Saturday, December 6, 2014


Financial matters dictate talks on climate change

Only on Friday, a new UN report said the current projected financial costs for adapting to climate change might be a gross underestimate. Only on Friday, a new UN report said the current projected financial costs for adapting to climate change might be a gross underestimate.
Written by Amitabh Sinha | Lima | Posted: December 7, 2014 2:03 am

Climate change talks, one would assume, would be driven mainly by environmental concerns. But going by the buzz in Lima, money seems to be an equally big, if not bigger, driver of the way the climate agreement will be shaped. Some, of course, argue that money is the limiting factor and not the driver.

With huge sums of money involved in the kind of actions necessary to effectively deal with climate change, finance has always been an integral part of climate discussions. The order of financial commitments talked about is in tens and hundreds of billions of US dollars per year, sometime even trillions of US dollars.

Only on Friday, a new UN report said the current projected financial costs for adapting to climate change might be a gross underestimate.

The Adaptation Gap report by the UN Environment Programme said the adaptation costs can be at least two to three times higher than the current estimates of about $70-100 billion per year by 2050 even in the best case scenario. It could even reach $500 billion per year by 2050 if adequate steps on cutting greenhouse gas emissions are not taken.

The costs of reducing emissions can be even higher as it has economy-wide impacts. Estimates put that figure in the range of 1 to 2 per cent of global GDP per year under different scenarios. And there are costs associated to a variety of other climate actions as well.

Any talk of climate action, it is evident, is meaningless without huge amounts of money being apportioned for it.

The reason why finance has been dominating discussions at Lima is that for the first time, big money has actually started flowing in climate channels. There is a maze of financial mechanisms through which climate money flows, making exact computations difficult, but some encouraging assessments have come over this week. The most clear is the $10 billion added to the Green Climate Fund, established only recently, in a matter of a few months. It has got everyone excited, even though this money is only a pledge right now and is still to be delivered.

The Secretariat of UN Framework Convention on Climate Change (UNFCCC), the umbrella agreement under which the climate talks take place, put forward a first of its kind assessment which found that hundreds of billions of dollars in climate finance had already started flowing across the globe. Annual average flows were of the order of $340-650 billion, “possibly higher”, in 2011 and 2012. This included between $40-175 billion in climate support to developing countries from the developed world.

“The good news is that money is not an issue. There is plenty of money out there,” Aliz Mazounie of Climate Action Network, a group of climate non-government organisations, said. She said there was a need to further convert “bad” money, like money being used on subsidies for fossil fuels, into “good” money.

At the 2009 Copenhagen climate meet, developed countries had pledged to mobilise $ 100 billion every year by 2020, through public and private sources, and make it available for poorer nations to use it for their climate actions. These countries still swear by that commitment.

However, the scale, and consistency, of the requirement is such that even all this money might not be enough. Christiana Figueres, the topmost official of the UNFCCC, called the $100 billion pledge as “frankly a very, very small sum”.

“We are talking here about trillions of dollars that need to flow into the transformation at a global level,” she said.

Stefan Schwager, co-chair of the standing committee on finance which put out the assessment on climate finance flows, said it was good to know that the money flows were real and not imagined. “Climate finance flows have always been a little bit of sore spot at the negotiations over the last few years because nobody had a clear figure,” he said.

The sudden availability of money, and the prospect of more money being made available in future, has led countries like India to start making preparations to access this money to fund their climate programmes. The Indian government has already begun an exercise to complete all the necessary formalities early so that when the money does start coming in the Green Climate Fund, for example, it can move fast to access it.

“Why not? If money is being made available and we are entitled to tap into it, we should claim it. There would be requirement of thousands of billions of dollars for our climate action programmes and most of it would have to be raised through domestic resources. If we are able to access some money from other resources we would welcome it,” said Susheel Kumar, the head of the Indian delegation at Lima.


# $9.7 billion in Green Climate Fund till now. Contributors include US ($3 billion), Japan, Canda, Spain, Norway, Germany, Australia and some others.

# $100 billion to be raised per year from 2020 by developed countries

# About $650 billion in climate flows annually in 2011-12

# Up to $175 billion in annual support to developing to developed nations

# Climate money flows through a variety of other bilateral, regional and multi-lateral channels as well like the Global Environment Facility of the World Bank or in the form of Overseas Development Assistance

# As much as $500 billion per year might be required just for adaptation by 2050

# About 80% of the funds used for climate action in developed countries is raised at home. In developing countries this figure is 70%

# About 95% of global climate finance is spent on mitigation, or efforts to reduce emissions. Only 5% is utilised for adaptation.

# Subsidies for oil and gas, and investments in fossil fuels are almost double the total global climate finance

Source: Indian Express

America's Most Obvious Tax Reform Idea: Kill the Oil and Gas Subsidies

In a world where $100-a-barrel oil is here to stay, there's no need to pad the industry's bottom line.
When Saudi Arabia's longtime oil minister, Ali Al-Naimi, opens his mouth, the world listens. Yesterday, during a speech in Hong Kong, he delivered a message that U.S. policy makers in particular would do well to take note of. The days of $100-a-barrel crude, he told the crowd, are here "for the foreseeable future."
If he's right, one thing that shouldn't be around for the foreseeable future are the outdated tax credits that protect oil and gas companies, which will be plenty profitable in a world of $100-a-barrel oil. If Democrats and Republicans are looking for safe ground to set up camp for the budget negotiations, let's start with these $7 billion-a-year subsidies.
Why Big Oil Doesn't Need Uncle Sam's Help
The oil industry's lobbyists like to argue that its array of tax write-offs (which allow companies to deduct everything from drilling costs to the declining value of their wells) aren't any different than other deductions for less publicly reviled companies. Cutting them will discourage new exploration and put jobs at risk, they claim.
Yet, some of the breaks are anachronisms that date back almost to the days of John D. Rockefeller. And in a world of permanently high crude prices, there's very little rationale for subsidizing the bottom lines of companies like ExxonMobil and BP.   
Make no mistake, either: Those profits are perfectly healthy. Between drilling and refining, Exxon's U.S. operations alone earned $7.5 billion after taxes in 2012. California-based Occidental Petroleum Corporation, one of the so-called "independent" oil companies and the top oil driller in Texas, raked in $7.1 billion via its oil and gas division. 
There are plenty of reasons, far beyond the word of a single middle-eastern oil man, to expect that those profits will stay high. Oil prices have continued to hover around the $100 mark in part because of instability in the Middle East, but also because, even in our sluggish global economy, demand is still relatively tight. As things improve, demand -- and prices -- will only increase. So if you think China's best days are still ahead of it, and that Europe will eventually pull out of its funk, you should expect prices to keep floating skyward. The Energy Information Administration, for one, believes the cost of a barrel will most likely increase to around $162 by 2040 (as shown on the blue line below). 

The oil-filled shale formations in states like North Dakota and Texas that have powered the U.S. energy boom are notoriously expensive to drill. But if predictions like the EIA's come even close to true, then they should remain profitable plays for the industry for years to come. One might argue that without subsidies, they won't be quite profitable enough -- that by nixing the tax breaks that support domestic drilling and refining, we might encourage companies to put their money to do something else with their money. But as Harvard's Joseph Aldy has noted, independent analysts forecast that cutting the subsidy cord would have at most a minimal effect on U.S. drilling activity, possibly reducing it by as little as 26,000 barrels-a-day. Since 2009, he notes, production has been growing each month by 30,000 barrels a day.* 
If there's money to be made sucking oil out of the ground, in the end, somebody is likely to do it. 
The Worst of the Worst
Some of the biggest subsidies are, well, a bit goofy. In its FY 2013 budget request, Obama administration singled out eight oil and gas tax breaks for the ax, worth about $38.5 billion over the next decade. Those are laid out in the table below from a Congressional Research Service report earlier this month. Let's take the three big ones highlighted in the table below.
  • Expensing Intangible Drilling Costs ($13.9 billion): Since 1913, this tax break has let oil companies write off some costs of exploring for oil and creating new wells. When it was created, drilling meant taking a gamble on what was below the earth without high-tech geological tools. But software-led advances in seismic analysis and drilling techniques have cut that risk down.
  • Deducting percentage depletion for oil and natural gas wells ($11.5 billion): Since 1926, this has given oil companies a tax breaks based on the amount of oil extracted from its wells. The logic is, if manufacturers get a break for the cost of aging machinery, drillers can deduct the cost of their aging resources. (You decide for yourself whether that makes any sense.) Since 1975, it's only available to "independent oil producers," not the big oil companies, like Exxon and BP. But many of these smaller companies aren't actually small. According to Oil Change International, independents made up 86 of the top 100 oil companies by reserves. Those 86 had a median market cap of more than $2 billion. So essentially, this is a tax break that subsidizes the Very Big oil companies at the expense of the Very Biggest.* 
  • The domestic manufacturing deduction for oil and natural gas companies ($11.6 billion): In 2004, as American manufacturing was being ravaged by China's entrance on the global scene, Congress passed legislation designed to encourage companies to keep factories operating in the U.S. Thanks to some intensive lobbying, the oil industry ended up as one of the beneficiaries. But while the refining process does involve high-tech manufacturing, there was never any danger that either drilling or refining was going to migrate overseas. 
The big tax breaks don't stop there. For instance, accounting rules worth about $2 billion a year to the industry let companies deduct more for the cost of developing wells as oil prices rise. But it gives you a flavor of what we're talking about here -- bonuses that aren't even available to every company in the industry.
No matter how badly John Boehner and House Republicans might wish otherwise, any long-term deficit reduction deal is probably going to have to raise some taxes, probably by nixing deductions. At least, it will if it has any hope of making it past Senate Democrats and the White House. Just $40 billion to $70 billion won't be enough. But the oil and gas subsidies are breaks that, by all rights, have outlived their usefulness. It's time for them to go. 
*CORRECTION: An earlier version of this article stated that American production has "been growing by 30,000 barrels a day." 
*CORRECTION: An earlier version of this article stated that the median market cap of all independent oil producers was $2 billion.

Join the discussion…

    For a different view that is not based on "administration estimates" as is the CRS report that the author cites, one could look at this from the CBO
    Within the context of total tax subsidies for energy, it would be interesting to hear the argument as to why only oil and gas subsidies are "obvious" candidates for elimination.
    I'll see the author and raise about we eliminate all energy subsidies and raise 5x as much money?
      I'm going to raise you all commercial/industrial subsidies. All of them.
      Because, this is precisely the thing that govt investment is supposed to do. Our govt should spend our money with an eye towards investments that are good for society in the long term. This is exactly the opposite of the shorter term approach of for-profit businesses, and as it should be. Both serve crucial roles and act as ying and yang for the benefit of all. Each are indispensable. As for the whole cost issue.....I'm not sure how that is relevant, the govt could just reduce a corresponding level of taxes or credits to offset the additional cost of cleaner energy for consumers, and unless you're worried that tax credits will somehow cause general demand pull inflation......its certainly not an issue of money. The govt is in no way revenue constrained. Personally, I don't see why we are not seeing investment on the order of $50 or $100 billion a year to universities and distributed through grants etc every year on batteries, wind, solar, hydrogen fuel cell, algae, smart grids, power lines, efficiency work and credits..... As long as the govt doesn't raise taxes (its not like they need our money to spend the Govt's own dollars) what difference does it make to you if they invest for the benefit of society.....I see that you are not a climate change denialist.
        If you wouldn't mind refraining from MMT propaganda in response to my posts, I'd appreciate it. We have already discussed your beliefs at length and I don't find them convincing. The good news is I'm willing to spare everyone else another pointless discussion on the topic. Hopefully, you will be too.
          I will continue to post and reply at my leisure thank you very much. You have posted on this particular board like 20 times , so it takes some brass to try and tell someone else not to respond to you. Hypocrisy is unbecoming.
          Now, on to the merits of the argument.....there are many ways you can disagree with what I said without going to the whole "MMT propaganda" nonsense.
          Do you not think that the public (RE:govt) should invest in things that we view is in our best interest?
          Do you not think that investment from both the public (RE:not for profit) and the private (RE: for-profit) sector's different POV are beneficial to go towards having a better and more balanced economy?
          On a side note, this is exactly the type article where people's misunderstanding about the monetary system become directly applicable to real world problems. People who think the US govt borrow US dollars from China make different calculations about what the govt can and should be spending money on.....just a digression no need for you to respond to this part, thus fulfilling your "pointless discussion" criteria
          pretty brass coming from a guy who has posted dozens of comments on this board. As for your request....I must humbly decline to restrict myself. I reserve the right to say whatever I feel is necessary and whenever I feel inclined to say it. Debating the merits of govt investment in clean energy is an entirely appropriate thing for me to comment on regardless of whether or not you accept the fact that US uses a fiat monetary system.
      Oil & gas subsidies subsidize something which is polluting and undesirable.
      The credit for energy-efficiency improvements to existing homes (the largest of the "energy subsidies") subsidies something which is inherently desirable and all good. (This is a credit to eliminate waste. I've never heard anyone claim that wasting energy was good.)
      The credit for production of wind energy, whatever you think of it, is already being phased out. As it says in your own citation:
      "Many of the tax provisions that target energy efficiency and renewable energy have expired... Most of the support for energy efficiency and renewable energy in 2013 comes from provisions that are temporary. In contrast, most of the support for fossil fuels and nuclear energy comes from provisions that are permanent."
    This is a subsidy that deserves to be killed.
      Except that depreciation and tax deductions are not subsidies...
        for big petro they are.
        They're functionally identical, though. Unless you're talking about subsidies that exceed what they're paying someone in taxes, there's absolutely no difference between writing them a big subsidy check or giving them a big deduction -- either way, other people have to pay more to make up the difference.
          They are functionally not identical because they are completely different. Depreciation gives companies an incentive to pursue capital investment which creates good blue collar jobs for oil workers.
          A subsidy would go to the companies general balance sheet where it can be diverted towards dividends, executive salaries, etc...
            the quest for profits is also an incentive to pursue capital investment...especially in a world where the technology improves very rapidly, and when a company makes enough money to pay for the costs of their equipment by themselves.
              So what? If nobody was in on the quest for profit, if oil companies were not investing in capital investment in the pursuit of the quest for profit, then we would't have any domestic oil supply and ordinary Americans would be paying 7 dollars a gallon for gas.
              These profits are still taxes when they are distributed to shareholders.
                You really don't understand what's going on here. Like I say, learn how percentage depletion actually works.
                The "domestic manufacturing deduction" is equally bad: it's just a subsidy for doing, um, anything in the US. Now, pulling oil out of wells in the US can't really be done outside the US, so this is just free cash to oil drillers. It goes to executive salaries, dividends, etc.
                  The reason we have that is because the US already has some if the highest corporate taxes in the world. You would need to cut tax rates if you got rid of the deduction
            This isn't real depreciation. Look up how percentage depletion works. This subsidy goes directly to the company's general balance sheet, where it is diverted towards dividends, executive salaries, etc...
        Why not? Of course they are.
          If there's money to be made sucking oil out of the ground, in the end, somebody is likely to do it. ... http://www.Makingover68dollare...
          A subsidy is paid out by the government. These are not subsidies.
            You're wrong. You court the heights of infinite irrationality by merely contemplating what you eventually typed. ALL ECONOMIST, ALL ALL, ALL, ALL, ALL. ALL EDUCATED, INFORMED, PEOPLES, DISAGREE WITH YOU. A subsidy is not only that which is paid by the government. It is an opportunity cost of forgone revenue. You'll just have to take this up with someone like Martin Feldstein, who, curiously enough, is on the conservative side of the economic profession spectrum. Tax subsidy would be the technical term.
            Seriously, Colsa2, what you said isn't even the kind of thing that should be said by a simpleton. Only intellectual zombies say the kind of thing you just said. Are you in a coma?
              Using all caps isn't helping your argument. The ability to deduct depreciation encourages capital investment in a predictable way that gives businesses a benefit only inasmuch as they are investing in hard assets like new machines or drilling rigs which actually contributes to well paying blue collar jobs (since someone has to work on or build the rig they buy). A subsidy is a direct payment which depending on how its structured may or may not be encouraging behavior that might have happened anyway and may or may not be simply diverted to oil executives instead of oil workers.
              Besides all of this is a question of fairness. If my business buys a structure that subsequently loses value (due to aging or becoming obsolete) it makes sense to allow me to depreciate its value since I am actually losing value as time goes on and its resale value plummets due to wear and tear.
              In the background of all this is the fact that US corporations already pay the highest corporate tax rate in the OECD and we need deductions like this to lower our effective tax rate so our companies can compete with the rest of the world in the first place.
              If you want to use populist rhetoric to soak the Oil and Gas industry then talk about a carbon tax. At least that actually addresses the problem you want to address. Besides that don't make US oil companies play be different depreciation rules than other US heavy industry companies like manufacturers that need to depreciate loses. The US tax code is already complex enough.
                and the costs that those tax dollars you should have paid are spread over everyone else who paid....meaning everyone else pays more to give you a break.
                  It's not my money its the company's money. I can only take the money when my company makes a distribution, when I do in fact pay a lot of income tax on it.
                  And who the hell are you to say what's mine should belong to everyone else? Everyone else does not pay more. Everyone other company pays the same amount because everyone else is depreciating capital investments too.
                Aren't drilling rigs pretty much dependent on WHERE the drilling takes place? Manufacturers can use their assets in the US as well as abroad, so "tax incentives" are more strategic on that stage, no?
                So basically, the risk to losing blue collar jobs, as a result of drilling assets being deployed elsewhere than in the US, is dependent on how possibly profitable US drill sites, without the tax deductions, are compared to somewhere else in the world (with or without tax deductions at that spot), no? That's basically the risk government is taking by eliminating these "tax deductions".
                Refineries are supposedly expensive to build and/or move, so government needs to remove tax deductions just enough to assure that relocating existing activities is not worth the cost of the removed deduction.
                Why can't government think like a business in cases like this?
                  That doesn't make any sense. This would only create a loophole if companies could depreciate a drilling rig they purchased in the US and then deployed the drilling elsewhere. This does not happen in reality because rigs are gigantic and extremely expensive to transport. It also does not happen in reality because the US has a very large and growing oil and gas industry that is right now constantly trying to deploy more and more rigs to the US from abroad.
                  These tax deductions actively encourage investment only in the US.
                  Why do you want to increase taxes on refineries? Most refineries in the US are already very unprofitable and are losing money. Raising their taxes right now would only force them to pass on more costs directly to customers and raise the price of gasoline.
                    That's not the essence of what I wrote.
                    What I mean, in other words, is that drilling assets are limited to the site where the drilling takes place, compared to manufacturing assets, which are not. So the options of where to deploy said asset is much more dependent on geography for drilling than for manufacturing. Which means if "somewhere in the US" is chosen as a drill site, is the choice warranted because of tax legislation or because of probability of oil extraction?
                    As for refineries not being profitable, why is that government's problem? From what I hear, relocation is almost impossible because of the costs associated. Why not take advantage of the situation, I know business would.
                    None of these subsidies are depreciation. Not one of them.
                Except many corporations are now paying little to nothing in taxes through various loopholes. Many have paid next to nothing in taxes while receiving substantially larger tax rebates back, while simultaneously complaining that their taxes are too high. This at a time when taxes are, in fact, at historic lows. This at a time when corporate and CEO profits are hitting record-breaking highs, with executive salaries increasing by percentage hand over foot year after year, while labor wages have stagnated (and actually lessened over the years, when accounting for inflation).
                Nobody is buying the 'boo-hoo, poor corporations!' conservative rhetoric, any more.
                  Almost all of the corporations that are able to reduce their tax liability to zero or close to zero are tech companies like Google that use aggressive transfer pricing schemes to divert their earnings to jurisdictions with low tax rates. This has nothing to do with Oil and Gas companies that have to pay taxes in the country where the oil is drilled and cannot take advantage of these loopholes.
                  Depreciating capital assets is not a loophole.
                    My car is a capital asset in conducting the business of my life. Yet, I don't get to write off its depreciating value.
                      The business of your life already gets the standard deduction.
                        Right, Tom. My standard deduction means my tax rate exceeds 35% while the effective corporate tax rate is around 12%. The tax code favors Big Business...the examples are endless. My favorite is health insurance. Companies get a tax write off but us self-employed folks just pay...and pay...and pay. Why? We have the tax code Big Business -- and the wealthy executives running them -- paid for.
                    None of these subsidies consist of actual depreciation.
                    Percentage depletion is a plain giveaway, as I explained earlier.
                      Percentage depletion is a giveaway but severance taxes are a takeaway. Oil companies are subject to extraction taxes that nobody else pays also

                      Source: Atlantic

                      ...and I am Sid Harth

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