Energy subsidy

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Energy subsidies are measures that keep prices for customers below market levels, or for suppliers above market levels, or reduce costs for customers and suppliers.[1][2] Energy subsidies may be direct cash transfers to suppliers, customers, or related bodies, as well as indirect support mechanisms, such as tax exemptions and rebates, price controls, trade restrictions, and limits on market access.

The International Renewable Energy Agency tracked some $634 billion in energy-sector subsidies in 2020, and found that around 70% were fossil fuel subsidies. About 20% went to renewable power generation, 6% to biofuels and just over 3% to nuclear.[3]

Overview of all sources of energy[edit]

If governments choose to subsidize one particular source of energy more than another, that choice can impact the environment.[4][5][6] That distinguishing factor informs the below discussion on all energy subsidies of all sources of energy in general.

Main arguments for energy subsidies are:

  • Security of supply – subsidies are used to ensure adequate domestic supply by supporting indigenous fuel production in order to reduce import dependency, or supporting overseas activities of national energy companies, or to secure the electricity grid.[7]
  • Environmental improvement – subsidies are used to reduce pollution, including different emissions, and to fulfill international obligations (e.g. Kyoto Protocol).[citation needed]
  • Economic benefits – subsidies in the form of reduced prices are used to stimulate particular economic sectors or segments of the population, e.g. alleviating poverty and increasing access to energy in developing countries.[citation needed] With regards to fossil fuel prices in particular, Ian Parry, the lead author of a 2021 IMF report said, “Some countries are reluctant to raise energy prices because they think it will harm the poor. But holding down fossil fuel prices is a highly inefficient way to help the poor, because most of the benefits accrue to wealthier households. It would be better to target resources towards helping poor and vulnerable people directly.”[5][6]
  • Employment and social benefits – subsidies are used to maintain employment, especially in periods of economic transition.[8][better source needed] In 2021, with regards to fossil fuel prices in particular, Ipek Gençsü, at the Overseas Development Institute, said: “[Subsidy reform] requires support for vulnerable consumers who will be impacted by rising costs, as well for workers in industries which simply have to shut down. It also requires information campaigns, showing how the savings will be redistributed to society in the form of healthcare, education and other social services. Many people oppose subsidy reform because they see it solely as governments taking something away, and not giving back.”[5]

Main arguments against energy subsidies are:

  • Some energy subsidies, such as the fossil fuel subsidies (oil, coal, and gas subsidies), counter the goal of sustainable development, as they may lead to higher consumption and waste, exacerbating the harmful effects of energy use on the environment, create a heavy burden on government finances and weaken the potential for economies to grow, undermine private and public investment in the energy sector.[9] Also, most benefits from fossil fuel subsidies in developing countries go to the richest 20% of households.[10]
  • Impede the expansion of distribution networks and the development of more environmentally benign energy technologies, and do not always help the people that need them most.[9]
  • The study conducted by the World Bank finds that subsidies to the large commercial businesses that dominate the energy sector are not justified. However, under some circumstances it is reasonable to use subsidies to promote access to energy for the poorest households in developing countries. Energy subsidies should encourage access to the modern energy sources, not to cover operating costs of companies.[11] The study conducted by the World Resources Institute finds that energy subsidies often go to capital intensive projects at the expense of smaller or distributed alternatives.[12]

Types of energy subsidies are below. ("Fossil-fuel subsidies generally take two forms. Production subsidies...[and]...consumption subsidies."[3]):

  • Direct financial transfers – grants to suppliers; grants to customers; low-interest or preferential loans to suppliers.
  • Preferential tax treatments – rebates or exemption on royalties, duties, supplier levies and tariffs; tax credit; accelerated depreciation allowances on energy supply equipment.
  • Trade restrictions – quota, technical restrictions and trade embargoes.
  • Energy-related services provided by government at less than full cost – direct investment in energy infrastructure; public research and development.
  • Regulation of the energy sector – demand guarantees and mandated deployment rates; price controls; market-access restrictions; preferential planning consent and controls over access to resources.
  • Failure to impose external costs – environmental externality costs; energy security risks and price volatility costs.[9]
  • Depletion Allowance – allows a deduction from gross income of up to ~27% for the depletion of exhaustible resources (oil, gas, minerals).

Overall, energy subsidies require coordination and integrated implementation, especially in light of globalization and increased interconnectedness of energy policies, thus their regulation at the World Trade Organization is often seen as necessary.[13][14]

Support for new technology[edit]

Early support of solar power by the United States and Germany greatly helped renewable energy commercialization to reduce greenhouse gas emissions worldwide, but may not have helped local manufacturing.[15] Support for nuclear fusion continues, although it is not expected to be commercially viable in time to contribute to countries net zero targets.[16] Energy storage research is also supported.[17]

Fossil fuel subsidies[edit]

The degree and impact of fossil fuel subsidies is extensively studied. Because fossil fuels are a leading contributor to climate change through greenhouse gases, fossil fuel subsidies increase emissions and exacerbate climate change.[5][6]

According to the International Energy Agency, the elimination of fossil fuel subsidies worldwide would be one of the most effective ways of reducing greenhouse gases and battling global warming.[18] Along with this, elimination of these subsidies was welcomed by the G20 nations as a way reduce expenditures during the recession during the 2009 Pittsburgh Summit.[19] In 2016, the G7 nations set for the first time a deadline for ending most fossil fuel subsidies; saying government support for coal, oil and gas should end by 2025.[20] According to a 2019 report by the Overseas Development Institute, the G20 governments still provide billions of dollars of support for the production and consumption of fossil fuels, spending at least $63.9 billion per year on coal alone.[21] At the time of the 2020 G20 Summit, a policy brief found, that in general, governments have not enacted policies that sufficiently drew down fossil fuel subsidies since the 2009 Pittsburgh Summit.[22]

According to Fatih Birol, Chief Economist at the International Energy Agency, without a phasing out of fossil fuel subsidies, countries will not reach their climate targets.[23]

Removing fossil-fuel subsidies is discussed in the research article "Social tipping dynamics for stabilizing Earth’s climate by 2050" as a social tipping intervention needed for the take-off and diffusion of fossil-fuel–free energy systems.[24]

Subsidies by country[edit]

United Kingdom[edit]

The government says that the 5% value added tax (VAT) rate on natural gas for home heating is not a subsidy, but some environmental groups disagree[25] and say that it should be increased to the standard 20% with the extra revenue ringfenced for poor people.[26]

United States[edit]

Congressional Budget Office estimated allocation of energy-related tax preferences, by type of fuel or technology, 2016

Energy subsidies are government payments that keep the price of energy lower than market rate for consumers or higher than market rate for producers. These subsidies are part of the energy policy of the United States.

According to Congressional Budget Office testimony in 2016, an estimated $10.9 billion in tax preferences was directed toward renewable energy, $4.6 billion went to fossil fuels, and $2.7 billion went to energy efficiency or electricity transmission.[27]

According to a 2015 estimate by the Obama administration, the US oil industry benefited from subsidies of about $4.6 billion per year.[28] A 2017 study by researchers at Stockholm Environment Institute published in the journal Nature Energy estimated that "tax preferences and other subsidies push nearly half of new, yet-to-be-developed oil investments into profitability, potentially increasing US oil production by 17 billion barrels over the next few decades."[29]

See also[edit]

References[edit]

  1. ^ Timperley, Jocelyn (October 20, 2021). "Why fossil fuel subsidies are so hard to kill". Nature. Retrieved October 26, 2021. "Fossil-fuel subsidies generally take two forms. Production subsidies...[and]...Consumption subsidies...
  2. ^ OECD, 1998
  3. ^ a b Timperley, Jocelyn (October 20, 2021). "Why fossil fuel subsidies are so hard to kill". Nature. Retrieved October 26, 2021.
  4. ^ Harvey, Fiona (July 15, 2020). "Governments put 'green recovery' on the backburner". The Guardian. Retrieved October 19, 2021.
  5. ^ a b c d Carrington, Damian (October 6, 2021). "Fossil fuel industry gets subsidies of $11m a minute, IMF finds". The Guardian. Retrieved October 19, 2021.
  6. ^ a b c Parry, Ian; Black, Simon; Vernon, Nate (September 24, 2021). "Still Not Getting Energy Prices Right: A Global and Country Update of Fossil Fuel Subsidies". International Monetary Fund. International Monetary Fund. Retrieved October 19, 2021.
  7. ^ "Department of Energy Announces $10M in Funding to Cooperative and Municipal Utilities to Secure the Energy Sector's Industrial Control Systems". Energy.gov. Retrieved March 1, 2022.
  8. ^ "Energy subsidies in the European Union: A brief overview. Technical report No 1/2004" (PDF). European Environmental Agency. 2004. Archived from the original on March 14, 2012. Retrieved April 11, 2012. {{cite journal}}: Cite journal requires |journal= (help)
  9. ^ a b c United Nations Environment Programme, Division of Technology, Industry and Economics. (2002). Reforming energy subsidies (PDF). IEA/UNEP. ISBN 978-92-807-2208-6. Archived (PDF) from the original on March 21, 2007. Retrieved March 9, 2008.{{cite book}}: CS1 maint: multiple names: authors list (link)
  10. ^ Whitley, Shelagh. "Time to change the game: Fossil fuel subsidies and climate". Overseas Development Institute. Archived from the original on January 3, 2014. Retrieved January 3, 2014.
  11. ^ Douglas F. Barnes; Jonathan Halpern (2000). "The role of energy subsidies" (PDF). Energy and Development Report: 60–66. Archived (PDF) from the original on October 16, 2008. Retrieved March 9, 2008.
  12. ^ Jonathan Pershing; Jim Mackenzie (March 2004). "Removing Subsidies. Leveling the Playing Field for Renewable Energy Technologies. Thematic Background Paper" (PDF). Secretariat of the International Conference for Renewable Energies. Archived from the original (PDF) on April 6, 2004. Retrieved March 9, 2008. {{cite journal}}: Cite journal requires |journal= (help)
  13. ^ Farah, Paolo Davide; Cima, Elena (2015). "World Trade Organization, Renewable Energy Subsidies and the Case of Feed-In Tariffs: Time for Reform Toward Sustainable Development?". Georgetown International Environmental Law Review (GIELR). 27 (1). SSRN 2704398. and Farah, Paolo Davide; Cima, Elena (December 15, 2015). "WTO and Renewable Energy: Lessons from the Case Law". 49 JOURNAL OF WORLD TRADE 6, Kluwer Law International. SSRN 2704453.
  14. ^ Farah, Paolo Davide and Cima, Elena, WTO and Renewable Energy: Lessons from the Case Law (December 15, 2015). 49 JOURNAL OF WORLD TRADE 6, Kluwer Law International, ISSN 1011-6702, December 2015, pp. 1103 – 1116. Available at SSRN: http://ssrn.com/abstract=2704453
  15. ^ "Solar power in Germany – output, business & perspectives". Clean Energy Wire. September 21, 2018. Retrieved February 28, 2022.
  16. ^ "Major breakthrough on nuclear fusion energy". BBC News. February 9, 2022. Retrieved February 28, 2022.
  17. ^ "Why the EU supports energy storage research and innovation".
  18. ^ John Schwartz (December 5, 2015). "On Tether to Fossil Fuels, Nations Speak With Money". The New York Times. Archived from the original on December 6, 2015. Retrieved December 5, 2015. ...the elimination of subsidies as one of the most effective strategies for reducing greenhouse gas emissions.
  19. ^ Blondeel, Mathieu; Colgan, Jeff; Van de Graaf, Thijs (October 9, 2019). "What Drives Norm Success? Evidence from Anti–Fossil Fuel Campaigns". Global Environmental Politics. 19 (4): 63–84. doi:10.1162/glep_a_00528. S2CID 203912396.
  20. ^ Mathiesen, Karl (May 27, 2016). "G7 nations pledge to end fossil fuel subsidies by 2025". The Guardian. Archived from the original on June 6, 2016. Retrieved June 7, 2016.
  21. ^ "G20 coal subsidies: tracking government support to a fading industry". ODI. June 2019. Retrieved November 22, 2019.
  22. ^ "Fuel Subsidy Reform Since Pittsburgh G20: A Lost Decade?". Baker Institute's Center for Energy Studies. October 2020. Retrieved July 2, 2021.
  23. ^ Fossil fuel subsidies are “public enemy number one” – IEA Chief Archived 2013-02-11 at the Wayback Machine EWEA 04 Feb 2013
  24. ^ Otto, Ilona M.; Donges, Jonathan F.; Cremades, Roger; Bhowmik, Avit; Hewitt, Richard J.; Lucht, Wolfgang; Rockström, Johan; Allerberger, Franziska; McCaffrey, Mark; Doe, Sylvanus S. P.; Lenferna, Alex (February 4, 2020). "Social tipping dynamics for stabilizing Earth's climate by 2050". Proceedings of the National Academy of Sciences. 117 (5): 2354–2365. doi:10.1073/pnas.1900577117. ISSN 0027-8424. PMC 7007533. PMID 31964839.
  25. ^ editor, Damian Carrington Environment (January 23, 2019). "UK has biggest fossil fuel subsidies in the EU, finds commission". The Guardian. ISSN 0261-3077. Retrieved January 10, 2021. {{cite news}}: |last= has generic name (help)
  26. ^ "Green Alliance (Press release) End £2bn VAT subsidy on gas". www.green-alliance.org.uk. Retrieved January 10, 2021.
  27. ^ Dinan, Terry (March 29, 2017). "CBO Testimony, Federal support for developing, producing, and using fuels and energy technologies" (PDF). cbo.gov/. Archived (PDF) from the original on October 16, 2017. Retrieved November 7, 2017.
  28. ^ McDonnell, Tim (October 2, 2017). "Analysis | Forget the Paris agreement. The real solution to climate change is in the U.S. tax code". Washington Post. ISSN 0190-8286. Archived from the original on October 2, 2017. Retrieved October 3, 2017.
  29. ^ Erickson, Peter; Down, Adrian; Lazarus, Michael; Koplow, Doug (2017). "Effect of subsidies to fossil fuel companies on United States crude oil production". Nature Energy. 2 (11): 891–898. Bibcode:2017NatEn...2..891E. doi:10.1038/s41560-017-0009-8. S2CID 158727175.

Bibliography[edit]

  • Difiglio, Prof. Carmine; Güray, Bora Şekip; Merdan, Ersin (November 2020). Turkey Energy Outlook. iicec.sabanciuniv.edu (Report). Sabanci University Istanbul International Center for Energy and Climate (IICEC). ISBN 978-605-70031-9-5.

External links[edit]