Renewable energy advocates have long argued that governments should dump taxpayer support for fossil fuels and embrace cleaner technologies.
During a recent episode of the ABC’s Q+A program, an audience member suggested the deck was stacked against clean energy, with the equivalent of US$29 billion a year handed out to subsidise “fossil fuel extraction and production of energy”.
But that notion was rejected by National Party senator Matt Canavan, who said he didn’t accept the premise of the question, or the figures.
“There’s no subsidisation of Australia’s fossil fuel industries,” Senator Canavan said.
Is there no government subsidisation of Australia’s fossil fuel industries? RMIT ABC Fact Check investigates.
Senator Canavan is drawing a long bow.
There are many ways to define “subsidisation”. The Q+A audience member who questioned Senator Canavan cited figures from a 2019 International Monetary Fund (IMF) working paper which found fossil fuels in Australia received US$29 billion in subsidies in 2015.
That study relied on a very broad definition of “subsidy”, among other things counting social and environmental costs typically not borne by fossil fuel producers such as localised pollution, greenhouse gas emissions and traffic congestion.
Other definitions are narrower, focusing on direct or indirect transfers from governments to producers or consumers to encourage production or consumption.
Even on a narrower definition, Australian fossil fuel producers are to some degree “subsidised” by federal and state governments, with a range of budget spending programs, tax concessions and other forms of assistance on offer.
Fossil fuel companies receive fuel tax credits to pay them back for excise paid on fuel they use, tax breaks for exploration, and accelerated depreciation for capital spending as well as state spending to encourage specific projects, among other benefits.
Untangling the complex web of federal and state taxation and spending programs is difficult, as experts conceded.
And while there is some disagreement about whether all such benefits should be counted as “subsidies”, it is a stretch to argue there is “no subsidisation”.
Whether such benefits are in the public interest, or whether the renewable sector is subsidised to a greater or lesser degree, are different questions, and not the subject of this fact check.
What is a subsidy?
In broad terms, subsidies can involve directly or indirectly using public finances, public resources, or regulatory mechanisms to lower production costs, thereby encouraging production to be higher than it otherwise would have been.
Subsidies can also directly or indirectly target consumers with incentives to encourage consumption.
In 2019, the United Nations Environment Program recommended measuring fossil fuel subsidies according to the definition contained in the World Trade Organisation’s Agreement on Subsidies and Countervailing Measures. It said this definition was “the most widely recognised” internationally.
The agreement states that a subsidy exists when a government provides “a financial contribution” that confers “a benefit”.
It specifically covers: direct payments; forgone revenue (for example fiscal incentives such as tax credits); the provision of goods or services; and any support from income or price regulation.
The fossil fuel industries
The Organisation for Economic Cooperation and Development (OECD) defines fossil fuels as simply “coal, oil and natural gas”.
“By extension”, the International Energy Agency explains, “the term fossil is also applied to any secondary fuel manufactured from a fossil fuel”.
Fact Check will assume fossil fuels include coal, oil and natural gas, as well as secondary fuels such as petrol and LPG.
Senator Canavan made his claim about the “fossil fuel industries” in response to a question about “fossil fuel extraction and [the] production of energy”.
Energy generation relies on the consumption, rather than production, of fossil fuels.
However, fossil fuel fired power is often included when fossil fuel subsidies are measured.
In fact, the UN Environment Program report explicitly recommends it, since “[s]ubsidies for electricity and heat generated from fossil fuels incentivise overconsumption of fossil fuels”.
Fact Check has briefly considered some forms of government assistance that apply to fossil fuel electricity generation, bearing in mind that the term “fossil fuel industries” is somewhat difficult to define.
As mentioned, Senator Canavan was asked by an audience member about a 2019 report by the IMF examining subsidies for fossil fuels and fossil-fuelled electricity.
The $US29 billion figure contained in this report reflects the gap between what consumers currently pay for fossil fuels and what they would theoretically pay if prices reflected three things: the full cost of supply; consumer taxes; and the cost of any “adverse effects on society”.
Consequently, the IMF counts “negative externalities” in its definition. These are costs imposed on society and the environment that are typically not borne privately by fossil fuel producers, including traffic congestion, road accidents, localised air pollution and greenhouse gas emissions.
However, the UN Environment Program report found the IMF’s approach was “not widely accepted”.
David Pearce, CEO of the Centre for International Economics, told Fact Check it was hard to say who was benefiting from such a “subsidy”:
“If I’m driving my car using fossil fuels, but I’m not paying a tax for that, who’s getting the subsidy?” he said.
Senator Canavan rejected the IMF figures and its approach.
“I don’t accept the facts that were put in the question,” he said.
He suggested a better arbiter on the question of fossil fuel subsidisation was Australia’s Productivity Commission, a government-funded research and advisory body.
“I think the Productivity Commission here locally knows a lot more about the subsidies given to our different industries,” Senator Canavan said. “And they have rejected that.”
What the Productivity Commission actually says
The Productivity Commission’s Trade and Assistance Review provides an annual snapshot of tariffs, subsidies and tax concessions across various industry groupings.
But as the commission explains in its 2018-19 review, its estimates “do not capture all Australian support to industry”.
“The commission’s assistance estimates cover only those measures that selectively benefit particular firms, industries or activities, and that can be quantified given practical constraints in measurement and data availability. Consequently, there are some significant government programs that selectively confer industry assistance, but cannot be appropriately estimated.”
The commission, for example, does not measure the effects of government spending preferences, regulations, or arrangements with a “broader public objective” but which may benefit particular industries, such as transport infrastructure.
In addition, it only considers federal subsidies, although it notes that state and territory government assistance — to the primary production and resources industries in particular — “has been considerable”.
As a result, the report says its estimates “do not cover the full extent of assistance to industry and the gap between reported values and actual assistance is potentially large”.
Nor does the commission provide a specific breakdown of support provided to “fossil fuel industries”. As the commission told Fact Check in an email: “The commission does not have a breakdown of subsidies (or budgetary assistance) for the fossil fuel industry in its Trade and Assistance (TAR) review, but does produce estimates for tax concessions and outlays for mining and the [manufacturing] industry sub-division of petroleum, coal, chemical and rubber products.”
The annual review also contains a relevant sub-division of the services industry, “electricity, gas, water and waste”.
Each of these three classifications covers more than just fossil fuel companies.
For these reasons, the Productivity Commission’s figures do not allow an accurate assessment of subsidisation of “fossil fuel industries”.
In net terms, the commission’s latest report shows the Federal Government provided around $12 billion in subsidies across all industries in 2018-19.
Of that, the mining industry received $335.5 million; the manufacturing industry sub-division of petroleum, coal and chemicals received $384.6 million; and the services industry sub-division of electricity, gas, water and waste received $90.3 million
These net figures account for the effects of Australian border tariffs, both positive and negative.
As the graph below shows, as a proportion of gross assistance, the bulk of those subsidies came in the form of tax offsets for research and development or funding to the CSIRO.
That CSIRO funding would cover, for example, the Mining Geoscience Team, which the agency says among other things contributed towards “improving … productivity in the mining industry”.
As noted, it is difficult to unravel the level of fossil fuel subsidisation from the commission’s figures.
However, the figures do suggest that — at least to some extent — fossil fuel industries are receiving government support that could be considered “subsidisation”.
Another approach is to examine some specific measures available to fossil fuel producers.
Fuel tax credits
These credits are paid to refund fuel excise or customs duty paid on fuel used in vehicles or machines that do not operate on public roads. As the Australian Taxation Office explains, the amount depends on the type of fuel, when it was purchased and what it is used for.
Tax Office figures for 2017-18 show that fuel tax credits are claimed by companies across all industries.
Coal mining was the single biggest beneficiary, accounting for roughly $1 billion (15 per cent) of the $6.8 billion total. The oil and gas extraction industry accounted for a further $110 million.
There is, however, some debate as to whether the credits represent a “subsidy”.
The justification for the rebate is that many users of big vehicles or machines are not using the roads, and therefore should not pay fuel taxes ostensibly imposed to pay for public roads.
This argument was made by Senator Canavan in his Q+A appearance. He said the credit was to refund fuel taxes paid by businesses not using the road system.
“The idea being that the petrol tax you pay at the pump is to help pay for our roads, but obviously the big trucks in our mines are operating off-road and on roads that they have paid for,” Senator Canavan said.
The Minerals Council, an industry body, has also argued that the credit should not be counted as subsidy.
This argument assumes that fuel excise represents a genuine “hypothecated” tax that should not be borne by non-road users, rather than a broader revenue raising tax imposed by the Federal Government.
It notes, “the mining sector is a prime beneficiary” of these credits, so “the measure could arguably be considered producer support since it lowers the cost of inputs used in the coal-mining and hydrocarbon sectors”.
At the very least, the rebate serves to cut the cost of fuel inputs for fossil fuel industries, representing a transfer from taxpayers in the form of forgone revenue that effectively lowers the cost of production.
Miranda Stewart, Director of the Tax Group at Melbourne University Law School, said in her view the fuel tax credit represented a subsidy.
“The diesel fuel rebate reduces the cost of fuel business inputs for mining and agriculture, which are some of our largest emitting sectors, and this enables them to sell ultimately to export and domestic markets at cheaper prices so in this sense, there is a subsidy,” Professor Stewart said.
Research and development tax incentives
Another significant transfer to the fossil fuel industry comes in the form of the research and development tax incentive.
As with the fuel tax credit system, the question of whether the incentive — offering a tax offset for research and development activities — constitutes a “subsidy” is disputed.
The argument for the incentive is that research and development activities have broader economy-wide benefits that extend beyond the private interests of individual businesses.
The tax offset is designed to recognise this.
Mr Pearce said subsidies were usually designed with specific policy objectives in mind, but the “unintended consequences” of a policy such as tax concessions for research and development could be “that you do end up subsidising a particular industry relative to others”.
According to the Productivity Commission data, the mining sector (which as mentioned includes some but is not limited to fossil fuel producers) benefited to the tune of $288 million in 2018-19.
Coal, petroleum and chemical businesses collectively received $101 million in 2018-19. Electricity, gas, water and waste businesses claimed a further $41 million.
Although the tax break is widely available and is designed to encourage research and development with economy wide benefits, it too arguably fits the definition of “subsidisation”, given it results in forgone revenue directly lowering costs for private companies.
Fossil fuel producers also received a raft of other smaller payments that were included in the Productivity Commission’s figures that could be regarded as subsidies. For example, mining received $9.3 million in 2018-19 to encourage small companies to conduct mineral exploration, including for fossil fuels.
Meanwhile, electricity, gas, water and waste services received $8.9 million for the Carbon Capture and Storage Flagship Program, which the Government says funded the investigation of a potential storage network to capture carbon dioxide from “industrial plants or power stations”.
This included funding of up to $4 million to a private energy company to conduct a feasibility study into a coal-fired power plant in the Queensland town of Collinsville.
Other tax breaks
A briefing note from ANU’s Tax and Transfer Policy Institute, co-authored by Curtin University PhD candidate Maria Sandoval-Guzman and Professor Stewart, said subsidies for fossil fuel companies are built into Australia’s tax law.
These subsidies include an immediate tax deduction for expenditure on prospecting and quarrying, and faster depreciation of assets in specific industries; namely, gas supply, oil and gas extraction, petroleum refining and the primary production sector.
Each year Treasury produces a Tax Benchmarks and Variations statement that estimates how much “revenue the government doesn’t collect” due to “provisions in the tax system that apply an alternative treatment of particular taxpayers or forms of economic activity”.
Its 2019 statement showed that deductions for prospecting and quarrying cost taxpayers $200 million in 2018-19. Meanwhile, the cost of faster depreciation was either too small or not possible to estimate.
Critically, Senator Canavan did not distinguish between state and federal subsidies, referring only to “subsidisation”.
As noted, the Productivity Commission’s report only considers federal subsidies.
However, the states also allocate funding to fossil fuel industries in a manner that could be considered subsidisation.
For example, the Queensland Government has announced spending to expand the Abbot Point coal terminal to facilitate coal exports from the Galilee Basin.
The state’s 2016-17 budget papers make clear that this work was dependent on Adani’s Carmichael coal mine proceeding.
Fact Check has not considered state spending on fossil fuel industries in detail, except to reiterate the Productivity Commission’s position that previous state and territory assistance to industry “has been considerable”.
Although more recent calculations are not available, the commission found, for example, that state and territory governments’ assistance to industry amounted to around $4 billion in identifiable assistance in 2008-09.
It said this equated to around $184 per person, of which around 60 per cent went to the primary production and resources industries.
More from the experts
Mr Pearce, from the Centre for International Economics, said Australia had a complex set of tax and administrative arrangements that can be “quite hard to really finely unpick”.
However, he said even on the Productivity Commission’s own numbers, fossil fuel producers are “almost certainly being subsidised”.
“Just to a much smaller amount than the numbers you’re going to get from the IMF,” he said.
University of Queensland Professor of Economics John Quiggin adopted a broader definition of “subsidy”, more closely aligned with the IMF report.
He said “by far the most important subsidy of the fossil fuel industry is the absence of a carbon price”.
“If we had a carbon price that reflected the social cost of CO2 emissions, generating electricity with fossil fuels would be uncompetitive compared to new solar and wind, with storage.”
Melbourne University economics professor John Freebairn said it was difficult to “square the circle” in terms of a reasonable definition of “subsidisation”.
Professor Freebairn said most of the tax benefits available to fossil fuel companies such as research and development tax concessions and accelerated depreciation of some assets were available to other industries.
He said the private costs and benefits faced by fossil fuel producers was “pretty close to a level playing field” compared to producers in other industries such as manufacturing.
In their briefing paper, Ms Sandoval-Guzman and Professor Stewart said arguments against transitioning away from coal, mining and gas into renewable energy often centred on the impact on employment.
They argue that government spending could be redirected away from tax subsidies for fossil fuels, such as accelerated depreciation for polluting heavy vehicles or equipment, or fuel subsidies, towards transitional job support, retraining schemes and strengthened regional industries in renewables.
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