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IEA: fossil fuel subsidies must be cut

  • 25 Oct 2011, 18:00
  • Tim Holmes & Robin Webster

In recent months, a great deal of attention has focused on the costs of subsidies for renewable energy - so much so that the media campaign against 'green energy taxes' on consumer bills has been held responsible for the government rowing back on some of its green agenda. This is in spite of the fact that, as we have detailed, many of the claims made do not appear to have anything to substantiate them - and what evidence there is undermines or refutes them.

It is therefore sobering to realise just how substantial subsidies toward fossil fuel energy are on the global level. The International Energy Agency (IEA) reported this month that fossil fuel subsidies currently amount to nearly half a trillion dollars. On Monday, the chief economist of the IEA urged the world to slash fossil fuel subsidies in non-OECD countries. He told the online magazine Euractiv that

"Today $409 billion equivalent of fossil fuel subsidies are in place which encourage developing countries - where the bulk of the energy demand and CO2 emissions come from - [towards a] wasteful use of energy"

This figure was also almost double the United Nations Environment Program's figure for total investment in renewable energy - from any source - in 2010.

The IEA's "World Energy Outlook 2011", due to be published on November 9, will include a special focus on energy subsidies. A summary of the report released at the beginning of October gave some of its results. The IEA calculate that by 2020 fossil fuel consumption subsidies could reach $660 billion - or 0.7% of global GDP - if they are not curbed. To give a comparison, 0.7% of GDP is equivalent to the established rich world target for foreign aid giving.

The summary also includes a graph showing the rise and fall of fossil fuel subsidies over the last few years:

Screen Shot 2011-10-25 At 15.51.26

In spite of the G20's September 2009 commitment to phase out fossil fuel subsidies "in the medium term", fossil fuel subsidies rose by $110 billion between 2009 and 2010. This occurred as a result of the rise in energy prices over that period.

The purported benefits of this spending are considerably overstated, according to the IEA. Fossil fuel subsidies are often made out to benefit the poorest - but as the IEA's chief economist told the Economist in 2009, in fact the subsidies mainly benefit middle-income and higher-earning urbanites because the rural poor use little fossil fuel. Most of the benefit therefore accrues to these richer groups: only 8% of the money spent reached the poorest 20% of the population. These subsidies are therefore, in the IEA's words, "an extremely inefficient means of assisting the poor".

Overall, the IEA identify 10 major problems with fossil fuel subsidies - concluding that they:

  • Encourage wasteful consumption
  • Hasten the decline of exports
  • Threaten energy security by increasing imports
  • Encourage fuel adulteration and smuggling
  • Discourage investment in energy infrastructure
  • Disproportionately benefit the middle class and rich
  • Drain state budgets for importers
  • Distort markets and create barriers to clean energy investment
  • Dampen global-demand responsiveness to high prices
  • Increase CO2 emissions and exacerbate local pollution

The G20 committed to cutting subsidies of fossil fuels in September 2009. World Bank documents leaked earlier this year described cuts to fossil fuel subsidies as

"a promising near-term option because of its potential to improve economic efficiency and raise revenue in addition to environmental benefits."

The chief economist of the IEA told Euractiv in an interview that cutting such subsidies in major non-OECD countries is "the one single policy item" which could help reorient the world towards a trajectory of 2 degrees global warming. He said that analysis in the report

 "…indicates that the door for a 2 degrees trajectory may be closing if we do not act urgently and boldly…In our central scenario, seven countries introduce some form of carbon pricing which brings us to a 3.5 degree trajectory. But if we want to keep the temperature increase to 2 degrees, many more countries need to do so. ".

In October, the OECD said that their analysis has shown that phasing out fossil fuel subsidies could cut six percent off projected business-as-usual emissions by 2050. There may then be something of a of a disjuncture between these bold claims around temperature and rather more modest emissions estimates. For the full story, we will have to await the release of the report in a couple of weeks.

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