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:
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.