Despite some progress, and a positive agenda for eliminating global subsidies for fossil fuels, “Significant barriers prevent the full phasing out of subsidies and rationalization of energy prices across the G20,” according to new research from Rice University’s Baker Institute for Public Policy.
A team led by Baker Institute fellow Jim Krane looked at what has happened since the G20 developed nations in 2009 commited to an agenda to “phase out and rationalize the medium term inefficient fossil fuel subsidies.” By 2018, the Baker Institute study found that “eight member states maintained $207 billion in fossil fuel subsidies, International Energy Agency (IEA) data show. Costs ranged from a low of 0.3% of GDP in China to nearly 6% of GDP in Saudi Arabia, where, despite two cycles of price hikes, 60% of the cost of energy products and services continued to be borne by the state.”
Oil, natural gas, and coal today constitute 80% of the energy consumed in the world, and have since about 1910. “Even so, says the Rice paper, “these long-established fuels still receive most of the government support provided to the energy sector, despite their well-known environmental and public health damage.” According to the analysis, developed countries are still spending some $800 billion annually to support fossil fuels, compared for $140 billion for all worldwide subsidies for renewable power generation.
The report says, “There is evidence that fossil fuel subsidies are socially inequitable, that they encourage smuggling and waste, and distort economies in ways that undermine economic efficiency while harming the environment and the climate. Removing end-user subsidies on fossil fuels is in the best interests of governments and citizens in countries that use them, and in the environmental best interest locally and globally. In many cases, ending subsidies is also in the best interest of the firms supplying the fuels.”
The paper argues that reforming fossil fuel subsidies are “so unambiguously beneficial that it is often described as one of the few areas within the field of economics around which there is widespread agreement among scholars.” Fossil subsidies “are regressive, disproportionately benefiting the “better off,” according to the paper — an estimated 61% of gasoline subsidies accrue to the top 20% of income earners, while the bottom 20% receives just 3%.”
What to do? Among their recommendations:
* Countries should commit to a specific time frame for a full phaseout of implicit and explicit fossil fuel subsidies. The report calls for “full phaseout for low-subsidizing countries within the next five years, by December 31, 2025, and within a decade for those with higher subsidization rates (above 20%).”
* Clarify the language on subsidy reform to remove ambiguous terminology. This includes unambiguous policy to “set prices of coal, natural gas, oil, and refined fuels at a minimum price of 100% of the relevant international benchmark,” along with “rationalized prices for fossil fuel-fired electricity that cover feedstock at international prices and all fixed and variable costs, including capital investment, generation, transmission, distribution, and decommissioning.”
* Use direct cash transfers to maintain benefits for poor segments of society rather than preserving subsidized prices for vulnerable socioeconomic groups. Because of the regressive nature of some energy subsidies, “cash transfers can more effectively improve the lives of vulnerable citizens.”
* Launch a comprehensive public communications campaign. “Educate citizens about the regressive nature of subsidies, the crowding out of more equitable government spending on social programs, and the national interest in repealing them. Communications should also inform citizens of what to expect from reforms and transparently address the negative effects, including exposure to market price fluctuations.”
— Kennedy Maize