Stop Subsidizing Fossil Fuels, IEA Tells Governments

If the status quo continues, global subsidies for fossil fuel consumption will reach $660 billion in 2020 – 0.7% of global gross domestic product, says the International Energy Agency (IEA).

In 2010, governments and taxpayers spent $409 billion propping up production and consumption of fossil fuels, up from $312 billion in 2009 – the year when G-20 Leaders agreed to phase them out, saying they "encourage wasteful consumption, reduce our energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change."
Eliminating fossil fuel consumption subsidies by 2020 would reduce the world’s energy demand 4% and considerably reduce the growth of carbon emissions growth, says the IEA.

The largest subsidies go to oil ($193 billion in 2010), followed by $91 billion for natural gas. The two countries with the biggest subsidies are Iran and Saudi Arabia.

If those subsidies were to end, IEA says, national revenues would actually increase in contrast to what governments claim: that subsidies alleviate energy poverty and promote economic development.

The reality is quite different: they create wasteful use of energy, contribute to price volatility by blurring market signals, encourage fuel smuggling, and lower the competitiveness of renewables and energy efficient technologies, says Maria van der Hoeven, IEA Executive Director and Secretary-General for the Organization for Economic Co-operation and Development (OECD). 

To track government policies supporting fossil fuels, OECD compiled for the first time an Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels. The findings of the Inventory include:

  • Germany’s historically generous subsidies for hard-coal mining fell from EUR 4.9 billion in 1999 to EUR 2.1 billion in 2009, and should be phased-out entirely by 2018
  • France gradually phased out support for the coal industry: dropping from over EUR 1 billion in 1990 to EUR 92 million in 2007, before it ended it through a range of  measures that addressed the social costs associated with mine closures
  • Mexico spent $629 million in 2009 to subsidize energy consumption, which willl decrease as the new national energy strategy is put in place and the government better targets subsidies directly to low income households, rather than for energy use
  • The US supported energy producers with $5 billion in 2009. The 2012 federal budget proposes eliminating a broad group of subsidies – thereby increasing government revenues by over $3.6 billion.

In other words, phasing out subsidies to fossil fuels, if well-executed, can generate important economic, energy security and environmental benefits.

"As nations look for policy responses to the worst economic crisis of our lifetimes, phasing out subsidies is an obvious way to help governments meet their economic, environmental and social goals," says Angel Gurria, OECD Secretary General.

In April, IEA issued a report  urging governments around the world to do away with hundreds of billions in subsidies for fossil fuels.

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