Hefty Subsidies Prop Up Unsustainable Energy System

Efforts by a variety of organizations to quantify global support for fossil fuels have generated estimates that range from $523 billion to over $1.9 trillion, depending on the calculation and what measures are included. What is clear is that the level of support has rebounded to 2008 levels following a dip in 2009-10 during the global financial crisis, writes Worldwatch Research Fellow Philipp Tagwerker in the Institute’s latest Vital Signs Online trend (www.worldwatch.org).

Traditional calculations account for two kinds of energy subsidies. Production subsidies lower the cost of energy generation through preferential tax treatments and direct financial transfers (grants to producers and preferential loans). Consumption subsidies lower the price for energy users, usually through tax breaks or underpriced government energy services. While production subsidies predominate in Organisation for Economic Co-operation and Development (OECD) countries, consumption subsidies are favored in developing countries to reduce the burden on poor households’ income, as poor people have to use a greater share of their income to buy fossil fuel products.

The International Energy Agency (IEA) estimates that coal, electricity, oil, and natural gas consumption subsidies in 38 developing economies were $523 billion in 2011. Using a price-gap approach, the IEA figure includes subsidies that bring the price of fossil fuels below the international benchmark. Subsidies that lower the price just to the international level or slightly above it are not captured. In a parallel study by the OECD, support measures for the production and consumption of fossil fuels in its 24 member countries were inventoried. Using a broader definition than the price-gap method (including direct budgetary transfers and tax expenditures), support for fossil fuels in OECD countries alone averaged $55-90 billion per year between 2005 and 2011.

The lack of a clear definition of “subsidy” makes it hard to compare the different methods used to value support for fossil fuels, but the varying approaches nevertheless illustrate global trends. Fossil fuel subsidies declined in 2009, increased in 2010, and then in 2011 reached almost the same level as in 2008. The decrease in subsidies was due almost entirely to fluctuations in fuel prices rather than to policy changes.

In developing countries, roughly $285 billion­-more than 50 percent of all fossil fuel consumption subsidies-went to oil in 2011. Natural gas consumption there received $104 billion in support. Coal received only $3 billion in direct consumption subsidies in these countries, but another $131 billion went to public underpricing of electricity,much of which is generated from burning coal. In industrial countries, using the broader definition of consumption subsidies, the support for oil was valued at roughly $38 billion in 2011. Natural gas support in these countries totaled around $10 billion. Coal was supported the least in industrial countries, receiving $7 billion in subsidies.

Support for renewables is still small-$88 billion in 2011, compared with the support for fossil fuels estimated by the IEA and OECD. But it expanded by 33 percent in 2011, more than the 28 percent increase for fossil fuel subsidies. Of the $88 billion support for renewables, two-thirds went toward electricity and the remaining third to biofuels.

Externalities have so far not entered into the calculation of subsidies, although the additional costs associated with increased resource scarcity, the environment, and human health are enormous. Without factoring in such considerations, renewable subsidies’ cost between 1.7¢ and 15¢ per kilowatt-hour (kWh), higher than the estimated 0.1-0.7¢ per kWh for fossil fuels. If externalities were included, however, estimates indicate fossil fuels would cost 23.8¢ more per kWh, while renewables would cost around 0.5¢ more per kWh.

From an emissions perspective, 15 percent of global carbon dioxide emissions receive $110 per ton in support, while only 8 percent are subject to a carbon price, effectively nullifying carbon market contributions as a measure to reduce emissions. Accelerating the phaseout of fossil fuel subsidies would reduce carbon dioxide emissions by 360 million tons in 2020, which is 12 percent of the emission savings that are needed in order to keep the increase in global temperature to 2 degrees Celsius.

Subsidy estimation and transparency initiatives need to be scaled up and consolidated. A common methodology and definition can aid in analyzing the distortions that subsidies cause in the economy and allow for a better-informed dialogue to negotiate their phaseout. The same analysis could help alleviate the political resistance toward fuel price increases, as countries can be guided in their decision making and supported in the reallocation of funds.

Further highlights from the report:

  • Producer subsidies other than the support measures captured in the OECD inventory were quoted at $100 billion in the June 2010 report to G-20 leaders from the OECD, the IEA, the World Bank, and the Organization of the Petroleum Exporting Countries.
  • After removing tax breaks for energy products such as a reduced value-added tax, a recent report by the International Monetary Fund estimated that the total amount of fossil fuel subsidies increased to at least $1.9 trillion, or 2.5 percent of global GDP.
  • Russia announced plans to increase regulated natural gas tariffs on the domestic market by 15 percent for all users from July 2013, and China announced that starting in March 2013, oil product prices would be adjusted every 10 working days to better reflect international prices.

About The Naib

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