Fossil fuel subsidies dig world into economic, environmental hole – RENewEconomy.com

In the same week that a new study found that G20 nations, including Australia, were providing $US88 billion ($A102 billion) a year in subsidies just for fossil fuel exploration, another report – this time from the highly conservative International Energy Agency – has put a number to the global value of subsidies that artificially lowered end-use prices for all forms of fossil energy in 2013: $US548 billion.

It’s a huge number, and although $25 billion less than in 2012, the IEA notes that the $548 billion spent in 2013 – over half of which was directed to oil products – remains more than four times the value of subsidies to renewable energy and more than four times the amount invested globally on improving energy efficiency.

In its 2014 World Energy Outlook report, released on Wednesday, the IEA says the subsidisation of fossil fuels remains a big problem globally, imposing enormous economic, social and environmental costs.

As well as being a huge drain on the public purse, the IEA report argues that fossil fuel subsidies – usually justified by governments for social reasons, such energy equality, redistribution of wealth and reduction of dependence on imported fuels – don’t actually save people money.

“One thing is certain,” says the report: “the cost of fossil fuels to an economy is not reduced by subsidies; it is just redistributed. Consumers as a whole usually still have to pay the full cost of the energy – through higher taxes and lower spending elsewhere in the economy.”Screen Shot 2014-11-13 at 11.06.36 AM

In the case of countries that are large exporters of energy – like Australia – the IEA says the “exhaustibility of the resource means that higher consumption now reduces sales in the future.”

Critically, it says, “the market distortions created by fossil fuel subsidies lead to a misallocation of resources, which results in a longer term economic cost.”

The report adds that fossil fuel subsidies crowd out more productive and meritorious government spending and depress private investment, including in the energy sector itself.

These subsidies, the report continues, also encourage excessive fossil fuel consumption, which can aggravate pollution, boost greenhouse gas emissions, artificially promote energy-intensive industries, accelerate the depletion of natural resources and reduce incentives for investment in renewables and energy efficiency.

In fact, the report names the handicapping of renewables as one of the most damaging effects of subsidising fossil fuel – an effect that hinders investment in clean energy technology, slows deployment and reduces learning rates, thus slowing the pace of cost reduction as the technologies mature.

“Fossil fuel subsidies rig the game against renewables,” says the report, “and act as a drag on the transition to a more sustainable energy system. On the other hand, subsidies to renewables can, if well designed – aid the deployment of sustainable technologies in support of energy security and environmental goals.”

In other words, it says, “the more a government subsidises fossil fuels, the more it has to subsidise renewables if it wants to keep a level playing field.”

According to the IEA, the estimated amount spent globally on subsidising renewable energy was $121 billion in 2013 – $16 billion or 15 per cent higher than in 2012. The US was the biggest subsidiser of renewables of any country, dedicating $27 billion to the cause in 2013, mostly directed to biofuels, solar PV and wind power. The EU subsidised renewables to the tune of $69 billion, says the report, most of which went towards solar PV.

But if you take away fossil fuel subsidies, then you find that, in many cases, renewable energy doesn’t need them to compete. As shown in the chart below, the IEA uses the Middle East as an example to show that, were oil not subsidised in the region, new oil-fired plants would not be able to compete with any of the main renewable technologies or with nuclear power. And that’s in the Middle East, a region made up of OPEC nations.

Screen Shot 2014-11-13 at 11.21.50 AM

The Middle East also provides a striking example of the effect of subsidies on energy efficiency, says the report, where, with the exception of a few countries, the prevalence of fossil fuel subsidies has slowed the uptake of modern energy efficient technologies in most end-use sectors.

In Saudi Arabia, for example, petrol prices at around $US0.15 per litre mean it would take around 16 years for a Saudi motorist to recover the cost of upgrading to a new, fuel efficient vehicle – a highly unattractive pay-back period.

In short, says the report, reducing or phasing out fossil fuel subsidies would bring major benefits, not just to the countries that subsidise, but to the whole world.

“By raising prices to power generators and end-users, (cuts to subsidies) would encourage more rational use of energy, more efficient investment in energy supply and less ease, leading to less pollution and lower emissions of greenhouse gases.

“It would also bring economic gains to the countries with subsidies through a better allocation of economic resources, reduced fiscal burdens and improved trade balances.”

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