Carbon Fuel Subsidies Exceed $500 Billion Globally

IEA counts $550bn energy support bill

The Financial Times, June 6, 2010

The world economy spends more than $550bn in energy subsidies a year, about 75 per cent more than previously thought, according to the first exhaustive study of the financial assistance devoted to oil, natural gas and coal consumption.

The study by the International Energy Agency, the western countries’ oil watchdog, says phasing out subsidies over the medium term, as agreed last year by the G20, would trigger vast savings in energy consumption and carbon dioxide emissions.

Past efforts have foundered as many countries have vested interests in providing lower-cost fuel to their citizens and industries, and in propping up sectors such as coal mining.

The IEA estimates that in 2008 – the latest year for which data are available – 37 large developing countries spent about $557bn in energy subsidies, according to a draft seen by the Financial Times. Previous estimates put it at about $300bn. Iran, Russia, Saudi Arabia, India and China top the ranking, according to the report.

Some of the biggest spenders, including Saudi Arabia and China, recently warned of the need to cut subsidies over the medium term.

Fatih Birol, chief economist at the IEA in Paris, said removing subsidies was a policy that could change the energy game “quickly and substantially”.

“I see fossil fuel subsidies as the appendicitis of the global energy system which needs to be removed for a healthy, sustainable development future,” he told the Financial Times.

“Phasing out oil, natural gas and coal subsidies would increase energy efficiency and push investments in clean energy sources,” he added.

The new report will be discussed at the G20 summit in Toronto this month.

The IEA estimates that energy consumption could be reduced by 850m tonnes equivalent of oil – or the combined current consumption of Japan, South Korea, Australia and New Zealand – if the subsidies are phased out between now and 2020. The consumption cut would save the equivalent of the current carbon dioxide emissions of Germany, France, the UK, Italy and Spain.

Critics of energy subsidies say they encourage wasteful consumption, reduce global energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change.

They also claim that subsidies are a burden to national budgets, with spending on financial support to oil, natural gas and coal sometimes larger than education or health spending. The IEA says the 37 countries surveyed spent, on average, about 2.1 per cent of their GDP on energy subsidies.

But supporters, including some G20 members which reluctantly signed the statement last year, such as India, say subsidies are needed to help poor people in developing countries and control inflation.

© Copyright The Financial Times Ltd 2010.

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