Tuesday, February 18, 2014

Fossil fuels still being heavily subsidized

Many people think that renewable energy sources are the ones being heavily subsidized but the latest study published by Worldwatch institute says that global support for fossil fuels have generated estimates that range from $523 billion to over $1.9 trillion, depending on the calculation and what measures are included.

These numbers mean that the level of support for fossil fuels (coal, oil and natural gas) has rebounded to 2008 levels following a decrease in 2009-10 when there was major global financial crisis, which as a result also caused significant dip in all kind of investments.

Traditional calculations on how much fossil fuels are subsidized say that they account for two kinds of energy subsidies. Production subsidies lower the cost of energy generation through preferential tax treatments and direct financial transfers (which refers to grants to producers and preferential loans). There are also consumption subsidies that lower the price for energy users, primarily through tax breaks or underpriced government energy services.

It has been said that production subsidies predominate in Organization for Economic Co-operation and Development (OECD) countries, while consumption subsidies are favored in developing countries because they are able to reduce the burden on poor households' income, as poor people have to use a greater share of their income to buy fossil fuel products.

The International Energy Agency (IEA) recently estimated that coal, oil, and natural gas consumption subsidies in 38 developing economies were somewhere around $523 billion in 2011. It has to be said though that these IEA figure includes subsidies that bring the price of fossil fuels below the international benchmark and subsidies that lower the price just to the international level or slightly above it are not captured.

There was also a parallel study conducted by the OECD, which focused on support measures for the production and consumption of fossil fuels in its 24 member countries. Their study was much broader as it also included direct budgetary transfers and tax expenditures, and support for fossil fuels in OECD countries alone averaged $55-90 billion per year between 2005 and 2011.

Why so many different studies on the same subject? The answer for this is that the lack of a clear definition of "subsidy" makes it hard to compare the different methods used to value support for fossil fuels, but the varying approaches nevertheless still clearly show global trends. Fossil fuel subsidies declined in 2009 due to financial crisis, increased in 2010, and then in 2011 reached almost the same level as in 2008. The decrease in subsidies was due almost entirely to fluctuations in fuel prices rather than to policy changes as some would believe due to the bigger emphasis on renewable energy development.

If we focus only on developing countries we can see that the total of around $285 billion¬-more than 50 percent of all fossil fuel consumption subsidies went to oil in 2011. Natural gas consumption received significantly less ($104 billion) in support while coal received only $3 billion in direct consumption subsidies in these countries, but there was another $131 billion which went to public underpricing of electricity, much of which is generated from burning coal.

In industrial countries, using the broader definition of consumption subsidies, the support for oil was valued at roughly $38 billion in 2011. Natural gas support in these countries totaled around $10 billion while coal was supported the least in industrial countries, receiving only $7 billion in subsidies.

Support for renewable energy sources is still small in comparison to fossil fuels subsidies-$88 billion in 2011, compared with the support for fossil fuels estimated by the IEA and OECD. The support is however constantly growing and has grew by 33 percent in 2011, more than the 28 percent increase for fossil fuel subsidies. Of the $88 billion support for renewable energy sources, two-thirds went toward the electricity and the remaining third to biofuels.

Some factors have not been included into the calculation of subsidies, such as the additional costs associated with increased resource scarcity, the environment, and human health, all of which are significant. Without factoring in these factors, renewable subsidies' cost between 1.7¢ and 15¢ per kilowatt-hour (kWh), higher than the estimated 0.1-0.7¢ per kWh for fossil fuels. If these factors were included, estimates indicate that fossil fuels would cost 23.8¢ more per kWh, while renewable energy sources would cost around 0.5¢ more per kWh.

From an amount of carbon emissions, 15 percent of global carbon dioxide emissions receive $110 per ton in support, while only 8 percent are subject to a carbon price, effectively nullifying carbon market contributions as a measure to reduce emissions. It has been also reported that accelerating the phase-out of fossil fuel subsidies would reduce carbon dioxide emissions by 360 million tons in 2020, which is 12 percent of the emission savings that are needed in order to keep the increase in global temperature to threshold of 2 degrees Celsius.

The renewable energy industry has just started developing and therefore needs subsidies to achieve better cost-competitiveness with currently dominant fossil fuels. Nuclear energy and fossil fuels were given much larger subsidies when being in nascent phase of their development so there really shouldn’t be so much fuss about renewable energy subsidies, particularly when you consider that renewable energy industry is currently one of the fastest job creators in many countries of the world.

Renewable energy does not only create new jobs but also has positive environmental impact and doesn't contribute to climate change impact like fossil fuels do. So why shouldn't then governments from all around the world continue to boost renewable energy with even more money.

In UK for instance, the latest report by the UK's TaxPayers’ Alliance says that renewable energy subsidies will rise from just under £2 billion in 2013 to over £5 billion by 2018/19.

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