Fossil fuel subsidies: billions up in smoke?

Click to read the report online
Click to read the report online

On a visit to Scotland in 1435, Aeneas Sylvius, the future Pope Pius II, saw many marvellous things, but as he wrote in his journal, the most astonishing was how “the poor, who almost in a state of nakedness begged at the church door, depart with joy in their faces on receiving stones as alms!” Like most Europeans at the time, the pre-Pope didn’t know what coal was, but once he heard the explanation, he saw that the monks were doing a good deed by helping the poor to heat their hovels.

These days, he may have been astonished to learn that often it’s the other way round. German taxpayers for instance gave 2 billion euros to coal producers in 2011. Poland’s coal producers got 7 billion euros over 1999-2011. These are just a couple of examples of the 550 measures that support fossil-fuel production or use in the OECD’s 34 member countries.  These measures had an overall value of $55 to $90 billion a year in 2005-2011 according to a new OECD report, Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels 2013.

Despite the many benefits for the environment and public finances of reforming fossil-fuel subsidies, lack of information regarding the amount and type of support measures in place makes it difficult to design and apply policy efficiently. Usually, lack of data is associated with developing counties, but in this case the culprits include OECD members. The International Energy Agency (IEA) has been producing data on fossil-fuel consumer subsidies in emerging and developing countries for several years using an estimation approach known as the “price-gap” method. This measures the extent to which a policy keeps domestic fuel prices below an international reference price. According to the IEA’s 2012 World Energy Outlook, fossil fuel subsidies amounted to $523 billion in 2011, up almost 30% on 2010 and six times more than subsidies to renewables.

However, the IEA approach does not capture support to producers and tax concessions to producers and consumers. The new report does, and you can download the data for each country or consult a country overview here.

Lack of data isn’t the only difficulty facing reform. There is a problem of political economy you’ll find in many other cases too. Those who stand to lose from the reform may be significantly worse off and feel the impact immediately. Benefits on the other hand may be more long term and not amount to much when spread over the whole population. Moreover, those seeking to block reform are often better informed and better organised than the reformers.

That said, there are a number of examples of successful reform. The figure of 2 billion euros to the German coal industry actually represents a significant drop from the 5 billion the industry got in 1999. Much of the money Poland is now paying is associated with historical liabilities, and since 2011 the country has to follow EU regulations that only authorise state aid for the purpose of closing mines, treating damage to miners’ health, and addressing environmental problems from past mining.

The OECD report cites a number of other examples of successful reforms, and identifies a number of common characteristics of programmes that work. First, improve the availability and transparency of support data. Apart from informing the debate, this helps to identify where support is helpful and where it’s not. (The report itself insists that  it “does not analyse the impact of specific measures or pass judgement on which ones might be usefully kept in place, and which ones a country might wish to consider for possible reform or removal.)

Second, some people are going to suffer from subsidy removal, so provide them with financial if needed.

Third, where possible, integrate the subsidy reforms into a package that includes broader structural reforms.

And finally: “Ensuring credibility of the government’s commitment to compensate vulnerable groups and, more generally, to use the freed public funds in a beneficial way.” So announcing that you’re cutting pensioners’ heating allowance to help pay bankers’ bonuses may not rally the support you need.

Useful links

Taxing Energy Use: A Graphical Analysis provides the first systematic statistics of effective tax rates – on a comparable basis – for each OECD country, together with “maps” that illustrate graphically the wide variations in tax rates per unit of energy or per tonne of CO2 emissions.

Joint report by IEA, OPEC, OECD and World Bank on fossil-fuel and other energy subsidies: An update of the G20 Pittsburgh and Toronto Commitments” prepared for the G20 Meeting of Finance Ministers and Central Bank Governors (Paris, 14-15 October 2011) and the G20 Summit (Cannes, 3-4 November 2011)

Patrick Love

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