Fossil fuel subsidies have allowed energy exporting countries to distribute resource revenue, bolstering legitimacy for governments, many of which are not democratically elected. But subsidy benefits are dwarfed by the harmful consequences of encouraging uneconomic use of energy. Now, with consumption posing a threat to long-term exports, governments face a heightened need to raise prices that have come to be viewed as entitlements.
The EU biofuels industry has increased its use of palm oil by 365 per cent over 2006-2012, from 0.4 to 1.9 million tonnes per year. The additional demand can be linked primarily to the growth in biodiesel production stimulated by government policies (primarily purchase mandates) during the same period. The increase in palm oil consumption in the biofuels sector has amounted to 1.6 million tonnes, or 80 per cent of the total increase in palm oil consumption in Europe (1.9 million tonnes) over 2006-2012.
Consumer subsidies to oil consumption depress the visible price of fossil fuels to end users, and with it their incentive to substitute alternative fuels or conservation. Understanding which countries mute price adjustments in oil products, and to what degree, is important in mapping out the options and trade-offs for reform.