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Hidden Cost of Energy: Fuel Subsidies

Hidden Cost of Energy Fuel Subsidies
Nobody wants to pay more for gas.

Fossil fuels account for the vast majority of energy production, and, as non-renewable resources, the price has steadily increased for energy as supply dwindles and demand has surged.  Throughout most of the world, especially the richest nations, the true cost of energy is not seen due to a wide array of fuel subsidies and energy “support.”

There is not much agreement on what exactly constitutes a fuel subsidy but, all seem to agree that a lot of money is being spent on supporting various energy industries by artificially reducing the direct cost of production and consumption. So, while many tactics are employed in reducing energy costs, very few countries accurately report what they spend. Further, assessing the fiscal damage to the environment as well as the lack of funds generated by not imposing taxes (such as those on carbon emissions) become even trickier to estimate.

The International Monetary Fund estimates global fuel subsidies at 1.9 trillion USD, or 8 percent of all governments’ revenue. These estimates are extremely conservative, though, considering the dollar amount they use for the social cost of carbon, $25 per ton, is less than a third of what the UK and independent analysts have found. Also, the estimate does not include the vast majority of energy producer subsidies, only looking at consumer subsidies for oil and coal.

The impact of fuel subsidies is far-ranging. Pre-tax subsidies, or those that are direct cost reductions from the government to consumers, come at a global cost of 480 billion USD according to IMF’s report on 2011’s data. These are funds that are being deprived from social programs for urgencies such as roads, water distribution and poverty alleviation.

Subsidies are often unequally distributed. In developing countries, the IMF found the top fifth of societies in household income reap six times the subsidies of anyone else. The cost of these subsidies is offset by increased prices of other goods and services –resulting in a 6 percent decrease in income for every $0.25 cost decrease per liter.

Artificially increasing demand and consumption for fossil fuels reduces investment and growth in alternative fuel sources as much as the growth of many other markets — especially, exports.

Though developing countries appear to receive the most negative impact, developed nations such as the US and Russia spend the most through post-tax subsidies. Estimates on US subsidies range from $10 billion to $52 billion and do not include any of the associated health or environmental costs.

So, what can be done?

Various countries have successfully phased out tax reduction programs in the coal industry such as Poland, Germany and most developed nations do not offer pre-tax subsidies.  Unfortunately, little progress has been made on oil subsidies, which account for over 2/3 of the total. Developed countries will have to continue to lead the charge in reforming these harmful economic policies.  Transparency to the accurate amounts of what is actually being spent and to whom the money is going to may very well be the first step toward achieving more effective means of viable economic stability and sustainable progress in the use of depleting resources.

– Tyson Watkins

Sources: IMFIEA, Oil Change International, Grist, BBC News, Climate Progress
Photo: Giphy.com