Let’s not add (fossil) fuel to the fire II: Subsidy phase out

Subsidies to fossil fuels are 6x more than renewables / endfossilfuelsubsidies.org

It’s not every day I find myself on the same side of the fence as market liberals. After all, markets work well only until they fail. (And when it comes to the climate they have failed miserably.) But there is one thing we see eye-to-eye on: the damage done by fossil fuel subsidies.

This concurrence was recently highlighted by a US Republican House staffer who argued that fiscal conservatives are, by definition, natural supporters of phasing out fossil fuel subsidies.

No level playing field in the energy sector

Historically and currently in the energy sector, there has been no level playing field . The field is heavily tilted in favour of fossil fuels. In 2011, post-tax (production and consumption) subsidies for fossil fuels equalled US $1.9 trillion worldwide and $502 billion in the US alone. That is six times more than renewable energies receive.

That is also a whopping 2.5 % of global GDP: At a time of economic and financial crises, when governments have very limited financial resources and are consequently imposing austerity measures on the rest of their budgets, spending this amount on fossil fuel subsidies is indefensible.

As opponents to renewables rail against government initiated financial mechanisms to incentivise renewables development, their protests ring hollow against the colossal size of fossil fuel subsidies. Fatih Birol, chief economist at the International Energy Agency (IEA), reminds us that “Energy [from fossil fuels] is significantly underpriced in many parts of the world, […] undermining the competitiveness of renewables.”

In addition to artificially dampening the attractiveness of renewable energy technologies, fossil fuel subsidies incentivise wasteful consumption, exacerbate energy price volatility, encourage fuel smuggling, disproportionately benefit the wealthy and increase greenhouse gas emissions, to name but a few disadvantages.

A phase out of fossil fuel subsidies

Back in 2009, G20 countries made a non-binding commitment to phase out “inefficient fossil fuel subsidies that encourage wasteful consumption.” As of today – four years later – not a single one of those countries have honoured this commitment. A significant rate limiting factor identified by Oil Change International and Earth Track is the lack of self-reporting by countries regarding their subsidies and reform efforts, as well as inconsistencies in interpretation of the term “inefficient fossil fuel subsidies”.

Removing financial support for fossil fuels will have a direct effect on reducing greenhouse gas emissions. Estimates by the IEA and OECD show that a phase out of fossil fuel consumption subsidies alone would reduce greenhouse gas emissions by 10 % by 2050 compared to the business-as-usual scenario.

Political courage in tackling a politicised issue

The major challenge in a phase out is navigating the thorny, complex issue of potentially consequent energy price increases. This has been the kryptonite in some subsidy reform attempts and has led governments such as in Indonesia to regress back to fossil fuel subsidies in order to alleviate price increases that resulted either from the subsidy removal or a pass-through from international price volatility.

Public perception of who the winners and losers are from a phase out affects whether a proposal is met with public acceptance or protest, as was the case in Nigeria in 2012. Even though in reality, only a tiny fraction of fossil fuel consumption subsidies goes to the poorest quintile of the population, policy makers should present a viable alternative that addresses perceived losses.

Tackling the potential, albeit short-term, rise in energy prices hence calls for political courage, transparency and clear communication. It needs a careful and long-term policy plan. It is precisely the reason a phase out of fossil fuels – through a phase out of subsidies for them – must go hand-in-hand with a phase in of renewable energy at the same time in order to provide a cost-effective, climate compatible alternative.

The costs of renewable energy have halved in the past decade while that of oil has tripled (inflation adjusted). Bringing down energy prices will not happen through fighting the rising costs of fossil fuels; it will happen through increasing the share of renewables in the energy mix, as every new unit of capacity lowers the cost of the next. Financial mechanisms like the feed-in tariff for renewables also have a built-in obsolescence that fossil fuel subsidies do not.

Solution: A rapid phase in of renewables

While levelling the playing field is sufficient in allowing renewables to trump fossil fuels on the cost front, the historical and infrastructural entrenchment fossil fuels currently enjoy means that the energy transition in an open market will be slow – too slow to achieve the energy security urgently needed and to stay on this side of the 2°C global temperature rise threshold.

Since we have been grossly overspending our carbon budget – the maximum amount of CO2 we can emit in the first half of the 21st century to have a chance of not exceeding the 2°C limit – global emissions must be drastically reduced. In order to do this, 80 % of the remaining coal, oil and gas reserves (from listed assets) will need to remain in the ground.

The solution to meeting both emissions limits and energy demands lies in an accelerated and mass uptake of renewable energy. Such a large scale energy transition is achieved most effectively and quickly with the right national policy frameworks in place. The relatively quick successes in countries like Denmark, Germany and Austria were achieved through policies such as a feed-in tariff that enabled participatory, decentralised energy production. The high share of renewable energies resulted in economic development and local value creation that benefited citizens.

Admittedly, in less economically advanced countries where electricity bills account for a large share of household expenditure, even a slight increase in electricity prices passed on by utilities to the final consumer resulting from a feed-in tariff can be prohibitive. This can be offset by a government fund financed by the expenditure relieved from the removal of fossil fuel subsidies. Globally, an end to such subsidies would return the equivalent of 8 % of government revenue back to the public purse.

Birol frames fossil fuel subsidies as an obstacle to societal progress: “Fossil fuel subsidies are a hand brake as we drive along the road to a sustainable energy future. Removing them would take us half way to a trajectory that would hold us to 2°C.” Removing them would take us to a fossil-free future by levelling the playing field for renewable energies.

 

Recommendations for fossil fuel subsidy phase out were made by e.g. the International Monetary Fund (IMF), the Organisation of Economic Co-operation and Development (OECD), the IEA and the World Bank.

Wednesday, July 17th, 2013