Why $775 billion in fossil-fuel subsidies are so hard to scrap

at 12:03 PM ET, 06/18/2012

Environmentalists have rallied around a new, simple goal. As the Earth Summit gets underway in Rio de Janeiro, they’re asking the world’s nations to scrap the $775 billion spent each year subsidizing oil, gas, and coal. They’re even urging Justin Bieber to (yes) tweet about it.


In Nigeria, they’re not fans of scrapping fuel subsidies. (PIUS UTOMI EKPEI - AFP/GETTY IMAGES)
On the surface, it’s an alluringly elegant idea. Getting rid of government subsidies that artificially lower the price of oil or coal would reduce fuel use and produce nearly half the emissions cuts needed to limit global warming to 2°C. It’s a free-market way for the world to get halfway to its climate goals. What’s not to love?

And yet, every time this notion pops up at global summits, it gets touted, endorsed, promised... and then roundly ignored. It’s worth taking a closer look at why it’s so hard to repeal fossil-fuel subsidies.

The idea of repeal first came up in 2009, when leaders at the G-20 summit pledged to phase out fossil fuel subsidies over the next decade. Since then, an additional 50 countries have said they’d do likewise. Yet those promises have had virtually no effect. As a new report (pdf) from the Natural Resources Defense Council details, global subsidies have nearly tripled since 2009 — from $300 billion to $775 billion. Here’s the breakdown:

What, exactly, do these subsidies consist of? Duncan Clark offers a full country-by-country breakdown. Governments in Iran, Saudi Arabia, Egypt, Venezuela, Indonesia and elsewhere all spend money to reduce the price of gasoline at the pump, which in turn encourages higher oil use. Other nations, like Russia, offer natural-gas discounts for heating. China spends $2 billion per year to promote coal-burning.

And they’re not easy to repeal. Consider Indonesia. Back in March, the country’s president, Susilo Bambang Yudhoyono, proposed a subsidy reform package. The price of gasoline and diesel would rise by one-third — although Indonesians would still only pay about 60 percent of the free-market price. Yet even that proved too much. The Indonesian parliament quickly vetoed the proposal and instead passed $24.6 billion in additional subsidies.

In an op-ed for the Jakarta Post, Izhari Mawardi explains why. The biggest concern was that rural households would get squeezed by pricier fuel. Inflation was also a worry: “Each time the government removed a portion of the subsidy,” he notes, “ripple effects caused price increases in distribution and the prices of normal goods that depended on transportation costs.”

Economists have often countered these protests by proposing a trade. Governments should quit subsidizing fossil fuels and instead devote the money to efficiency upgrades or lump-sum payments to citizens. In theory, this could be even more progressive. Mawardi notes that the Indonesian government spends about five times as much subsidizing fuel as it does on social assistance for the poor — yet most of the benefits of fuel subsidies go to the richest 20 percent of Indonesians.

Trouble is, pulling off a swap isn’t easy. Will Hickey, an energy expert who teaches in South Korea, notes that in many oil-producing countries that subsidize fossil fuels — like Nigeria — the public has “no faith in central governments to deliver on employment and growth.” Even if most of the benefits accrue to the rich, fuel subsidies are often the simplest, most practical way to run a welfare state. “The fuel subsidy,” Hickey writes, “is the only real claim to ownership or bona fide shared interest most people have on resources in their own country.”

That helps explain why Nigeria was rattled earlier this year by violent strikes and ferocious mass protests over a government plan to cut back popular fuel-import subsidies. And it’s not to say that removing fossil-fuel subsidies is an impossible task. (Hickey argues that “political reform and transparency initiatives” are the crucial first steps here.) But it explains why the politics are so dicey — and why another round of subsidy-scrapping promises made at the Earth Summit could very easily end up getting ignored.

 
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