$500 Billion in Fossil Fuel Subsidies; Removing Them Would Boost Growth & Revenues, Reduce Greenhouse Gas Emissions: OECD

November 17th, 2011 by Andrew

Removing fossil fuel subsidies would boost economic growth and make energy markets much more efficient, not to mention all the good that would result in terms of reducing greenhouse gas emissions, according to a study and policy report from the Organization for Economic Cooperation and Development (OECD). Doing so would also give a big boost to financially strapped governments at a time when many are in dire, or near dire, need of improving their finances.

In order to realize this aim, the OECD has published a groundbreaking report based on International Energy Agency (IEA) data that for the first time provides detailed information on more than 250 fossil fuel subsidy mechanisms. Entitled, “Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels,” the publication will be update regularly and expanded over time to cover additional countries and subsidy mechanisms.

At Least Half a Trillion Dollars of Fossil Fuel Subsidies

Some $500 billion of government and taxpayer funding went to subsidize fossil fuel production and consumption in 2010, according to the OECD. That’s despite G-20 leaders pledging in 2009 to phase-out energy subsidies that encourage wasteful consumption, reduce our energy security and undermine efforts to deal with the threat of climate change,” according to an OECD press release. Reform efforts have been hindered by a lack of information on the amount and nature of fossil fuel energy subsidies, particularly in developed countries that make up almost all of the OECD’s 34-nation membership, the organizations noted.

Moreover, fossil fuel subsidies often fail in achieving their touted benefits, noted OECD Secretary-General and IEA executive director Maria van der Hoeven. Rather than alleviating energy poverty or fostering economic development, they often result in wasteful energy use, add to volatility in energy and fuel prices, cause extensive environmental damage, encourage fuel smuggling and stifle competition from cleaner, renewable energy alternatives.

“In a period of persistently high energy prices, subsidies represent a significant economic liability,” stated IEA Executive Director Maria van der Hoeven, noting IEA estimates that subsidies that artificially reduce the price of fossil-fuels amounted to USD 409 billion in 2010 – almost USD 110 billion higher than in 2009. This is based on the IEA’s global survey to identify economies that artificially lower end-use prices for fossil fuels to below the full cost of supply.

Removing Fossil Fuel Subsidies: Benefits Abound

The OECD’s latest analysis shows that phasing out subsidies to fossil-fuel consumption alone could reduce greenhouse gas emissions by 6% in 2050 compared with a business as usual scenario, while at the same time increasing economic efficiency.

Doing so would also stimulate renewable energy and energy efficiency investment, growth and job creation, while also providing a big boost to public finances, as governments across the OECD, and wider world, struggle to support economies wracked by the latest financial crisis and recession, as well as the sharply rising costs of more frequent extreme weather.

“We estimate that the annual value of the transfers generated by these policies has ranged from about USD 45 billion to 75 billion a year in recent years. This wide range is, in part, influenced by the price of crude oil. In 2008, when oil prices peaked at over 140 dollars a barrel, the support for fossil fuel production and use had risen to around 75 billion dollars. In 2010, when oil prices were lower, the total support dropped to around 60 billion dollars,” OECD Secretary-General Angel Gurria elaborated.

The OECD provides a country-by-country breakdown of fossil fuel subsidies included in its report. An interactive map shows fossil fuel consumption subsidy rates as a proportion of the full cost of supply as of 2010.

Progress and Keys to Successfully Phasing Out Fossil Fuel Subsidies

Thankfully, there are some signs of progress, the OECD notes: nearly half of the countries identified by the IEA as artificially lowering the price of energy to below the full cost of supply have taken steps since the since the beginning of 2010 to rationalize energy prices.

“While this is an encouraging start, much work remains to be done in order to realize the full extent of benefits. It is crucial that countries follow through on their commitments by implementing reforms that are well-designed and durable,” IEA executive director van der Hoeven said.

The OECD reviewed some of the strategies that governments are using to successfully phase out fossil fuel subsidies. They highlight key elements that are keys to their success:

• Available and transparent data are essential to inform objective discussion.

• Financial support for economic restructuring and assisting poor households can help to protect vulnerable groups.

• Integrating reforms to fossil fuel subsidies into broader structural reforms can help build support for the reforms, particularly when the money saved is used to benefit the wider public.

“Both developing and developed countries need to phase out inefficient fossil fuel subsidies. As they look for policy responses to the worst economic crisis of our lifetimes, phasing out subsidies is an obvious way to help governments meet their economic, environmental and social goals,” OECD Secretary-General Gurria said.

“For this to succeed, we need well-targeted, transparent and time-bound programs to assist poor households and energy workers who might be adversely affected in the short-term. OECD and IEA data and analysis can help guide the process.”









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