According to a recent IMF Survey Magazine article, Counting the Cost of Energy Subsidies, world-wide energy subsidies in 2015 account for $5.3 trillion or 6.5% of global GDP. The article summarises findings of an IMF working paper (see link below), which provides estimates by country, product (e.g. coal and oil) and component (e.g. global warming, local air pollution and congestion) in an Excel file
The working paper argues that energy subsidies are both larger and more pervasive than previously thought. According to the IMF Survey Magazine:
Eliminating global energy subsidies could reduce deaths related to fossil-fuel emissions by over 50 percent and fossil-fuel related carbon emissions by over 20 percent. The revenue gain from eliminating energy subsidies is projected to be $2.9 trillion (3.6 percent of global GDP) in 2015. This offers huge potential for reducing other taxes or strengthening revenue bases in countries where large informal sector constrains broader fiscal instruments.
In interpreting the findings it is important to understand how the term ‘subsidies’ is being used. 
According to the report, most of the $5.3 trillion “arises from countries setting energy taxes below levels that fully reflect the environmental damage associated with energy consumption.”
In other words, the term subsidy is being used whenever taxes do not fully account for the negative externalities associated with extracting and burning fossil fuels. Perhaps a better term would be ‘under-taxing’ rather than ‘subsidising’. Nevertheless the scale of not internalising externalities is huge. As Lord Nicholas Stern (author of the 2006 Stern Review on the Economics of Climate Change) says:
“The failure to reflect the real costs of fossil fuels in prices and policies means that the lives and livelihoods of billions of people around the world are being threatened by climate change and local air pollution.”
But, while not taxing external costs account for more than 80% of the underpricing of fossil fuel energy, some three-quarters of these external costs relate to local environmental damage, rather than international damage such as global warming. Thus charging for these external costs would benefit primarily the local population, as well as generating revenues, and thus provides a strong argument for governments raising energy prices through increased taxes or reduced subsidies.
So which countries are the major culprits in ‘subsidising’ fossil fuels? What specific measures does the IMF recommend to tackle the problem and what countries are addressing the problem and in what ways? The working paper and articles address these questions.
Articles
Counting the Cost of Energy Subsidies IMF Survey Magazine (17/7/15)
G20 countries pay over $1,000 per citizen in fossil fuel subsidies, says IMF The Guardian, Damian Carrington (4/8/15)
Fossil fuels subsidised by $10m a minute, says IMF The Guardian, Damian Carrington (18/5/15)
Working Paper
How Large Are Global Energy Subsidies? IMF Working Paper, David Coady, Ian Parry, Louis Sears, and Baoping Shang (May 2015)
Questions
- Explain how energy subsidies are defined in the IMF working paper.
- What measurement problems are there in calculating the size of the ‘subsidies’?
- Draw a diagram to show how the under taxing of fossil fuel usage leads to a greater than socially optimum level of consumption of fossil fuels.
- What specific policies are pursued by the four biggest fossil fuel subsidising countries?
- What political problems are there in persuading countries to reduce fossil fuel subsidies/increase fossil fuel taxes.
- Is there a relatively high or low income elasticity of demand for energy? What are the implications of this for different income groups of policies to hold down energy prices?
A professor in the USA recently posed an interesting dilemma to students taking his psychology exam. At the end of the exam students were provided with a bonus question in order to gain extra credit. All they had to do was decided whether they would like two or six additional marks adding on to their final score. The twist was that if more than 10% of the class opted for an additional six marks then everyone would get nothing added on!
The professor had placed the students in a prisoner’s dilemma scenario. To see this consider an individual student weighing up which option to choose; if more than 90% of the class chose two additional marks, then this student is better off choosing six additional marks. Whereas if more than 90% of the class chose six additional marks, then this student is indifferent between the two options (the student will get no additional marks regardless of their choice). It follows that choosing six additional marks is a weakly dominant strategy.
In a similar fashion, in the classic prisoners setting keeping quiet is collectively better, however, each criminal has a strong individual incentive to confess. Likewise, in oligopoly markets the interdependence between firms results in a tension between cooperation and competition. Firms collectively benefit from keeping prices high, but an individual firm has an incentive to undercut its rivals and steal a large share of the market. A strong prediction when self-interested participants play the prisoner’s dilemma game just once and choose their strategies independently is therefore that the prisoners will confess to the crime and that firms will set low prices.
So did the US professor end up giving away many bonus marks? No, about 20% of the class opted for six additional marks and as a result all the students ended up with no extra marks. In fact, the professor claims to have been running the same experiment for the previous seven years and only once has he ended up giving away any bonus marks. On the one hand, this result is consistent with what is predicted in the prisoner’s dilemma game. However, running contrary to this is the fact that around 80% of the students opted for just two additional marks. It would certainly be interesting to see what would happen if in future years the professor relaxed the threshold above which all students get no extra marks.
UMD ‘tragedy of the commons’ tweet goes viral The Baltimore Sun, Quinn Kelley (09/07/15)
A professor tested the ‘Prisoner’s Dilemma’ on his students by bribing them with extra credit points Tech Insider, Will Haskell (17/07/15)
Questions
- Draw the payoff matrix for the student’s dilemma.
- What are some of the possible explanations for around 80% of the class choosing two extra marks?
- How do you think the outcome of the game might have changed if students were allowed to communicate with each other before making their choice on the number of additional marks to ask for?
- How do you think student choices would change if the threshold above which all students get no extra marks was varied?
In a blog post on 1 May this year, What’s really on offer?, we looked at the ‘super-complaint‘ by Which? to the Competition and Markets Authority (CMA) about supermarket special offers. The complaint referred to bogus price reductions, ‘cheaper’ multi-buys which weren’t cheaper, smaller pack sizes and confusing special offers. Under the rules of super-complaints, the CMA had 90 days from the receipt of the complaint on 21 April 2015 to publish a response. It has now done so.
Here is an extract from its press release:
In its investigation the CMA found examples of pricing and promotional practices that have the potential to confuse or mislead consumers and which could be in breach of consumer law. Where there is evidence of breaches of consumer law this could lead to enforcement action.
However, it has concluded that these problems are not occurring in large numbers across the whole sector and that generally retailers are taking compliance seriously to avoid such problems occurring. The CMA also found that more could be done to reduce the complexity in unit pricing to make it a more useful comparison tool for consumers. …Nisha Arora, CMA Senior Director, Consumer, said:
‘We have found that, whilst supermarkets want to comply with the law and shoppers enjoy a wide range of choices, with an estimated 40% of grocery spending being on items on promotion, there are still areas of poor practice that could confuse or mislead shoppers. So we are recommending further action to improve compliance and ensure that shoppers have clear, accurate information.
Although the CMA believes that misleading pricing is not as widespread as consumer groups have claimed, 
in some cases the supermarkets could be fined. The CMA also says that it will work with the supermarkets to eliminate misleading information in promotions.
In addition it recommends that the Department for Business, Innovation and Skills (BIS) publishes guidelines for supermarkets on displaying unit prices in a consistent way. It also recommends that legislation should be simplified on how items should be unit-priced.
The following articles look at the implications of the CMS’ findings.
Articles
Some UK supermarket promotions are misleading, watchdog says Financial Times, Andrea Felsted (16/7/15)
Shoppers beware: Grocers ‘confusing’ consumers with special offers, unit pricing, says government investigation International Business Times, Graham Lanktree (16/7/15)
Supermarket pricing: CMA finds ‘misleading tactics BBC News, Brian Milligan (16/7/15)
How special are special offers? BBC News, Kamal Ahmed (16/7/15)
CMA publications
Response to super-complaint: link to elements of report CMA (16/7/15)
Questions
- Give some examples of the types of promotion used by supermarkets?
- In what ways might such promotions be misleading?
- How is competition from Aldi and Lidl affecting pricing and promotions in the ‘big four’ supermarkets (Tesco, Sainsbury’s, Asda and Morrisons)?
- What cost and other advantages do Aldi and Lidl have over the big four? How might the big four reduce costs?
- Are misleading promotions systemic across the industry?
- How can behavioural economics help to explain consumers’ response to promotions in supermarkets?
- What is meant by ‘heuristics’? How might supermarkets exploit consumers’ use of heuristics in their promotions?
Many Chinese people have taken to investing on the Chinese stock market, seeing it as a way of making a lot of money quickly. From October 2014 to June this year the market soared, rising by 126% from 2290 to 5166.
More and more people used their savings to buy stocks and China now has over 90 million individual investors. And it was not just savings that were invested. Increasingly people have been borrowing money to invest, seeing it as an easy way of making money. Unlike stock markets in developed countries, where the majority of shares are held by financial organisations, such as pension funds, holdings by individuals account for about 80% of stocks on the Chinese market.
But since mid-June, share prices have plummeted by 32% (see chart). People have thus seen a huge fall in the value of their savings, while many others have found their shareholdings worth less than their debts. The fall, like the rise that preceded it, has been driven by speculation, fuelled by first optimism and then pessimism.
The Chinese government is worried that the fall might dampen investment and economic growth. It has thus has been supplying liquidity to various institutions to buy shares, but this has had little effect and is dismissed by many as meddling. What is more it could expose companies which take advantage of the liquidity to greater risk.
So serious has been the rout, that over 50% of listed companies have halted trading on the mainland Chinese stock exchanges.
So just why has there been this bubble and why has it burst? What implications will it have for (a) China and (b) the rest of the world? The following articles explore the issues.
China’s stock market fall hits small investors BBC News Magazine, John Sudworth (7/7/15)
China Stocks Plunge as State Support Fails to Revive Confidence Bloomberg (8/7/15)
Chinese stocks are crashing Business Insider UK, Myles Udland, David Scutt (8/7/15)
Shanghai stocks plunge, over 1,200 Chinese companies halt trading Economic Times of India (8/7/15)
Everyone freaking out about China’s stock-market crash is missing one thing Business Insider UK, Elena Holodny (7/7/15)
China’s stock market has lost nearly a third of its value in a month Vox, Timothy B. Lee (8/7/15)
Chinese leaders may be undermined as investors suffer stock market slide The Guardian, Emma Graham-Harrison (8/7/15)
Opinion: China’s stock-market crash is just beginning MarketWatch, Howard Gold (8/7/15)
What does China’s stock market crash tell us? BBC News (22/7/15)
Questions
- What is meant by a ‘bubble’? Has the recent performance of the Shanghai Stock Market been an example of a bubble?
- Is the current fall in share prices in China an example of overshooting? Explain how you would decide.
- Distinguish between stabilising and destabilising speculation. Why does destabilising speculation not go on for ever?
- What is meant by the ‘stock market wealth effect’? How is the fall in the Chinese stock market likely to affect consumption and investment in China? How does the proportion of assets held in the form of shares affect the magnitude of the effect?
- What are the likely implications of the fall in the Chinese stock market for the rest of the world?
- Why has the Hong Kong stock market not behaved in the same way as the Shanghai market?
- What have the Chinese authorities been doing to arrest the fall in share prices? How likely are they to succeed?
Last week saw the launch of Apple’s new music streaming service. This will clearly provide serious competition for the existing music streaming providers such as Spotify and Tidal. One important difference is that whilst Spotify offers a free version to listeners funded by advertising revenue, all Apple Music users will be required to pay a monthly subscription charge. However, Apple will allow listeners a free three-month trial of its service.
Initially Apple intended not to pay artists royalties during this trial period. However, it soon reversed this plan when the pop-star Taylor Swift wrote a blog post criticising Apple for this and threatening to withhold her most recent album.
The negotiations between Apple and the record labels are also facing considerable scrutiny from the competition authorities on both sides of the Atlantic. They seem particularly concerned that Apple may have conspired with or pressured labels to withdraw their support for rival streaming services such as Spotify that offer free versions to consumers. Although not clear, it has been suggested that the European Commission’s initial probe into this may have been initiated by a complaint from a company offering such a free version of its service.
On the other hand, there has also been considerable criticism of free music services such as Spotify. One of the cofounders of the Beats music streaming service, which was subsequently acquired by Apple, has argued that the free business model does not properly value recorded music. Likewise, Taylor Swift removed her entire back catalogue from Spotify, and the leading record label, Universal, is applying pressure on Spotify to change its business model. It is currently unclear whether Apple has been directly responsible for Universal’s standpoint. What is clear is that Apple’s entry will shake-up this market and the identity and business model of the future market leader is at stake.
Streaming sets off a painful debate in the music industry Financial Times, Jonathan Ford (22/03/15)
Apple’s new music service will push paid subscriptions, with free samples re/code, Dawn Chmielewski and Peter Kafka (08/05/15)
Taylor Swift is fighting the wrong part of the music industry Financial Times, Jonathan Ford (05/07/15)
Here’s what happens to your $10 after you pay for a month of Apple music re/code, Peter Kafka (15/06/15)
Questions
- What are the key features of the music streaming service market?
- What are the pros and cons of Spotify’s business model?
- Why might the views on free streaming services differ between small and large artists and labels?
- How do you think the music streaming market might develop in the future?
According to a recent IMF Survey Magazine article, Counting the Cost of Energy Subsidies, world-wide energy subsidies in 2015 account for $5.3 trillion or 6.5% of global GDP. The article summarises findings of an IMF working paper (see link below), which provides estimates by country, product (e.g. coal and oil) and component (e.g. global warming, local air pollution and congestion) in an Excel file
According to the report, most of the $5.3 trillion “arises from countries setting energy taxes below levels that fully reflect the environmental damage associated with energy consumption.”
