Subsidies are slowing the energy transition

Regularly we read about consumption or production subsidies that give fossil fuels a big advantage over low carbon alternatives. Clifford Krauss writes a good article in the New York Times about the difficulties in removing the, yet also on the impact of keeping them.

 

Global Governments, Loath to Change, Are Wasting Oil With Subsidies

Venezuela has no shortage of problems, but one of the more curious is its cheap prices at the gas pump.

Drivers pay roughly the equivalent of 40 cents a gallon for regular gasoline, and that is after the government raised prices slightly in a minor adjustment in a vast, popular subsidy, which is helping to prop up the tottering government politically, while helping to bankrupt it economically. With little incentive to conserve fuel and the more they drive, Venezuelans release more greenhouse gases into the atmosphere, which contribute to climate change.

Venezuela is hardly the only developing country wasting oil and natural gas with consumer subsidies. In many nations, transportation fuels are as cheap as soda. Electricity rates are so discounted in the Persian Gulf states that some residents do not bother to turn down their air-conditioners while away on vacation. By some estimates, the consumption subsidies may be responsible for more than 10 percent of total global emissions of carbon dioxide, the leading greenhouse gas. They also contribute to traffic jams and air pollution in cities across the developing world.

When oil prices tumbled in late 2014, environmentalists and economists at the World Bank and the International Monetary Fund urged governments to abandon policies that froze energy rates at artificially low levels. A substantial number of governments announced pricing policy changes, seizing the opportunity to improve their finances. Malaysia and Morocco ended gasoline and diesel subsidies, while India not only stopped subsidizing diesel but raised fuel taxes.

But many governments stood still or failed to fulfill their announced policies, despite making broad commitments to decrease carbon emissions at the December climate summit in Paris. In some cases, street demonstrations and election campaign pressures halted reforms, while in others, special interest groups — like truckers and farmers who depend on cheap diesel — lobbied to stall or upend change.

The Supreme Court of Argentina recently dealt the country’s new leader, President Mauricio Macri, a big political defeat by reversing a gas price increase for residential users, a central policy initiative of Mr. Macri’s to improve the economy. Energy subsidies account for more than half the Argentine government’s fiscal deficit.

“Some countries have tweaked policies,” said Jim Krane, an energy expert at Rice University in Houston, “but with oil prices so low, there is a golden opportunity to adjust prices and reduce waste. It’s a shame more countries aren’t taking advantage.”

Progress in cutting consumption subsidies has been especially uneven in countries that froze local prices when global prices slumped, only to neglect to raise them locally when global prices rose again.

This year, for instance, oil prices nearly doubled at times from their February lows. But Bolivia and Algeria continued to freeze energy prices at low levels. In Indonesia, which had promised to adjust gasoline and diesel prices monthly to comply with market shifts, changes in prices have been few and sporadic, and some subsidies once cut have since re-emerged.

After neglecting to put announced fuel price increases into effect last year, Egypt said that it would move slowly to pare subsidies through the decade without ending them. Iran missed its target to end its subsidies last year.

“Enduring pricing reform is still politically challenging,” said Masami Kojima, an energy analyst at the World Bank. With fuel prices easing again at times this year, she added, “governments have a second chance to seize this moment and tackle subsidy policy and move to market-based pricing.”

But few are taking it.

Consumption subsidies are just one of many energy subsidies. For instance, the United States, like most developed countries, does not subsidize energy consumption, but it does offer tax breaks to fossil fuel and renewable-energy companies. Gasoline is moderately priced in the United States, relative to countries with higher fuel taxes. And environmentalists and some economists say a carbon tax should be levied to reduce emissions and to price in the social costs of pollution, congestion and damage to public health.

But economists say energy subsidies are a particular drain on the economies of poor countries.

The argument against the subsidies seems obvious to most mainstream economists. Worldwide, such subsidies have cost governments and state oil companies as much as $500 billion annually in recent years, according to the International Energy Agency. Economists say the vast majority of benefits from the subsidies go to the wealthy, not to the poor, because it is the wealthy who do the most driving and use the most electricity. Wasteful consumption of all fossil fuels, including the dirtiest coal, burdens governments with additional spending that might otherwise go to social programs.

Subsidized cheap fuels also encourage smuggling, create fuel shortages, depress fuel prices on the black market and enrich organized crime. In some Southeast Asian countries, fishermen have found it more attractive to smuggle cheap fuel to neighboring countries rather than fish.

Nevertheless, the poor — and political movements that count on the impoverished as their base — typically protest cuts in subsidies because higher energy prices have an impact on daily life. That is why many economists urge governments to strengthen social safety nets, like by using the money saved once subsidies are removed to create employment and improve health care and education for the poor.

But for political leaders, ending subsidies is not so easy because it immediately means higher consumer prices.

The conflict between economic necessity and political necessity is especially palpable in the Persian Gulf, where governments need to cut spending as their oil revenues recede but also need to curry the favor of their populations while political turmoil swirls across the Middle East.

The Saudi government has raised electricity prices for residential customers as well as the price of gasoline and diesel, but Saudi drivers still pay less than $1 a gallon at the pump. Gasoline prices have also been raised significantly in recent months in Kuwait, Bahrain and Oman, but drivers still pay a fraction of what Europeans or even Americans pay.

And while Qatar has raised electricity prices for foreigners, its own citizens still cool their homes virtually free.

“It’s human nature, not just Arab nature, to bridle when something that was once free or low cost suddenly costs more,” said Chase Untermeyer, a former United States ambassador to Qatar, “even if the consumers can easily afford it.”

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