Understanding Fossil Fuel Subsidies Around the World, with Paasha Mahdavi

Notable quotes:

• Subsidies can serve the needs of the public when applied to various goods: “Fuel subsidies are kind of like public-service spending that the government does in order to boost the economy by keeping input prices low … subsidies are effectively part of a social contract between citizens and governments, especially in places where governments aren’t doing a good job delivering a lot of public services that they’re supposed to.” (4:43)
• Gasoline and diesel subsidies don’t benefit everyone: “There’s fairly straightforward evidence that the poor lose the most (in particular, the urban poor), especially because they’re not benefiting from the cheaper price to fill up their cars because they don’t have cars, and they’re suffering from the health consequences of subsidies.” (11:35)
• Addressing the durability of subsidy reforms can have long-lasting effects: “Reforms can be more durable if governments make what are called credible promises of increased public spending on other social outcomes, health outcomes, and labor outcomes, and try to get back to the story of why these subsidies exist in the first place.” (26:45)

Top of the Stack

• “Fossil Fuel Subsidy Reforms Have Become More Fragile" by Paasha Mahdavi, Michael L. Ross, and Evelyn Simoni
• “Why Do Governments Tax or Subsidize Fossil Fuels?” by Paasha Mahdavi, Cesar B. Martinez-Alvarez, and Michael L. Ross
• Human Nature: Nine Ways to Feel About Our Changing Planet by Kate Marvel
• “Climate Change and National Security” TEDx talk by Josh Busby

The Full Transcript

Daniel Raimi: Hello and welcome to Resources Radio, a weekly podcast from Resources for the Future (RFF). I'm your host, Daniel Raimi. Today, we talk with Dr. Paasha Mahdavi, associate professor of political science and cofounder of the 2035 Initiative at the University of California, Santa Barbara.

Paasha recently published a paper with colleagues that documents how governments around the world have tried—and in many cases failed—to reduce the gasoline and diesel subsidies they provide to their populations. These subsidies are often quite large, sometimes a dollar or two per gallon, and have enormous consequences for local politics, economies, the environment, and global climate change. Reforming them has been a goal of governments for decades but, as Paasha will describe, actually implementing those reforms poses major hurdles. Stay with us.

All right, Paasha Mahdavi from UC Santa Barbara, welcome to Resources Radio.

Paasha Mahdavi: Thank you, Daniel. I'm really happy to be here. I’m a big fan of the show.

Daniel Raimi: Thanks. Happy to have you, and big fan of your work, of course, which we'll be talking about today. You've done lots of work over the years on all sorts of topics, including the subject of our conversation, which is fossil fuel subsidies around the world. But first, I'd love to ask you the same question we ask all of our guests when they join us for the first time, which is how you got inspired to work on environmental issues in your life.

Paasha Mahdavi: So, it goes back to when I was a kid, which seems to be a running theme with a lot of your guests. For me, it's interesting: it was a story about the two sides of my family.

My father's younger brother—so, one of my uncles—was a metals and commodity trader. He worked in Iran at the time of the Soviet Union, and he taught me about the magic of things that we extract from the ground. Separately, my mother's two older brothers—so, two different uncles—were pioneers in solar thermal technology, and they taught me how we can tap into this seemingly unlimited power of the sun. So, as a kid, I was like, “This is amazing. We have an infinite fuel? We can do this?” And my uncle's like, “Well, sort of!” But I became fixated with energy and this idea that we could create, at some point, this perpetual energy system, which of course they later learned is not really possible because of physics. But I became really, really interested in it, even as a young boy.

In between them, these sets of uncles, was an untold story, to me at least, of how politics and economics shape how people use energy and natural resources. And so, when I went to college and later grad school, with a stop in between working as an energy consultant, I learned how markets and governments (in short, what we call a political economy), are as important, if not more, than the engineering or physics that the two of my uncles were doing, or a lot of the business side that my other uncle was doing—that these things are as important, if not more, in determining how humanity harnesses energy resources.

Daniel Raimi: That is super interesting. And where did you grow up? Did you grow up in California, or somewhere else?

Paasha Mahdavi: I did. I grew up in San Diego. I was born in Minnesota, funny enough, but moved when I was 10 months old or something. And so, you could imagine the idea of solar being fascinating to a boy growing up in Southern California. You're like, “It's sunny here all the time. Why aren't we using this for everything?”

Daniel Raimi: Right; totally. That's super cool.

Well, let's dive in now and talk about a paper that you recently published with colleagues that's in the journal Nature Climate Change. The name of the paper is Fossil Fuel Subsidy Reforms Have Become More Fragile, and we'll have a link to it in the show notes, so people can check it out. But I'd love to ask you to just start us off with some basics.

Why do governments subsidize fossil fuels? What are the main ways that they provide those subsidies, particularly to consumers, which is what we're mostly going to talk about today?

Paasha Mahdavi: There's a lot of literature on this that really goes back to the 1990s, when we started to see and really track fossil fuel subsidies. Throughout this conversation, I'm mostly going to focus on consumer-facing subsidies, and I'll say more about what that means.

But, to answer the question of why governments do this, a lot of the literature from people at the International Monetary Fund and the World Bank—initially folks like David Coady, Ian Parry, and Masami Kojima—showed that fuel subsidies are kind of like public-service spending that the government does in order to boost the economy by keeping input prices low. And then, it was later in the 2000s when a political scientist named David Victor pointed out that, well, look, there's a lot of politics entrenched here. This is not just an economics story, and subsidies are effectively part of a social contract between citizens and governments, especially in places where governments aren't doing a good job delivering a lot of public services that they're supposed to, such as high-quality roads, education, and healthcare—but at least they can give people cheap fuel.

So, this is a big thing that really explains why governments do this. And in a paper that we did with one of my coauthors on this paper, Michael Ross, along with Chad Hazlett, who's a professor of statistics at UCLA, we did this paper back in 2017 in Nature Energy that shows that that social-contract story is even stronger for people in oil-producing countries, where there's this expectation that the fuel that people are consuming, in the form of gasoline and diesel primarily, should be cheap, because fuel belongs to the people. We're producing so much oil; why should I have to pay a lot for it? So, there's a story here that emerges of a social contract that explains why governments began subsidizing fossil fuels.

And, to answer your question about how these were provided: again, I mentioned that mostly our work focuses on consumer-facing subsidies, and really, we look at the fuels that are ubiquitous across the world and are fairly comparable, and those turn out to be gasoline and diesel.

To a lesser extent, there are other fossil fuel subsidies that people at the International Monetary Fund have tracked, but how these kinds of subsidies are provided varies in a couple of ways, and they can be categorized into three buckets that are really actually two. The first starts with governments that set up what are called a fixed-price system or a fixed-price design, where a consumer pays a price at the pump that's effectively set by fiat. The government sets a price that's lower than the market price, and it adjusts it from time to time, but it is a fixed price. And this is very common in lots of parts of the world where there is some set price, and everybody knows what the price of gasoline is. It's kind of a wild idea for us here in the United States to think of that, but there's a sense of these kinds of fixed-price systems.

Then, there's this second bucket, which is a quasi-floating price system, where some governments use formulas that kind of track the global price of what gasoline would be. We had called these, in some earlier research, a smoother approach to pricing, and this is, again, why governments would do this. Maybe they weren't providing as large a subsidy, but they were trying to provide some stability for the economy. And so, this kind of quasi-floating system largely tracked some market price but was still below it if you are subsiding.

Then there's a pure floating-price system, where you're just letting the market dictate the price. You can have subsidies largely in the form of really just not taxing. This is kind of an implicit subsidy, so you have no tax, and you just have a floating-price system that we call an “implicit subsidy,” because there are costs that are borne by using fossil fuels, and even if you take out the climate costs, there are costs to roads and things like that. So, that's the big overview of how these things are provided.

Daniel Raimi: That's great. And in today's conversation, correct me if I'm wrong—we're mostly going to be talking about explicit subsidies rather than implicit subsidies that come from the lack of a tax on energy consumption.

Paasha Mahdavi: Yes, that's right. Those first two, you can think of those more as explicit subsidies in many ways because, the other thing to mention (and this kind of gets into how we measure this stuff) is you look at what the price should be based on some market price and what the price is—what you're paying. And that's called a price-gap approach. So, that's fairly explicit in terms of the difference between what you would otherwise be paying and what the government has decided that you'll be paying.

Daniel Raimi: Right. Great. Okay, awesome.

So, one other background question before we get into the policies and your analysis is, Who benefits primarily from these subsidies? So, we're talking about consumer-facing subsidies here, and what I'm wondering about specifically is, Do these policies primarily support low-income people who might otherwise struggle to afford energy services, or do they largely accrue to the wealthy and elite in different countries?

Paasha Mahdavi: This is a great question, and this is one that many of us in this space have tried to answer for a long time. There is an answer that emerges, and there's fairly clear and consistent evidence that, especially from case studies, that there are two primary beneficiaries from subsidies. (I'm talking about folks like Morgan Bazilian and Francisco Del Granado, and this political scientist Johannes Urpelainen.) The most commonly discussed beneficiary is the urban, middle, and upper classes. These are people who own cars and benefit from the lower prices of goods that are transported into cities. So, even if they don't own cars, they're still benefiting from an artificially lower price on being able to get around, like transportation, as well as being able to consume goods that are brought in from outside the city. Then there's the less discussed beneficiary, which are the middlemen. One of my former students, Khobaib Osailan, who's now a professor in Saudi Arabia, shined light on this and showed that there are certain members of the ruling elite that benefit from capturing Brents that are associated with selling fuel at subsidized rates.

This is an interesting story, especially in the Middle East and North Africa. One of the things that he looked at in particular were military elites, and military elites benefit in a couple of ways. They own some of the distribution stations, like gas stations, and, of course, the military directly benefits from lower input costs. So, you have a couple of very clear sets of beneficiaries, and some of those are consumers, and some of those are elites.

So, who loses then if we think about it this way? Well, there's fairly straightforward evidence that the poor lose the most (in particular, the urban poor), especially because they're not benefiting from the cheaper price to fill up their cars because they don't have cars, and they're suffering from the health consequences of subsidies. And lots of research has shown that subsidies increase, for example, rates of asthma; increase the carcinogens in the air; and also increase fatality rates from accidents.

So, the urban poor are pretty much the clear sufferer and what kind of makes these subsidies relatively regressive. And then, of course, there are the rural poor as well that similarly don't benefit from low gasoline or diesel prices, although there's mixed evidence on that based on usage.

The other loser, I'll shout out here, is connected to a lot of my other work, which is on national oil companies—many of the state-owned oil companies across the world. Again, most countries in the Global South have a state-owned oil company of some kind (those that produce oil, at least). These companies and their refiners effectively are eating the cost, either because these places are not exporters, so they have to import fuel and then sell it for cheaper, or they're losing because of the opportunity cost. They can't export their products if they have to send so many of those domestically and aren't earning the same prices. So, it is an interesting story of winners and losers.

Daniel Raimi: Right; for sure. Well, we could talk about this winners and losers question for a long time. There's so many interesting rabbit holes to go down there, but I would love to move on and ask you about the sort of policy analysis that you and your colleagues have done in this paper, where you look specifically at the pledges that governments have made to reform their fossil fuel subsidy programs and phase them down or phase them out. There's a lot of variation, of course, across countries, but can you give us a general overview of what some of these policies look like and what the ambition is?

Paasha Mahdavi: Absolutely. So, this paper—and again, just to the point about winners and losers, we wrote a whole other paper on that, and there's a lot of politics involved in that story. This particular paper is with Eve Simoni and Michael Ross. The three of us looked at the effectively two types of reforms that governments made to try to either reduce their subsidies or phase them out—again, primarily for gasoline. One set of reforms we looked at were announced and actually implemented price reforms, meaning that there was a change to the nominal price. Again, this is largely an analysis that we did of countries that remain and have been these very large explicit subsidizers. Nearly all of them are petroleum-producing states, and most of them had fixed-price systems.

And so, within a fixed-price system, if you're not changing that story—if you are adjusting that fixed price—we called that a price reform and looked at a couple of thresholds. We looked at any adjustment that was above 10 percent compared to the prior month. We also looked at a higher threshold, as well. So, that's one batch of reforms where you're looking at a kind of nominal increase in the price. And the second type were what we call “fixity reforms,” effectively changing from the system of fixed prices to one that's approximating or getting closer to the floating-price system. This was something that came out of a lot of discussions, both in the lead up to the Paris Agreement and afterward, about the need to move away from fixed prices. And so we looked at that, as well, for a type of reform.

What we did in our analysis is, again, looking at the actual prices that consumers are paying. What we did is ultimately limited to kind of a price that the typical consumer would be paying in either the capital city, if those prices were posted, or nationally, if those were set by the government, and track that at a monthly level over the course of roughly … Let's see, we did 2003 to 2015, so that 13-year period, and then 2016 to 2023, so an eight-year period there.

Using those two lenses that I mentioned about price reforms and fixity reforms, what we saw was that in the kind of pre-Paris period, if you want to call it that, so 2000-ish to 2015, the countries in our sample adopted an average of about 0.24 reforms per year per country. But the reform rate rose after 2015. So, from 2016 to 2023, that rate rose to 0.38 per year. So, an increase of more than 50 percent in kind of what we call the reform rate. If you dive into the data and look at these policies, there were more reforms in 2015 and 2016 than in any other year in our sample.

Daniel Raimi: Really interesting. And when you say reforms, do those always mean reforms in the direction of lower subsidies, or do they just mean reforms in any direction?

Paasha Mahdavi: No, this was only reforms in the direction of lower subsidies. We didn't count a reform that led to a deepening of a subsidy, so it had to be a positive increase in the price.

Daniel Raimi: Got it. Got it. Okay. Well, tell us what you found about how effective or ineffective these reforms have been in actually reducing subsidies.

Paasha Mahdavi: As the title kind of gives away, these reforms have become more fragile. What do we mean by that?

I mentioned that we saw more reforms, especially in the post-2015 period, but we had a lot more reform failure. And effectively, it's a story of a lot of ambition saying, well, we're going to pass a lot of subsidy reforms, but when you track them, what you find is that these reforms tended to be very short-lived. And, not only that, but the failure rate was higher. This happened even before 2015, but the failure rate was higher after 2016. So, again, if you're looking at the numbers, between about 2000 to 2015, 45 percent of all reforms survived for at least 12 months.

So, if you passed a reform, and you looked at just one year out, was it still there? 45 percent of them were; 22 percent survived for at least 36 months. Not a great rate for three years, but still above 20 percent.

From 2016 to 2023, now compare that 45 percent number to what we found, which is that only 30 percent survived for 12 months and only 9 percent, so less than 1 out of 10, survived for at least 36 months. So, the failure rate substantially increased, and it's something that is true of both those price reforms that I talked about before and the fixity reforms as well.

Daniel Raimi: Really interesting. And one point just to throw in here, that I realize I maybe should have mentioned earlier, is to just give people a sense of the order of magnitude of these subsidies. So, I was looking at a couple tables in the paper and the subsidies range quite widely, but one fairly central number is 25 cents per liter of a subsidy, right? That's not an uncommon level in some of these countries. When you translate that to a per-gallon subsidy, it's almost one dollar a gallon. So, these are not trivial subsidies that we're talking about here.

Paasha Mahdavi: Exactly, right. I mean, you think about how in some cases you've got an explicit subsidy, like in Iran in the fourth quarter in 2023 at 55 cents per liter—that is a significant subsidy. In Libya, it was 56 cents. Some are fairly low, as well—9 cents in Ecuador in the fourth quarter 2023, for example. But yes, magnitude check is important and, especially for all of us here in the United States where we're not used to thinking about per liter, thinking about what that subsidy might mean per gallon. For Iran, that's almost $2 per gallon of subsidy, which is fairly significant.

Daniel Raimi: Yeah. Converting liters to gallons, I always think of just multiplying it by four.

Paasha Mahdavi: It's roughly four-ish.

Daniel Raimi: Close enough. Well, so I'd love to ask you now about what you think is going on here. Why is it that it's been hard for governments to stick to these reforms? I'm sure, of course, that there's lots of complexity and nuance that varies across places and times, but I'm curious to hear what some of your overarching theories are.

Paasha Mahdavi: So, I love it that you just said that there are a lot of complexities and nuances that vary over places in time, because that is the subject of one of our earlier papers that we published. Again, Michael and I wrote it, and this time with Cesar Martinez-Alvarez, who's another faculty member here at UC Santa Barbara, where it is a story of local politics, and things are just different in different contexts. But being the social scientists, and especially the positivist social scientists, that we are … Well, is there a systematic story here or not?

This research that we did, combined with a lot of that prior research, identified effectively three challenges for why it's so hard for governments to stick to these reforms. The first two are somewhat out of the government's hands, but show that once the reform is adopted, there's little appetite to keep it going.

Why is that? Again, let's think about those fixed-price countries. Let's say they're setting their price at 50 cents per liter. That's just the price that's set. They increase that to 60 cents per liter, right? So, that’s a big 20 percent increase. That would be classified as a price reform for us. If the oil market price steadily increases, that subsidy change doesn't look so much like a subsidy change anymore. Now you get a bigger and bigger subsidy, because that price now remains kind of far away from the rising market price of what it would be. And I should just clarify that what we mean by that is not really the price of Brent, but rather a calculated price of gasoline, including shipping and transportation of what it would be based on the price of Brent and some refinery adjustments and averages. So, it is still connected to global loan-market prices, but it’s important that we're comparing apples to apples here, gasoline to gasoline.

But as crude oil prices rise, a lot of those subsidy reforms disappear, especially if they rise significantly. So, that's a reform failure, mainly because of a market reason, but also because they weren't keeping up. This is the impetus behind why we want fixity reform—remove yourself from a fixed-price system so that your reform isn't going away for that.

The other reason that we track is inflation, or currency depreciation. And here, the issue is that it's kind of like an effective subsidy–reform failure where, again, the government increases the price of gasoline, but that fixed price erodes. That 60 cents just doesn't mean what it used to because of inflation or due to what the currency is worth on the market. And, again, that's something that hits the opportunity cost of selling that on the market or the cost of importing the oil.

Those two things are the quasi-ish market reasons that have a political story to them, as well, because the governments aren't keeping up. But, in the end, we're political scientists, so we're really interested in the political story. Why is it so hard for governments to do it, especially if you take those two things out?

One of the big stories is political backlash. Surprise, surprise: people don't like higher prices. And for a lot of places, an increase in the subsidy is just like a tax increase.

We compared this story to increases of value-added taxes. We see a lot of similarities and the attitudes toward it. But we also looked at fuel-related protests, and this is an emerging strand of research. For our work, we had identified … I think we looked at between 2006 and 2019, the attempts to raise the gasoline price were followed by protests in at least 24 countries.

That's directly fuel-related protests that were sparked because of the increase in places like Nigeria, Bolivia, and France. The yellow vest movement. This work by other folks like Neil McCulloch who've been looking into this in more detail, shows that link as well. I have to shout out another one of my students who's working on this, Saber Khani, who's working on this in the context of Iraq in particular, where you have lots of places where people don't normally protest, but when you increase the price of fuel, people will go out in the streets. And so, for that reason, a lot of the reforms we saw were nominally changed. So, in this case, you increased the price to 60, you saw protests, you reduced it back to 50, and that would be a failure of the reform. That's a big chunk of what we've seen as to why governments can't stick to what they've tried to do.

Daniel Raimi: Yeah, really interesting. This next question is maybe impossible, but I'll give it a shot: Are there tools out there that governments can use to try and make these reforms more durable? Or if it's not the government, are there tools that maybe civil society or environmental organizations can use to try to make these things more durable? I suspect that the tools are pretty limited, but I'm curious what you think about that.

Paasha Mahdavi: I'll just add a caveat to say that our study, and a lot of our studies on this topic, don't directly examine this question yet. So, I'll clarify that my answer is speculative in the things that we point to in our research.

I mentioned that one of our prior studies, which came out in 2022, looked at these kind of idiosyncrasies and local conditions. In some places, some of those idiosyncrasies allowed for Baptist and bootlegger-style coalitions of people who were on opposite sides coming together in support of the reform, because they're not the ones winning from the subsidy in the first place. So, there's some stories like that in different parts of the world; Ghana is one of the cases we looked at. But one of the other areas that we point to in our research is that reforms can be more durable if governments make what are called “credible promises” of increased public spending on other social outcomes, health outcomes, and labor outcomes, and try to get back to the story of why these subsidies exist in the first place.

For places that don't have really good public-service delivery, the fuel subsidy is one thing the government can do. Well, when you remove that, show me that you can do something on public services like health. Show me you can do something on the labor side—use that money that’s saved to improve public goods. That is one area to try to make that more durable. And there are people like Jordan Kyle who've looked at this question in a research sense and tried to understand … Well, the hard part there is that there's not as much trust that the government can do this. So, that's been a trickier one to make reform more durable, but it is an option.

The other thing that we point to, and which I think is one of the key elements of all of this, is that, rather than using these market-based approaches for removing the subsidy—so, for example, moving to floating prices—governments could try a different tactic to reduce the cost of subsidies by reducing demand for fossil fuel consumption, especially in urban areas, by, for example, subsidizing public transportation, improving urban transit, or making the move to electric vehicles.

But overall, thinking about the demand side of the equation a little bit more than just the supply side of the equation, the urban planning story—which is often the unsung element of so many of these conversations—is really important here and can reduce the overall cost of this subsidy.

One last thing I'll point out, and this is another case that emerged from our data (which is the case that not in this particular paper, but in a prior paper), is the case of Mexico, where the subsidies were removed successfully right before Andrés Manuel López Obrador took office, the president before Claudia Sheinbaum right now. There's a story of, well, can you remove subsidies kind of at the end of a president's term, especially a president who can't be re-elected? Can you start to take unpopular measures toward the end, knowing that your successor's not going to change them?

That's one political tactic to use, and maybe there's something to that, but we haven't analyzed that systematically. And so that's kind of a … if you think about lame duck presidents and places where you're termed out in one term and done, this is an option. But as we're seeing in lots of places, backsliding can occur from future administrations, so it's not quite future-proof.

Daniel Raimi: Right, for sure. Well, those are all really interesting, and all of this stuff is so interesting. Of course, we're just scratching the surface here, so I'd encourage people to check out the paper and check out many of the references that you're making, as well, Paasha, in this discussion.

I'd love to close this out now with the same question that we ask all of our guests at the end of each episode, which is to recommend something that you've read or you've seen on TV, or that you've listened to on a podcast, that you think is great and you think our audience might enjoy. What's at the top of your literal or your metaphorical reading stack?

Paasha Mahdavi: One book that's been at the top of my stack, that I started reading over the weekend, is Kate Marvel's new book, Human Nature. It is a fantastic read. She is a climate scientist who has managed to weave together Greek mythology with a Hollywood-style script in one of the chapters on how humanity views climate change, what we can do about it, and how climate change makes humans behave, act, and feel, and all of that. But it really is a tremendous piece of climate communication. So, I'd highly encourage folks to read Kate Marvel's book.

The other is a TEDx talk that I watched two weeks ago by Josh Busby. Josh is a political science professor at University of Texas, Austin, who's had extensive experience working with the US Department of Defense. He gave a TEDx talk on climate change and national security, and especially on how the military in the United States, as well as militaries kind of around the world, address climate risks, and why climate change is fundamentally a threat to national security. I found that to be such a powerful message. And of course, it's a message he's written about a lot. He published his own book a couple years back, as well. But it's a great TEDx talk of folks who are into those things, and I highly, highly encourage it.

Daniel Raimi: Yeah, those both sound great. I know Josh; he's great, and I actually assign several readings from Kate Marvel in my class, so I've got to check out this new book.

Paasha Mahdavi: Oh, awesome.

Daniel Raimi: That's great.

Paasha Mahdavi: Yeah, it's a great new book. Just hot off the press.

Daniel Raimi: Awesome. Well, Paasha Mahdavi from UC Santa Barbara, thanks so much for joining us on the show today, helping us learn a little bit about fossil fuels and efforts to reform them and how those efforts have been struggling. We really appreciate you coming on the show and sharing your work with us.

Paasha Mahdavi: It's a pleasure to be here, and thanks again for shining light on this work.

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