A new study has found support for renewable energy sources was less than 15% of the subsidies for fossil fuels in 2011

Despite a global commitment to phase-out fossil fuels, governments are not shying away from favouring oil and coal over renewable energy for subsidies.

Despite a global commitment to phase-out fossil fuels, governments are not shying away from favouring oil and coal over renewable energy for subsidies.

In 2012-13, the Indian government spent Rs 96,200 crore ($15.5 billion) to compensate oil marketing companies that had been forced to sell petroleum products below cost, says a recent report by the International Institute for Sustainable Development. This equals 1.75% of India’s GDP. The Ministry of Petroleum and Natural Gas estimates that this subsidy could rise by 12% in 2013-14.

To what extent do governments around the world subsidize coal, oil and natural gas? Estimates by independent experts range from $523 billion to over $1.9 trillion a year, depending on the calculation and what measures are included.

The figure at the top of the range comes from the International Monetary Fund, and is 2.5% of global GDP.

While the estimates may differ, Philipp Tagwerker – a research fellow at the Washington-based think tank Worldwatch – has found that by 2011, these subsidies climbed back to 2008 levels after a dip in 2009 at the start of the global financial crisis, and that these subsidies have only increased since then.

Use of fossil fuels for power generation and transport is the main source of carbon dioxide – the main greenhouse gas whose increasing concentration in the earth’s atmosphere is leading to climate change.

Government provide energy subsidies at two stages. First, there are the production subsidies that lower the cost of energy generation through preferential tax treatments and direct financial transfers such as grants to producers and preferential loans. Then there are consumption subsidies that lower the price for users, usually through tax breaks or underpricing.

Tagwerker finds in his study that while production subsidies predominate in Organisation for Economic Cooperation and Development (OECD) countries, consumption subsidies are favoured in developing countries.

The International Energy Agency (IEA) estimates that coal, electricity, oil and natural gas consumption subsidies in 38 developing economies were $523 billion in 2011. The IEA figure includes subsidies that bring the price of fossil fuels below the international benchmark. Subsidies that lower the price just to the international level or slightly above it are not captured. In a parallel study by the OECD, support measures for the production and consumption of fossil fuels in its 24 member countries averaged $55-90 billion per year between 2005 and 2011, when direct budgetary transfers and tax expenditures were also taken into account.

The lack of a clear definition of “subsidy” makes it hard to compare the different methods used to value support for fossil fuels. Still, the varying approaches illustrate global trends. Fossil fuel subsidies declined in 2009, 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.

In developing countries, roughly $285 billion¬ – over 50% of all fossil fuel consumption subsidies – went to oil in 2011. Natural gas consumption in these countries received $104 billion in support. Coal received $3 billion in direct consumption subsidies in developing countries, but another $131 billion went to subsidizing electricity bills, and much of the electricity is generated from burning coal.

In industrialized countries the support for oil was valued at roughly $38 billion in 2011. Natural gas support in these countries totalled around $10 billion. Coal received $7 billion in subsidies.

The study found that support for renewable energy sources was less than 15% of the subsidies for fossil fuels in 2011. Subsidies for renewable energy added up to $88 billion that year, though that was 33% above the 2010 figure. In the same period, fossil fuel subsidies had increased 28%. Of the subsidies for renewables, two-thirds went toward electricity generation from wind, solar and other renewable sources, and the remaining to biofuels.

These subsidies do not take into account the external costs of fossil fuel extraction and use – such as increased resource scarcity, effects on the environment and on human health. Without factoring these in, subsidies for renewables 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 – which economists call externalities – are included, however, estimates indicate fossil fuels would cost 23.8¢ more per kWh, while renewables would cost around 0.5¢ more per kWh.

From the point of view of greenhouse gas emissions, 15% of global carbon dioxide emissions receive $110 per ton in support, while only 8% are subject to a carbon price, effectively nullifying carbon market contributions as a measure to reduce emissions. The study says accelerating the phase-out of fossil fuel subsidies will reduce carbon dioxide emissions by 360 million tons in 2020, which is 12% of the emission savings needed in order to keep the increase in global temperature to 2 degrees Celsius, a goal agreed to by all governments under the United Nations Framework Convention on Climate Change.

Tagwerker says that subsidy estimation and transparency initiatives need to be scaled up and consolidated. A common methodology and definition can help analyse the distortions that subsidies cause in the economy and allow for a better-informed dialogue to negotiate their phase-out. This can also help explain the situation to policymakers, and thus alleviate the political resistance toward fuel price increases.

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