Oct 31, 2018

Fossil fuel subsidies head back up after years of decline

Worldwide government subsidies for consumers to buy fuel and electricity derived from fossil fuels rose in 2017 after falling for several years, new International Energy Agency data shows.

Adapted from an IEA report; Chart: Axios Visuals

Why it matters: Subsidies are a thorny problem in the wider push to transition the world to cleaner and less carbon-intensive energy sources, as a new IEA commentary notes.

  • Subsidies help poor consumers obtain needed energy. But they often also benefit relatively wealthier people who don't need them while pushing up emissions and straining federal budgets.
  • For example, phasing out power subsides would help facilitate deployment of the Middle East's abundant solar resources.

By the numbers: Subsidies rose 12% last year to reach over $300 billion worldwide, the IEA estimates.

  • This trend is driven largely by increasing oil prices, which subsequently boost the value of the subsidies keeping consumer fuel costs artificially low.

Where it stands: IEA analysts Wataru Matsumura and Zakia Adam suggest that in addition to the higher figures, progress on subsidy reform in a number of countries is at risk.

  • They note that multiple nations — "from India to Indonesia and from Mexico to Malaysia" — began reforms in recent years, taking advantage of the steep drop in oil prices that began in mid-2014.
  • In addition, "Kuwait, Oman, Qatar, Saudi Arabia and the UAE have all increased domestic prices for gasoline, natural gas and electricity in recent years."

Threat level: "The rise in international fuel prices in 2018 could set back efforts to phase out fossil fuel subsidies," they write, adding that some countries have begun delaying implementation of moves toward market-based pricing.

The big picture: Joe Aldy, associate public policy professor with Harvard's Kennedy School of Government and former White House energy aide under President Obama, tells me:

"The increase in oil subsidies reflects the challenge many developing countries face when setting fuel prices. When crude oil prices fell in 2014, a number of countries reset their fuel prices and effectively reduced their subsidies."
"Political opposition to subsidy reduction reappears, however, when crude oil prices increase, and a number of countries have begun to reinstate their subsidies."

Between the lines: Aldy also offers some thoughts on policy and options for effective subsidy reform....

  • While a government can reduce the level of subsidies by having consumer prices more closely aligned with market prices, the cost of the subsidies still grows unless policymakers take the often politically unpopular step of actively raising prices.
"Not surprisingly, many politicians prefer to avoid making such a choice, and subsidies increase. A more effective subsidy reform would remove the need for policymakers to act every time crude oil prices change."
"A complete reform would leave markets to determine the price of fuels, as in the United States and other developed countries. A substantial, intermediate step would be to create an automatic fuel pricing mechanism that adjusts — but not too quickly — to changing crude oil prices."

Of note: Keep in mind this data is about subsidies for consumers. Another big part of the picture is large worldwide subsidies for fossil fuel production, which isn't part of this report.

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