Who’s Getting the Fossil Fuel Subsidies?

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.

bribery

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!

John Bell,

Ordinary bloke

 

Your energy bill going up?

In the UK our energy prices are going up. That’s not the case world over. Some countries are seeing price reductions, and the overall picture is that we are on track for a 4° C rise. Policy makers appear to be happy with this, as it is lower than the 6° some portend, but this will be “horrible” according to Dr Fatih Birol, Chief Economist at the International Energy Agency, who spoke at Imperial College London on 6 Feb.

(The lecture is available on the web at the moment. Have a listen to it – it’s 1 hour 15 mins in length. If you don’t fancy that, then please read on and see my shorter paraphrased version below. Note that unless there is a link to another source all of the figures quoted below come from the lecture).

Alastair Buchanan, the head of the UK energy watchdog Ofgem, recently raised concerns about our increasing reliance on imports for our energy needs leading to increases in prices. But in the US they are on track to be largely energy self-sufficient by 2025, due to recent increases in domestic oil

and gas production (e.g. fracking), and decreases in domestic oil usage (due to for example regulation on car energy efficiency).

In Europe this has lead to a $200bn increase in annual costs of oil & gas (from $250bn to $450bn). Coal prices collapsed in Europe as the coal not used in the US (due to gas out-pricing coal in the states), leading to a large increase in coal usage in Europe (in 2012 the UK saw an increase of 20% in coal use).

It is jealousy of the situation in the states that leads George Osborn

e to want to tap into potential shale gas reserves in the UK. But there are genuine concerns about fracking (not seismic activity seriously, but more the escape of methane and the affect on the landscape – it’s not just windmills that suffer from that malaise – at least in the case of windmills the installation is easily reversible). And none of this helps us towards the 2° C target. Gas alone will not do the trick.

Climate Change Off Switch - reduced

Global energy usage is still on the increase, largely but not entirely due to the emerging economies. There is certainly a huge imbalance at the moment. For example, the entire energy usage in sub-Saharan Africa (population 850 million) is the same as for … New York.

Half of the expected global energy increases to 2035 are predicted to come from renewables – therefore the rest from fossil fuels. The increases in China are expected to be equal to the current usage in the US PLUS Japan.

This is at least in part due to the huge and increasing subsidies that fossil fuel production receives. Yes, it might seem ludicrous given what we know, but the global subsidy has passed $500bn (see from about minute 55 in the lecture). That is the same size as, you guessed it, the entire global renewable energy industry. Pause for effect.

In Europe our carbon pricing means that there is a $10 per ton disincentive on carbon dioxide emissions. The fossil fuels subsidies globally means that to counter that there is a $110 per ton CO2 incentive!

One of the upshots is that the energy efficiencies expected to be realised over the next decade or so (without new technologies) in industry, for power generation, transport and buildings, is only 1/3 of its potential. We could be a lot more efficient than we are, and a lot more efficient than we expect to be. There would be 2-4% increase in GDP if this untapped potential is released, e.g. by funds being found up-front to invest in energy efficiency.

We will use up 80% of the 2° C carbon budget using our existing global infrastructure alone. Add in expected building programmes and we will have used up the entire budget.  We will have closed the door on a 2° C future by 2017.

If we realise the energy efficiency potential of known technologies now, that can be deferred to 2022.

If you add in new technologies and changes in our usage, we still have a chance.

John Bell,

Ordinary bloke