Tuesday 11 October, 2011. The Green Piece Column.
The International Energy Agency (IEA) revealed last week that fossil fuel production and consumption is subsidised by governments around the world to the tune of around US $409 billion last year, an increase of around 33 per cent on 2009, or around US $110 billion more (see story).
At a time when the world’s economy seems stagnant at best, what justification can there be for this increase? Why, when we are suppose to be encouraging investment into and the use of greener alternatives and renewable energy sources, are dirty ol’ fossil fuels receiving more money than ever?
Recalling the G20 summit of 2009, the Agency wants governments to honour their pledge to phase out subsidies that ‘encourage wasteful consumption, reduce our energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change’. So what has been the hold up? And just why governments are reneging on this pledge?
Subsidising dirty fuel
In fairness to the G20, there has been a lot of progress. While overall subsidies may be up, among the countries that make up the G20, there has been some significant progress in recent years.
For example, IEA acknowledged that Germany’s historically generous subsidies to hard-coal mining fell from €4.9 billion in 1999 to €2.1 billion in 2009. France gradually phased out its support to the coal industry: from more than €1 billion in 1990, to nothing today.
New inventory analysis by IEA of 24 countries, which account for about 95 per cent of OECD’s total primary energy supply, reveals that 54 per cent of support fossil fuel production was for oil. Globally, motor vehicles use one third of the world’s oil, so motorists essentially massively subsidised for driving around in their oil-drinkers. That is quite simply astounding when you think of how much it costs to fill up (although fuel duty and VAT essentially remove the perk for consumers).
A report prepared for the 2009 G20 summit by International Monetary Fund, the World Bank and other international groups recommended that fossil fuel subsidies should be the starting point in the fight against climate change and poverty, improving environmental performance and promoting economic growth.
But many subsidies for fossil fuels are handed out in poor countries, where people living in poverty need help, to buy, for example, fuel to cook with. Still, subsidy reforms in industrialized countries and emerging economies could contribute $10 billion a year to a climate fund, the report suggested.
Driving poverty or prosperity?
For those living on the edge of existence, however, any increase in fuel prices can have a devastating effect. We may not like it, but fossil fuels are an essential and integral part of our lives and people around the world depend on them for cooking, heating and transport purposes. So how do we slowly wean ourselves off fossil fuels and onto cleaner alternatives without endangering the world’s most vulnerable?
It is a delicate task, but the pay off can be huge, as the World Bank, IMF, OECD and IEA have all already advised; cutting subsidies for fossil fuels will provide an impetus for investment, growth and jobs in renewable energy and energy efficiency sectors and could help drive energy security and reduce environmental impact of human activity.
Besides government money not spent on subsidies for fossil fuels could be redirected towards social projects which support the vulnerable and be invested into cleaner energy. Pulling subsidies for fossil fuels need not mean pulling the plug, merely redirecting our energies (excuse the pun) to encourage fuels which have the least climatic impact and increase energy security.
In fact a recent study by Global Subsidies Initiative (GSI) published in March 2010, looked at evidence gathered from recent research, and concluded that eliminating subsidies to fossil fuels could be one of the most cost-effective and least distortionary options available to governments for reducing their greenhouse gas (GHG) emissions.
But the report called ‘Untold Billions: Fossil Fuel Subsidies, Their Impacts and The Path to Reform’ also tells the story of where reforms have gone wrong. For example, when the Government of Indonesia dramatically raised fuel prices twice in 2005 by reforming subsidies—thereby escalating the prices of food and commodities—demonstrators took to the streets throughout the country, with mobs
starting fires and throwing stones in protest.
But according to the IEA the world’s 20 per cent poorest received just 8 per cent of the $409 billion subsidies last year. More than 1 billion people in the world have no access to power so subsidies aren’t getting to them any way. Essentially subsidies benefit the wealthier and growing economies the most, not the poorest.
Our verdict: Reform is a must
There is no doubt that reform of subsidies is needed, but how, when and who needs careful planning.
Governments around the world find it hard to reform subsidies because oil and energy companies are so incredibly powerful; they need to make reforms without making energy security worse. Upsetting those that supply the goods sounds potentially lethal plus big oil companies fund political campaigns that work in their favour, making ties between governments and industry impossibly tangled. The US is a great example of why it is so hard to push reform. When Obama was elected President in 2008, reforming fossil fuel subsidies was one of the first things he tried to do. With the public mood driving for greater energy security, the creation of new jobs and reducing budgetary waste, it should have been an easy task.
But a plan to cut a measly $41 billion over 10 years by reducing or eliminating some tax credits and allowances for oil and gas companies fell on deaf ears in Congress in the last two budget submissions.
Eliminating fossil fuel consumption subsidies by 2020 would cut global energy demand by 4 per cent, the IEA estimate, considerably reducing carbon emissions growth. Money from these cut subsidies could be invested in clean alternatives, like wind energy instead.
Without further reform, spending on fossil fuel consumption subsidies will continue to rise, projected to reach $660 billion by 2020, or 0.7 per cent of global gross domestic product. In the face of pledges to cut greenhouse gas emissions, support clean tech industries and cut fossil fuel subsidies; that would be madness.
Faye Sunderland.
