Worldwatch: Fossil fuel subsidies continue to outweigh those for renewable energy; international pledges on reform unfulfilled

Fossil fuel subsidies continue to far outweigh support for renewable energy, according to new research conducted for the Worldwatch Institute’s Vital Signs Online service. Although independent reporting on these subsidies has increased, global efforts to move forward with subsidy reform have been hindered by a variety of causes, leaving international pledges unfulfilled.

Total subsidies for renewable energy stood at $66 billion in 2010 (a 10% increase from the year before); the total value of global fossil fuel subsidies is estimated at between $775 billion and more than $1 trillion in 2012, Two thirds of the renewable energy subsidies went to renewable electricity resources and the remaining third to biofuels.

GSI: Fuel Subsidies in India
In 2011–12 India’s subsidies and under-recoveries for fuel totalled INR1.4 trillion (US$27.7 billion). Total subsidy expenditure (including for fertilizer and food) was up by 27% on the previous year, significantly contributing to the rise in fiscal deficit of 1.3% of the GDP for 2011–12, according to the International Institute for Sustainable Development’s Global Subsidies Initiative (GSI).
The Government has announced its goal of reducing total subsidy expenditure to 2% of GDP in 2012-13, with further reductions down to 1.75% in following years. However, reform has been hampered by concerns over how higher fuel prices will affect the broader economy—potentially disrupting key sectors like transport, industry and agriculture—and the ability of poor citizens to cope with higher prices.
GSI, in collaboration with the National Institute for Public Finance and Policy (NIPFP) and The Energy Resource Institute (TERI), released three new reports on India’s fuel subsidies and the options and recommendations for reform.
As an example, for diesel pricing the short-term recommendation is to progressively decontrol diesel prices by eliminating under-recovery over a period of around one year. For the medium term, the organizations suggest refining and implementing options investigated over the short term. For the long term, the recommendation is to liberalize diesel pricing.

Although the total subsidies for renewable energy are significantly lower than those for fossil fuels, they are higher on a per kWh basis (without including externalities). Estimates based on 2009 energy production numbers placed renewable energy subsidies between 1.7¢ and 15¢ per kWh, while subsidies for fossil fuels were estimated at around 0.1–0.7¢ per kWh. Unit subsidy costs for renewables are expected to decrease as technologies become more efficient and the prices of wholesale electricity and transport fuels rise.

Other findings from the Worldwatch report include:

• Global production subsidies total an estimated $100 billion per year, and consumption subsidies add to roughly $675 billion.
• In 2010, developing countries spent roughly $193 billion, or 47% of all fossil fuel consumption subsidies, on oil while industrial countries spent roughly $28 billion.
• Since 2007, roughly 80% of spending on consumption subsidies occurred in countries that are net exporters of fossil fuels.

The US National Academy of Sciences estimates that fossil fuel subsidies cost the United States $120 billion in pollution and related health care costs every year. But these hidden costs (externalities) are not reflected in fossil fuel prices.

According to projections by the International Energy Agency (IEA), if fossil fuel subsidies were phased out by 2020, global energy consumption would be reduced by 3.9% that year compared with having subsidy rates unchanged. Oil demand would be reduced by 3.7 million barrels per day, natural gas demand would be cut by 330 billion cubic meters, and coal demand would drop by 230 million tons of coal.

The effects of the subsidy removal would extend beyond the end of the phaseout period. By 2035, oil demand would decrease by 4%, natural gas by 9.9%, and coal demand by 5.3%, compared with the baseline projection. Overall, carbon dioxide emissions would be reduced by 4.7% in 2020 and 5.8% in 2035.

The IEA’s chief economist recently estimated that eliminating all subsidies in 2012 for coal, gas, and oil could save as much as Germany’s annual greenhouse gas emissions each year by 2015, while the emission savings over the next decade might be enough to cover half of the carbon savings needed to stop dangerous levels of climate change.

Progress toward a complete phaseout, however, has been minimal. The 2009 pledge by the Group of 20 major economies to reduce “inefficient fossil fuel subsidies” has been left vague and unfulfilled, the Worldwatch Institute notes. The lack of a definition has left countries to make their own determination if their subsidies are inefficient. As of August 2012, G20 countries had not taken any substantial action in response to the pledge—six members opted out of reporting altogether (an increase from two in 2010), and no country has yet initiated a subsidy reform in response to the pledge. Furthermore, there continues to be a large gap between self-reported statistics and independent estimates in some countries.