UNEP Report Urges Global Energy Subsidy Reform, Including Cutting Fossil Fuel Subsidies; Reductions in GHG Emissions and Increase in Global GDP
27 August 2008
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| Economic value of energy subsidies in Non-OECD countries, 2005. Click to enlarge. Source: IEA World Energy Outlook 2006. |
Globally, approximately US$300 billion—0.7% of global GDP—is spent annually on energy subsidies. The bulk of this is being used to artificially lower or reduce the real price of fuels like oil, coal and gas or electricity generated from such fossil fuels.
A new report—Reforming Energy Subsidies: Opportunities to Contribute to the Climate Change Agenda—by the UN Environment Programme (UNEP) calls for the elimination of these environmentally harmful subsidies and major reform in three main areas: (1) Reporting and compiling consistent data on energy subsidies as well as analyzing their effects (transparency and accountability); (2) enhancing mechanisms of communication with policymakers to show them the need for and benefits of reforming subsidies as well as to assist them in implementing policy reforms at the national level; and (3) capacity building for government officials and other stakeholders from both developed and developing countries, and assistance in reforming subsidies.
Many countries have already taken great strides in abolishing the most ineffective and costly subsidies or adapting them to changing market conditions and policy goals. Nonetheless, much more needs to be done, including in developing countries where subsidies are generally bigger and their harmful effects—on economic growth, the environment and social welfare—greater. An increased focus on the issue of energy subsidies by the international community is of utmost importance in accelerating the reform process.
—Reforming Energy Subsidies (2008)
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| Environmental effects of subsidies. Click to enlarge. Source: Reforming Energy Subsidies (2008) |
Russia has the largest subsidies in dollar terms, amounting to about $40 billion, most of which go to natural gas, according to the report. Iran is a close second, at $37 billion, followed by six other countries—China, Saudi Arabia, India, Indonesia, Ukraine and Egypt—each having subsidies in excess of $10 billion per year. Underpricing is most prominent for natural gas, with consumers on average paying less than half the true economic value of the gas.
The key to determining whether a subsidy is good or bad for mitigating climate change is whether the energy source it supports is more or less carbon-intensive than the alternative. Various empirical studies provide strong evidence that the large subsidies to fossil-fuel consumption worldwide in place today contribute to higher greenhouse-gas emissions and exacerbate climate change. A study by the OECD in 2000, for instance, showed that global CO2 emissions would be reduced by more than 6 per cent and real income increased by 0.1 per cent by 2010 if all subsidies that lower the prices of fossil fuels used in industry and the power sector were removed everywhere in the world. An earlier study by the IEA revealed that the removal of consumption subsidies in eight of the largest non-OECD countries would reduce primary energy use by 13 per cent, lower CO2 emissions by 16 per cent and raise GDP by almost 1 per cent in those countries as a whole. Because coal is the dirtiest fuel, removing coal subsidies generally yields the biggest environmental benefits.
—Reforming Energy Subsidies (2008)
Key messages of the report include:
Subsidies often lead to increased levels of consumption and waste, exacerbating the harmful effects of energy use on the environment.
They can place a heavy burden on government finances, weakening the potential for economies to grow and reducing the potential to invest in social equity.
They can undermine private and public investment in the energy sector, which can impede the expansion of distribution networks and the development of more environmentally benign energy technologies such as decentralized renewable energy technologies.
They do not always end up helping the people who need them most.
The report challenges the widely held view that such subsidies assist the poor, arguing that many of these price support systems benefit the wealthier sections of society rather than those on low incomes. They are also diverting national funds from more creative forms of pro-poor polices and initiatives that are likely to have a far greater impact on the lives and livelihoods of the worse-off sectors of society.
The report acknowledges that some subsidies or mechanisms, whether in the form of tax breaks, financial incentives or other market instruments can generate social, economic and environmental benefits. An example of that is the used of feed-in tariffs that have supported a surge in renewable energy in countries such as Germany and Spain.
The report also accepts that there may be cases where some subsidies can—if well-devised and time-limited—meet important social and environmental goals. An example of that is encouraging a switch from dirty, health-hazardous or environmentally harmful fuels such as charcoal.
The report also cites the case of Chile where well devised subsidies have increased rural electrification from around 50% to more than 90% of the population over 12 years.
But the report argues that many seemingly well-intentioned subsidies rarely make economic sense and rarely address poverty. The report therefore challenges the widely-held myth that scrapping fossil fuel supports would hit the poor.
The report cites the example of LPG subsidies in India where US$1.7 billion was spent in the first half of the current financial year on trying to get the fuel into poor households. “LPG subsidies are mainly benefiting higher-income households…despite the ineffectiveness of the subsidy the programme is being extended until 2010,” says the study.
The report says that in many developing countries the real beneficiaries of such subsidies are neither the poor nor the environment but well-off households, equipment manufacturers and the producers of the fuels.
In the final analysis many fossil fuel subsidies are introduced for political reasons but are simply propping up and perpetuating inefficiencies in the global economy—they are thus part of the market failure that is climate change.
—Achim Steiner, UN Under-Secretary General and UNEP Executive Director
UNEP released the report at the meeting of the UN Framework Convention on Climate Change (UNFCCC) in Accra, Ghana.
Reforming Energy Subsidies: Opportunities to Contribute to the Climate Change Agenda was commissioned by UNEP’s Division of Technology, Industry and Economics. The principal author is Trevor Morgan of Menecon Consulting and now with the International Energy Agency.
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OK, the first thing I noticed about this article is that it only reports on the energy subsidies in *Non*-OECD countries. The member counties of the OECD(the ones not on their graph) are:
Australia
Austria
Belgium
Canada
Czech Republic
Denmark
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Japan
Korea
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
Slovak Republic
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
So how much energy subsidies do we(the taxpayer) pay so some fatcat SUV driver can drive cheap?
Posted by: ai_vin | 27 August 2008 at 10:45 AM
ai_vin: Yes, the report doesn't cover OECD. But everyday a thousand new reports are issued which also don't cover OECD. This one is what it is. It doesn't address egg production in Alberta either.
I offer some comments about this dense bureauocratese (don't bother I just coined that.)
From the story:
"A new report—Reforming Energy Subsidies: Opportunities to Contribute to the Climate Change Agenda—by the UN Environment Programme (UNEP) calls for the elimination of these environmentally harmful subsidies and major reform in three main areas:"
K sez: The text about subsidies and their problems almost sounds like it could have been written by Milton Friedman.
The comes the expected spin. It turns out climate change is market failure. Or perhaps market failure is climate change.
As Achim Steiner, UN Under-Secretary General and UNEP Executive Director tells us:
"In the final analysis many fossil fuel subsidies are introduced for political reasons but are simply propping up and perpetuating inefficiencies in the global economy—they are thus part of the market failure that is climate change."
K sez: Onward. To the three recommendations:
"(1) Reporting and compiling consistent data on energy subsidies as well as analyzing their effects (transparency and accountability)"
K sez: This is clear enough. No one is opposed to better data and information. "analyzing their effects" depends on who does the analyzing.
"(2) enhancing mechanisms of communication with policymakers to show them the need for and benefits of reforming subsidies as well as to assist them in implementing policy reforms at the national level"
K sez: Unclear. Does it mean the UN would lobby directly within all levels within national governments? Or does it mean the lobbying the national leaders?
Does it advocate a new communication network; something like a private UN internet? Is a Prius owner a policymaker? Is Angelina? They certainly have influence.
What does assisting them in implementing reforms mean? Will they send information or peacekeeping troops?
"(3) capacity building for government officials and other stakeholders from both developed and developing countries, and assistance in implementing policy reforms at the national level."
K sez: What is capacity building? Is it power? It sounds like power. Does assistance mean the UN would be paying stakeholders such as environmentalists? Do they propose to subsidize lobbyists to end subsidies for fuels?
Gotta learn some hypertext so I can format comments.
Posted by: K | 27 August 2008 at 12:45 PM
Some definitional problems here. Is it a subsidy if an aluminium smelter pays 3c per kilowatt hour 24/7 while the household day rate is 15c? Since GDP gets bigger with more wars and frivolous consumption perhaps some alternative measure is needed eg same activity level with less pollution has higher 'GDP'.
I can't fathom their support for feed-in tariffs. For example when poor Germans pay higher electricity prices for rich Germans to have solar panels it's a good thing. However when the poor get a heating oil subsidy it's bad.
Posted by: Aussie | 27 August 2008 at 01:07 PM
Coal is not dirty!!
Most people have seen coal and some have seen ancient steam locomotives push out large pillars of black steam and smoke.
Most people have not seen crude oil.
But crude oil is not clean either. If most people had to clean something from their carpet, they would prefer to remove a hundred pounds of coal rather than a hundred pounds of crude oil after experiencing both. A hoover will not pick up crude oil. Think of used motor oil mixed half and half with road tar.
The mine-to-kilowatt hour effiency of coal in steam power plants is higher than the well-to-wheel kilowatt hour efficiency of automobiles by far. And the CO2 per Kilowatt hour delivered to the customer is much less. Only 100 gallons of fuel leaves a refinery for every 123 gallons that enters, and who knows how much natural gas was flared off for every gallon of crude oil produced.
It is convenient for people who talk about dirty coal to not know about the dirt left underground when the oil comes out or the ash left at the refinery after being removed from the crude oil. They also do not know about the tar like #6 fuel oil that is left after gasoline is made. The CO2 release of the product mix and the waste of crude oil should be averaged over all products. Gasoline and diesel cannot be accurately rated for CO2 unless the mix of fuels and loss is considered.
Natural gas seems clean like refined gasoline or the mineral oil bought in bottles at the drug store, but most of the production of natural gas would stop if the production of oil was stopped, and it would become far more expensive. Logically the CO2 release of natural gas should be combined with the CO2 release of oil to evaluate how "clean" its use is in comparison to coal. It is interesting that many consider CO2 "dirty" and they breathe it out all day long. What foods produce less CO2?? Can hydrogen be injected in the veins to reduce CO2 production?
Without even driving it, the purchase of a car is responsible for the release of more fossil CO2 than many people of the world use in their entire life time.
The truth is that most people of the world cannot afford to concern themselves with CO2. A high price for energy in any country, including the most advanced, leads to the earlier demise of the "Children of Mankind" of all ages. Higher income people are more immune to the effect. All environmentalists are in this class as are their young offspring. How many offspring of lower income classes should expire earlier so that your's coughs less? ..HG..
Posted by: Henry Gibson | 27 August 2008 at 02:51 PM
Coal is NOT clean!
Burning coal is a leading cause of smog, acid rain, global warming, and air toxics. In an average year, a typical coal plant generates:
3,700,000 tons of carbon dioxide (CO2), the primary human cause of global warming--as much carbon dioxide as cutting down 161 million trees.
10,000 tons of sulfur dioxide (SO2), which causes acid rain that damages forests, lakes, and buildings, and forms small airborne particles that can penetrate deep into lungs.
500 tons of small airborne particles, which can cause chronic bronchitis, aggravated asthma, and premature death, as well as haze obstructing visibility.
10,200 tons of nitrogen oxide (NOx), as much as would be emitted by half a million late-model cars. NOx leads to formation of ozone (smog) which inflames the lungs, burning through lung tissue making people more susceptible to respiratory illness.
720 tons of carbon monoxide (CO), which causes headaches and place additional stress on people with heart disease.
220 tons of hydrocarbons, volatile organic compounds (VOC), which form ozone.
170 pounds of mercury, where just 1/70th of a teaspoon deposited on a 25-acre lake can make the fish unsafe to eat.
225 pounds of arsenic, which will cause cancer in one out of 100 people who drink water containing 50 parts per billion.
114 pounds of lead, 4 pounds of cadmium, other toxic heavy metals, and trace amounts of uranium.
Posted by: ai_vin | 27 August 2008 at 09:41 PM
The thing that concerns me most about this article is that many of the 'key messages' of the Report (i.e. what we should take away from it) and its general tone - sound very similar to the types of arguments used to reduce/eliminate welfare; remove affordable housing; and other such services that make a system run smoother.
When you compare the money potentially saved by gov't cutbacks vs. the amount of profits by fossil fuel extractors, refiners, distributers, and other such energy industry types, I think we can see that we are chasing pennies rather than the windfall profits of these companies for questionable ' overall world improvement'. Of course, the essential point to my argument that the Environment is important, but not the most nor the only, important thing.
The problem is further that you get these reports from an agency (albeit a noble agency) that is exclusively concerned with one narrow issue - and seems to be oblivious to the other 'just as, or more important' problems in the world. So read it, digest it, and then put it on the pile of other 'good sounding but otherwise overly simple diagnoses'.
Posted by: Jer | 28 August 2008 at 06:30 AM
You forgot the radioactivity released by coal:
http://www.sciam.com/article.cfm?id=coal-ash-is-more-radioactive-than-nuclear-waste
(shorter alias: http://tinyurl.com/2ceggh )
If coal-fired power plants had to meet the same radiation release standards as do nuclear power plants in the US, they would all have to be closed immediately.
Posted by: richard schumacher | 31 August 2008 at 07:30 AM