The steep decline in the world oil price in the last quarter of 2014 slashed fuel price subsidies. Several governments responded by announcing that they would remove subsidies for one or more fuels and move to market-based pricing with full cost recovery. Other governments took advantage of low world prices to increase taxes and other charges on fuels. However, the decision to move to cost recovery and market prices, ending budgetary support, has not been implemented consistently across countries.
G20 country governments are providing $452 billion a year in subsidies for the production of fossil fuels. Their continued support for fossil fuel production marries bad economics with potentially disastrous consequences for the climate. In effect, governments are propping up the production of oil, gas and coal, most of which can never be used if the world is to avoid dangerous climate change. It is tantamount to G20 governments allowing fossil fuel producers to undermine national climate commitments, while paying them for the privilege.
The combustion of fossil fuels is a leading contributor to climate change, and many countries have already taken steps to reduce their emissions of CO2 and other pollutants. Some policies remain, however, that encourage more production and use of fossil fuels than would otherwise be the case. In so doing, these policies increase emissions and make mitigation more costly than necessary. Fossilfuel subsidies are one such policy.
Numbers ranging from half a trillion to two trillion dollars have been cited in recent years for global subsidies for fossil fuels. How are these figures calculated and why are they so different? The most commonly used methods for measuring subsidies are the price-gap approach-quantifying the gap between free-market reference prices and the prices charged to consumers-and the inventory approach, which constructs an inventory of government actions benefiting production and consumption of fossil fuels.
Energy subsidies are among the most pervasive, and most controversial fiscal policy tools in the Middle East and North Africa (MENA). In a region with few functioning social welfare systems, subsidized energy prices continue to form an important social safety net, albeit a highly costly and inefficient one. In the MENA region's oil and gas producers, low energy prices have also historically formed an important element of an unwritten social contract, where governments extracted their countries' hydrocarbon riches in return for citizens' participation in sharing resource rents.
Government subsidies to energy producers, transporters, and consumers are widespread throughout the world and represent a large public investment in the energy sector. In theory, this investment could be funding a variety of social goals such as providing the poor with access to basic energy services and addressing common environmental problems linked to energy extraction and consumption.
Although some subsidies do address these types of concerns, most either do not, or do not do so effectively.
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 Inter-American Development Bank (IDB) is embarking on a major work program to identify and assess fossil fuel subsidies throughout Latin America and the Carribean. I had the privilege of presenting a number of ideas on how to leverage their effort during an expert meeting on the topic a few weeks back. The slides from my presentation can be viewed here.
Growing consensus that fossil fuel subsidies need to go
Bjorn Lomborg ran an op-ed in the Wall Street Journal a few days ago in which he concluded the real problem with energy markets is that there are too many subsidies to green energy. Lomborg argues that people who complain about subsidies to fossil fuels are in part misguided by the considerable "misinformation" on the subject, and he aims to "debunk" key "myths" around the numbers. While he agrees that fossil fuels shouldn't be subsidized either, his main focus is on government largesse to renewables.
Prioritizing Fossil-Fuel Subsidy Reform in the UNFCCC Process: Recommendations for short-term actions
Useful overview of ways the existing United Nations Framework Convention on Climate Change (UNFCCC) could be leveraged to expand transparency and reform of fossil fuel subsidies. Because there are a number of potential venues already extant under the UNFCCC that could be used, the chance to overcome political resistence may be higher than through some other venues. The author anticipates that developing countries implementing subsidy reforms as Nationally Appropriate Mitigation Actions may be particularly promising.