Policy Options: Subsidies
Global Environmental Facility
"Moderating or, when possible, phasing out fossil fuel subsidies, is fundamental to improving market conditions for energy efficiency and renewable energy markets. Tax and subsidy policies should treat fossil fuels and renewable energy equally."
International Energy Agency
Benefits of subsidy elimination would not only ameliorate ecological damage and climate change.
A subsidy is government funding given to a private
person or entity, intended to benefit the good of
society. Subsidies are used to make certain activities
cheaper when the activity's benefit is not represented
in the financial costs. For example, energy subsidies
that make it cheaper to produce or buy energy have
been justified to increase access to electricity,
providing a higher standard of living to society.
Industrialized countries have used this 'public good
perspective' to rationalize many forms of subsidies,
including tax concessions and direct grants to fossil
fuel production. While some fossil fuel subsidies
have decreased, they are still estimated to be about
$150 billion per year globally, many in industrialized
Developing nations' energy subsidies primarily have not been successful - leading to inefficient public utilities. The utilities are plagued by poor service and power outages, wasted resources, inability to draw in investment revenues or attract aid from public or private investors. Developing and transitional governments know that reducing conventional energy subsidies will not only help with these problems, but also help their ability to fund other development objectives. (UNDP)
While some people argue that no subsidies are justified, others are promoting temporary subsidies for renewables. The history of subsidizing fossil fuels (thereby altering their price) has made it difficult for renewable energy resources to compete. Governments should temporarily provide funding for new energy technologies so that they can become market competitive with traditional energy resources.
Fossil fuel subsidies negatively affect the marketplace:
- Subsidies consume federal money: Globally, $300 billion dollars is spent annually on nuclear/fossil power subsidies. This restricts funds needed for investments and other development projects. See World Council on Renewable Energy
- Removing fossil fuel subsidies has been shown to promote economic development in Colombia, Ghana, Indonesia, Turkey and Zimbabwe where GDP grew faster after subsidy reform The Earth Council
- A per-unit subsidy on fuel production causes energy prices to drop and quantity of fuel produced to rise, thereby increasing carbon dioxide emissions and pollution. An OECD study showed that global CO2 emissions would drop more than 6%. if all global fossil fuel subsidies were removed, real income would increase by 1.6% in non-OECD countries and by 0.1% in OECD countries by 2010 . Also, eliminating consumer subsidies in non-OECD countries would raise income by $35 billion. Earth Council
- Dependency and national insecurity are deepened by oil, gas and coal subsidies
- Low-income neighborhoods are disproportionately affected by pollution in cities from electricity plants, transportation exhaust and industry run by conventional energy
- Conventional subsidies inhibit research for new technologies by supporting inefficient fuels: Producers receive artificially low prices for fossil fuels, so the return on their investment decreases for R&D in renewables and new infrastructure.
Two scenarios can be demonstrated with this graph. First, we can see how, without accounting for negative externalities (i.e. pollution), prices will be artificially low. With the same demand curve, the market will set the supply at the market price. As you can see, where the demand curve intersects with the market price, this results in inefficiency- too much output at a reduced price. Governments benefit society when they set policy to include externality costs into the market price.
Also, we can demonstrate how a subsidy works. Subsidizing a fuel artificially lowers the price curve to the lower position (market price graph). Since we spend $150 billion on conventional fuel subsidies, and also don't include the externalities in price to the consumer or industry, fossil fuels are cheaper. Minimizing these subsidies and/or creating temporary subsidies for renewables will help make the relative prices for all fuels more realistic.
Subsidy reform: Replace old subsidies
with temporary ones that promote clean energy use
International Energy Agency/United Nations
A 'good subsidy' is one that enhances access to modern energy or has a positive impact on the environment, while sustaining incentives for efficient delivery and consumption
We must be careful when creating any type of subsidy. However, temporary subsidies for renewable energy can be beneficial, if a few criteria are followed. These subsidies can promote the needed competition for clean energy technologies and boost their capacity (leading to natural price reductions). Fossil fuels currently monopolize the market because of government assistance- it is only fair to give all fuels an equal chance to be competitive. Subsidizing renewables helps boost energy access to rural developing communities and lowers prices for renewables in industrialized nations to make them more cost-competitive. These subsidies can be justified because they lead to better health worldwide, to enhanced energy security and to sustainable development goals.
> Table 2
(click to expand table)
Types of energy subsidies
|lowers cost of production||raises cost of production||lowers price to consumers|
Necessary components of subsidy legislation
- Sunset clause!! We must not become dependent on subsidies. The policy should have a reasonable schedule to gradually lessen the subsidy
- Transparency: The public must be able to find out how much the government spent on the subsidy and which people and/or groups received subsidy money
- Well-targeted: It must be directed to people who are meant and deserve to benefit from them. Too often a subsidy benefits energy companies and the wealthy disproportionately (i.e. LPG subsidies in India), so consider more local targeted projects
- Efficiency: Subsidies should boost, not undermine a supplier's incentive to provide or a consumer's ability to use the energy supply
- Cost effective: Perform a cost-benefit analysis
- Practical: The subsidy must be affordable and reasonable to administer
Reforming Energy Subsidies, The impact of energy subsidies on sustainability, UNEP/IEA Workshops
Energy for Sustainable Development, A Policy Agenda, UNDP
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