Developing countries subsidise fossil fuel use

The International Energy Agency (IEA) annually estimates global fossil fuel consumption subsidies that measure what many developing countries spend to provide below market cost fuel to their citizens. In 2013, IEA found that fossil fuel consumption subsidies totalled US$548 billion, 4% lower than 2012.

According to IEA, this decrease is due to lower international energy prices. Oil subsidies make up over half of the total fossil fuel consumption subsidies, while electricity makes up 24%, natural gas 22% and coal less than 1%. According to the IEA, the US does not have any consumption subsidies for oil, coal, or natural gas.

IEA’s subsidy study found that many developing countries artificially lower energy prices to their citizens, paying the difference from their government resources. These wealth transfers are differentiable from subsidies that are intended to support uneconomic energy sources such as wind and solar technologies toward commercialisation. In contrast, the US and other developed countries offer support to energy production in the form of tax credits, loan guarantees or use mandates, which are not included in IEA’s fossil fuel consumption subsidy calculations since they are directed towards production rather than consumption of the fuel.

According to the IEA, global fossil fuel consumption subsidies are over 4 times higher than global renewable subsidies. IEA’s estimate for global renewable subsidies (biofuels and renewable electricity) in 2013 is US$120 billion, higher than the US$100 billion they reached in 2012. In contrast to fossil fuel consumption subsidies, renewable fuel subsidies often take the form of tax credits for investment or production, or premiums over market prices to cover the higher production costs compared to traditional fuels.

Fossil fuel consumption subsidies by country

Fossil fuel consumption subsidies are most prevalent in the Middle East and North Africa. Iran leads the world in fossil fuel consumption subsidies providing almost US$84 billion from its government resources in 2013 to lower the cost of fossil fuels to end users in the country. Of the US$84 billion in fossil fuel consumption subsidies Iran paid, 49% covered oil, 33% funded natural gas, and the remainder (18%) went to electricity.

Saudi Arabia is the second largest country subsidising end use fossil fuel prices, providing 77% of its US$62 billion in fossil fuel consumption subsidies to oil and 23% to electricity in 2013.

India ranked third with US$47 billion in fossil fuel consumption subsidies, 78% covering oil, 9% covering natural gas, and 13% going to electricity.

Russia came in fourth with US$46.5 billion in fossil fuel consumption subsidies – natural gas garnered 48% and electricity 52% of the total.

Venezuela ranked fifth with fossil fuel consumption subsidies totalling US$38 billion, 68% covering oil, 13% covering natural gas and 19% covering electricity.

Egypt and Indonesia ranked sixth and seventh, respectively, both funding over US$29 billion in fossil fuel consumption subsidies. Egypt’s fossil fuel consumption subsidies totalled US$ 29.9 billion in 2013 and mainly funded lower petroleum prices. The distribution of Egypt’s fossil fuel consumption subsidies was: 70% oil, 9% natural gas, 21% electricity. Indonesia’s fossil fuel consumption subsidies totalled US$ 29.2 billion in 2013 with oil receiving the most (73%) and electricity, 27%. The United Arab Emirates (UAE) and China ranked eighth and ninth in fossil fuel consumption subsidies, respectively, with subsidies totalling US$ 22.3 billion (UAE) and US$ 21 billion (China).

Coal received US$ 2.9 billion in fossil fuel consumption subsidies, just 0.5% of the total. The countries that subsidised coal in 2013 were Kazakhstan, Thailand, Taiwan, and the Republic of Korea.

Many of the countries providing fossil fuel consumption subsidies own state energy companies, including countries that comprise the OPEC, such as Iran, Saudi Arabia, and Venezuela. Net exporting countries see these subsidies as an opportunity cost.

Fossil fuel consumption subsidies are often used to alleviate poor energy poverty, but are an inefficient means for doing so, creating market distortions that result in wasteful energy consumption, according to the Institute for Energy Research (IER).

Developed countries, such as the US, do not have fossil fuel consumption subsidies.

Conclusion

According to the IER, many Americans are confused by the large amount of global fossil fuel consumption subsidies that the IEA calculates, not realising that these subsidies have nothing to do with tax policy, research and development or loan guarantees, where most US programs are directed. In fact, most liberalised countries not only do not offer fossil fuel consumption subsidies that artificially lower the end use price of the fuel, but in fact, tax energy consumption, Fossil fuel consumption subsidies are common and pervasive in the developing world, particularly in economies with state owned energy companies. The IEA has been advocating for years that fossil fuel consumption subsidies should be eliminated since they encourage wasteful consumption.

Fossil fuel consumption subsidies in developing countries are welfare transfers that can be differentiated from subsidies in the name of commercialising or sustaining uneconomic energy sources such as on grid wind or solar, which the US and other industrialised countries have been heavily subsidising. These latter forms of energy subsidies that help promote production of uneconomic energy sources can be abolished without detrimental affects to the US economy and its citizens, and in fact would increase economic efficiency since by their very nature, they are more expensive than competing forms of energy.

The OECD countries fund fault with developing countries for subsidising the costs of energy purchased by their citizens, but those same OECD nations are busy subsidising and mandating the use of uneconomic and inefficient forms of energy which will make energy more expensive and less reliable for their citizens. Neither of these policies reflects markets or makes sense, and the economies of all concerned would be better off if all such supports by government were abolished, the IER holds.

Adapted from a press release by Emma McAleavey.

Read the article online at: https://www.hydrocarbonengineering.com/the-environment/09122014/fossil-fuel-consumption-subsidies-1752/