The economic case for a large scale move to clean energy is undermined because, incredibly, government subsidies for fossil fuels are larger than the size of the global renewable energy industry. This subsidy amounts to a greater incentive to emit carbon dioxide than the market price put on carbon emissions, by a factor of more than ten to one on current prices.
In a previous post I promised to look further into the calculation of the fossil fuel subsidy to understand who is benefiting and what is covered. This is me fulfilling that promise.
In November 2010, the International Energy Agency (IEA), World Bank and OECD met a request of the G20 to produce a second report on the international energy subsidy. In it, they define the fossil fuel subsidy as any action taken by a government to decrease the costs to the fossil fuel industry or to reduce the price of fossil fuels or fossil fuel based energy to consumers. It is essentially the opposite of a tax.
They list the main reasons that the subsidies exist. It could be to alleviate energy poverty. It could be to boost domestic energy supply or to support industry development. It could be to redistribute wealth in rich oil producing nations from the producers of the oil to the rest of the population.
The report argues how the downsides outweigh the positives. The subsidies encourage wasteful consumption. They increase energy price volatility (by disguising market signals). Crime is increased as fuel intended for one purpose or market is used for something else or sold elsewhere. They tend to disproportionally benefit the well-off, increasing the poverty gap. Above all (for me) they undermine the competitiveness of renewables. And of course the money used for the subsidy could be used for other purposes, such as healthcare, or increasing energy efficiency.
So, who is giving out these subsidies, and who is benefiting? The IEA have available on their website a breakdown of the subsidies by country in an interactive map – have a play. They are mainly in the oil producing countries of North Africa and Middle East, due to consumers within the country paying artificially lower for their energy than the country could in theory make by selling the energy on the international market. For example in Kuwait domestic prices are 87.8% lower than they should be. Iran has the largest subsidy of $82bn (17% of GDP), which needlessly lead the country to be a net importer of oil – fortunately they recognise this and are tackling it.
You would have thought that calculating the subsidy would be simple – you just add up the money given to consumers or producers, don’t you? Perhaps unsurprisingly that is not the case, as the subsidies take many different forms, from direct money transfers, through creating a separate market or guaranteeing low prices for domestic consumption, to tax breaks or de-regulated access to government land for producers.
There are therefore several different methods for calculating the fi
gure. The method used by the IEA is called price-gap analysis. This method doesn’t include all diffe
rent types of subsidy (such as research and development into new technologies) by its definition, which is to calculate a reasonable market value available to a country, and then compare that with the price paid by consumers for energy within the country. If they are paying less than the market rate, then their use is being subsidised. If more, it is being taxed.
The encouraging news is that many countries that do subsidise fossil fuels do seem to be taking steps. This gives us a chance that at some point everyone will be paying the market rate for fossil fuel use. Capitalism will have that bit of an extra chance to prove that it is the right system to improve our lives while resources dwindle and without damaging our future.
Thoughts below please!