, 19 percent in Yemen, and an alarming 30 percent in Egypt. Those funds would be much better spent on education, health care, public sanitation, and other programs more directly targeted toward the poor.
Carbon taxes for the poor as well as the rich
Although Lomborg’s article passes over third-world fuel subsidies in silence, if pressed, he might agree that they are bad policy. In that regard, his argument is a little more subtle than that of “affordable energy” advocates like the American Petroleum Institute, which favors anything at all that keeps fuel prices low. In fact, elsewhere, Lomborg has written in favor of a modest carbon tax as one component of climate change policy for the developed world, with an emphasis on raising funds for clean energy research as much as on providing an incentive for conservation.
What about poor countries? Would it be enough for them to end outright subsidies of fossil fuels, or should they also impose taxes or use other policies to raise energy prices above the unsubsidized market price to reflect their local and global environmental harms? I think the case for higher fossil fuel prices applies to poor countries as well as rich ones.
First, remember that most fuel, even in poor countries, is consumed by households with incomes that are relatively high. Higher prices would give them meaningful incentives for conservation in transportation choices, construction practices, and industrial technologies.
Also, as in wealthier countries, fuel taxes could provide revenues to support targeted programs for helping the poor in ways that are consistent with sound environmental policy. Where indoor air quality is the problem, some of the revenues from fuel taxes could go toward electrification and cleaner and more efficient stoves for burning traditional fuels. Where use of wood as a household fuel is a cause of deforestation, as it is in some poor countries, fuel tax revenues could be spent partly on bringing electricity, gas, and other clean energy to poor neighborhoods and partly on reforestation and conservation.
Where Lomborg is right
Although I think Lomborg’s recent piece goes off the track in many respects, he is, as usual, right about some things. In particular, I agree with these two closely related points: that we are unlikely to see fossil fuels fully replaced by green energy anytime soon and that both advanced and developing countries need smarter energy policies.
Unfortunately, those parts of his message are likely to be obscured by the headline that The New York Times put on his op-ed: “The Poor Need Cheap Fossil Fuel.” That headline is an open provocation to environmentalists and an aid and comfort to the affordable energy crowd.
Let’s try reconciling all of the themes raised in Lomborg’s article and in my comments by reframing them in this way:
- Yes, fossil fuels are going to be with us for a while. For that reason, a smart energy policy needs to focus on shifting the mix of fossil fuels, so far as is possible, to relatively clean natural gas and away from relatively dirty coal, while also keeping the pressure on for energy conservation across the board.
- Price signals are one way to keep the pressure on. A carbon tax is a somewhat crude way to penalize relatively dirty fuels, in that climate change is not the only issue. We should be concerned, too, about sulfur and mercury from burning coal, urban air pollution from gasoline and diesel fuels, and local environmental risks of fracking for natural gas. Still, a carbon tax serves at least roughly to penalize the dirtiest fuels the most.
- And yes, no environmental policy is going to be successful politically if it is seen as a matter of saving the earth versus helping the poor. Fuel subsidies have to go, since, realistically, they are a burden, not a boon, to the poor, but at the same time, some of the budgetary economies from the elimination of subsidies and some of the revenues from carbon taxes should go toward smarter policies to help the world’s least advantaged.
Those ideas might help point us toward policies that are good for both the poor and the planet.
Ed Dolan is Wall St. Cheat Sheet’s in-house economics professor. He is the author of an acclaimed series of textbooks, Introduction to Economics, and Ed Dolan’s Econ Blog. Don’t miss: Quantitative Easing: Your Ultimate Cheat Sheet to the Monetary Policy.
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