How global fuel subsidies make everyone worse off

at 10:36 AM ET, 10/05/2011

Last year, oil prices remained stubbornly high, even with fairly anemic global economic growth. So how did countries respond? Did they pursue alternatives to fossil fuels with a renewed vigor and determination? Not exactly. Instead, as the International Energy Agency reports, many countries plowed more money into helping their citizens afford the pricier gas. Globally, fossil-fuel subsidies hit $409 billion in 2010, up from $300 billion in 2009. The increase, noted the IEA, “closely tracked the sharp rise in international fuel prices.”

You can see from the map on the right (larger version here) which countries do the most to subsidize fossil fuels. Leading the pack are the Middle East and North Africa: The Iranian government subsidizes a whopping 85 percent of the price of gas for its citizens, and Saudi Arabia 76 percent. But bigger countries like Russia (22.6 percent) and India (13.5 percent) are no laggards, either. China, too, pays its citizens billions to consume coal, gasoline and diesel, although Beijing has been slowly phasing out its subsidies — triggering protests on the way.

All told, fossil-fuel consumption subsidies could hit $660 billion in 2020, IEA chief economist Fatih Birol said Tuesday. And those subsidies add up, pollution-wise. A 2008 study from Harvard’s Kennedy School found that the world could cut global carbon-dioxide emissions 6 percent simply by scrapping fossil-fuel price supports. Lifting those subsidies might, in the short term, have a regressive impact in the form of higher energy prices. But, the authors noted, countries could easily take the money saved and use it to cushion the blow with efficiency upgrades or even simple lump-sum payments to citizens.

Another upside? It’s quite possible that getting rid of those subsidies would ease some of the crushing volatility in the oil markets. Back in 2008, when the price of crude shot up to $140 per barrel, oil demand in Asia and the Middle East kept rising regardless — in part because consumers didn’t have to pay the full market price. (At the peak of the 2008 oil crunch, for example, gas was still selling for just 50 cents per gallon in Saudi Arabia.) That, in turn, may have helped worsen the price spike, which, as James Hamilton has argued, led to recession in the United States.

All told, economic research seems to suggest that massive fossil-fuel subsidies actually hinder economic growth in the long run. The Global Subsidies Initiative conducted a review of six studies and found that “fossil-fuel subsidy reform would result in aggregate increases in gross domestic product (GDP) in both OECD and non-OECD countries. The expected increases among the studies ranged from 0.1 per cent in total by 2010 to 0.7 per cent per year to 2050.” Not too shabby.

In theory, the G-20 countries are working on a plan to zero out their oil subsidies. Back in 2009, President Obama said this would be one of his big goals abroad. But, apart from modest efforts from China, India, and Russia, subsidies keep rising. It’s hard to convince people of the benefits of paying more for gas when the global economy is already wheezing.

 
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