The IMF says we can no longer afford the economic wastage of fossil fuels, turning the green energy debate upside down as world leaders plan a binding climate deal in Paris
The political noose is tightening on the global fossil fuel industry. It is a fair bet that world leaders will agree this year to impose a draconian “tax” on carbon emissions that entirely changes the financial calculus for coal, oil, and gas, and may ultimately devalue much of their asset base to zero.
The International Monetary Fund has let off the first thunder-clap. An astonishing report – blandly titled “How Large Are Global Energy Subsidies” – alleges that the fossil nexus enjoys hidden support worth 6.5pc of world GDP.
This will amount to $5.7 trillion in 2015, mostly due to environmental costs and damage to health, and mostly stemming from coal. The World Health Organisation – also on cue – has sharply revised up its estimates of early deaths from fine particulates and sulphur dioxide from coal plants.
The killer point is that this architecture of subsidy is a “drag on economic growth” as well as being a transfer from poor to rich. It pushes up tax rates and crowds out more productive investment. The world would be richer – and more dynamic – if the burning of fossils was priced properly.
This is a deeply-threatening line of attack for those accustomed to arguing that solar or wind are a prohibitive luxury, while coal, oil, and gas remain the only realistic way to power the world economy. The annual subsidy bill for renewables is just $77bn, trivial by comparison.
The British electricity group SSE (ex Scottish and Southern Energy) is already adapting to the new mood. It will close its Ferrybridge coal-powered plant next year, citing the emerging political consensus that coal “has a limited role in the future”.
The IMF bases its analysis on the work Arthur Pigou, the early 20th Century economist who advocated taxes to stop investors keeping all the profit while dumping the costs on the rest of society.
The Fund has set off a storm of protest. Subsidies are not quite the same as costs. Oil veterans retort that they have been paying ‘social’ taxes for a long time.
But whether or not you agree with the IMF’s forensic accounting the publication of such claims by the world’s premier financial body is itself a striking fact. The IMF is political to its fingertips. It rarely deviates far from the thinking of the US Treasury.
It is becoming clearer that last year’s sweeping deal on climate change between the US and China was an historical inflexion point, the beginning of the end for a century of fossil dominance. At a single stroke it defused the ‘North-South’ conflict that has bedevilled climate policy and that caused the collapse of the Copenhagen talks in 2009.
Todd Stern, the chief US climate negotiator, said the chemistry is radically different today as sherpas prepare for the COPS 21 summit in Paris this December. “The two 800-pound gorillas are working together,” he said.
Mr Stern claims that a constellation of states responsible for 60pc of global CO2 emissions are “already on board” for a binding deal, aimed at limiting the rise in carbon to 450 particles per million (ppm) and capping the rise in temperature to 2C degrees above pre-industrial levels by the end of the century. Climate scientists warn that we are currently on course for 4C degrees.
Some countries have been startlingly bold. Mexico has vowed to cut gases by 40pc within fifteen years – and Black Carbon by 70pc – if there is a binding accord. Gabon has promised to cut emissions to 62pc below the current trend path within a decade. The hold-outs are a diminishing alliance, struggling to make a moral counter-argument.
China has of course gone green with the zeal of the converted. “We are going to punish any violators who destroy the environment with an iron hand,” said president Xi Jinping in March.
Two coal-powered stations were shut down in Beijing that month. The last will be mothballed next year. Deutsche Bank expects China’s coal use to peak as soon as 2016, an unthinkable prospect five years ago.
The Communist Party knows its own survival is at stake. Anti-smog protests are spreading in the big cities, a political mass movement in waiting. “Under the Dome”, a documentary on the country’s toxic air and water, racked up over 100 million views on the internet within 24 hours two months ago. Beijing’s censors suppressed it in panic.