Skip to main content

Editorial comment

Energy and, in particular, fossil fuel subsidies are brought up from time to time as a point of debate. Governments have continuously intervened in energy markets through direct and indirect subsidies but is this still a good idea? It can be argued that they help achieve economic and environmental objectives within an energy market. However, it can also be said that they cause imbalances in the development of energy technologies and result in a very high level of government expenses. Yet, this is often only the case for poorly implemented subsidy policies.

Register for a free trial »
Get started absolutely FREE in 2 minutes, no credit card required.

Two types of subsidies are currently utilised; direct subsidies in the form of spending on research and development, and indirect subsides in the form of foregone government revenue and tax expenditures. The World Bank has suggested that during 2008 US$ 557 billion was spent globally in the form of fossil fuel subsidies. In the US, the Environmental and Energy Study Institute focused study ‘Fossil Fuel Subsidies: A closer look at tax breaks, special accounting and societal costs’ has suggested that the small section of indirect subsidies discussed in the report amounted to nearly US$ 50 billion (most figures analysed discuss the 2010 – 2019 period). It is clearly evident that a lot of money is sunk into energy subsidies, so does this automatically mean it’s worth it?

In the US, the phasing out of fossil fuel subsidies is being called for. The 2013 US budget announcements made by President Obama earlier this year exemplify this. It has been argued that fossil fuel subsidies are no longer justified as this sector has changed dramatically over the last 100 years. Granted, fossil fuels do play a large part in the energy mix, but as the world looks to become greener, should some of the money given to fossil fuels be diverted towards renewable energy? Also, the efficiency of US fossil fuel subsidies is being questioned. The policies, which created these expenditures, are not regularly checked and reassessed, so, inefficiency is possible, as they have not changed with the movements in economics, the environment, politics, science and technology.

Despite the negatives, energy subsidies help to keep prices low, help economic development and encourage poverty reduction. So, on balance, yes energy subsidies can be inefficient and need readdressing as markets and economies change, but phasing them out altogether could result in far worse problems. The importance of energy subsidies to the cost of production and shares will be affected with their riddance. The availability of alternative substituted inputs needs to be addressed so that costs can be balanced out. Also, a problem can arise with regards to the ease at which the increased cost of products, once subsidies have been removed, can be passed onto the consumer. Overall, in my opinion, it appears that energy subsidies still need to be a part of the energy economy, but maybe in a slightly altered format.