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IEA: 'The Cost of Fossil Fuels to an Economy Is Not Reduced by Subsidies; It Is Just Redistributed'

Countries around the globe have committed to reducing subsidies for fossil fuels, primarily oil and gas. But that commitment is not being put into practice quickly enough for cleaner energy solutions to gain a competitive edge in some regions, according to the 2014 World Energy Outlook from the International Energy Agency.

Global subsidies for fossil fuels totaled nearly $550 billion in 2013. That figure is $25 billion lower than that of the previous year, but the IEA notes that is still not enough of a shift to make renewable energy competitive in the countries with the highest subsidies. 

More than half of the world’s fossil-fuel subsidies go to oil, and many of the subsidies are concentrated in oil- and gas-producing countries in the Middle East and North Africa. 

The subsidies that go to fossil fuels dwarf the subsidies for renewable energies, which the IEA put at $120 billion in 2013. The U.S. had about $27 billion in renewable subsidies in 2013, mostly going to solar PV, wind and biofuels.

In the Middle East, more than one-third of all electricity is generated with subsidized oil. Without subsidies, all mainstream low-carbon energy technologies — including nuclear — would be cost-competitive with oil generation.

The picture varies country by country. In Russia, for example, the IEA found that most non-hydro renewables except for onshore wind would struggle to compete even in the absence of gas subsidies.

“One thing is certain,” the report authors state. “The cost of fossil fuels to an economy is not reduced by subsidies; it is just redistributed.” The IEA found that only 8 percent of the money spent on fossil-fuel subsidies reaches the poorest 20 percent of the population.

It is not just renewable energy that is losing out to fossil fuels because of subsidies. Energy-efficient technologies, such as LEDs, are far less attractive in regions where oil and gas are heavily subsidized. In the Middle East, the payback for LEDs is approximately a decade, compared to less than two years if electricity rates reflected the real cost of supply.

Many of the countries that lean heavily on subsidies are instituting some reform, mostly because there simply isn’t enough money in the government coffers to support the subsidies anymore.

Although some of the countries that heavily subsidize oil or gas are also investing in renewables, such as Saudi Arabia, often they are not subsidizing renewables at nearly the same rate as they do fossil fuels, nor will they be in the future, according to the IEA.

Source: OECD/IEA 2014

The IEA does not call for an end to all energy subsidies, but rather for the implementation of an approach that would end those subsidies for fossil fuels while encouraging tailored price breaks for renewables.

“Fossil-fuel subsidies rig the game against renewables and act as a drag on the transition to a more sustainable energy system,” the IEA states. “On the other hand, subsidies to renewables can, if well designed, aid the deployment of sustainable technologies in support of energy security and environmental goals.”

Even if action to dismantle subsidies is slow to transpire in oil- and gas-rich countries, there are other moves afoot that could boost the increasing cost-competitiveness of some forms of renewable energy. On Wednesday, China and the U.S. announced an agreement on joint targets for reducing carbon dioxide emissions

In the U.S., fossil-fuel subsidies also might not get a free pass with the newly Republican-controlled Congress. Earlier this year, Rep. Dave Camp (R-MI) introduced a tax reform bill that removed subsidies for many energy technologies, including oil, gas and coal.  

Even without substantial reform on fossil-fuel subsidies, the IEA forecasts that nearly half of the world’s increase in electricity generation between now and 2040 will come from renewables.

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Joris van Dorp's picture
Joris van Dorp on Nov 18, 2014 8:26 am GMT

The article does not make clear how the IEA uses the term ‘subsidies’.

As an example, when oil products are sold to Saudi citizens at the cost of production, then according to the IEA this is a subsidy because the cost of production in Saudi Arabia is lower than the international market price. It turns out that about 80% of the ‘fossil fuel subsidies’ calculated by the IEA are this kind of subsidy (i.e. price differences between oil sold domestically in oil exporting countries versus to the international market!)

In oil importing countries, the international market price of oil is already internalised, hence, elimination the ‘fossil fuel subsidies’ as defined by the IEA will do nothing to make renewables or energy efficiency more competitive in oil importing countries.

What the article also does not mention is that the tax revenues from taxation of fossil fuel consumption in OECD countries absolutely dwarfs the fossil fuel subsidies in those countries (ratio of about 4 to 1!!). So while using the term ‘subsidies’ suggests that the tax payer is getting a raw deal, in fact the opposite is true. This is because the fossil fuel subsidies in OECD countries are intended to support the fossil fuel sector, but only in order to reduce the overhead and financing cost of the fossil fuel production,which then allows more tax revenues to subsequently be raised from fossil fuel consumption, rather than this wealth being lost to the banks and to bureacracy!

All the details about taxes and subsidies which clarify the above can be found in the following report.

http://www.oecd.org/env/49090716.pdf

The confusion about the subsidies versus taxation systems inside and outside OECD countries, and to do with fossil versus renewable energy sources, and to do with development versus production subsidies seems deliberately to be increasing every year, due to articles like this one, and has reached a fever pitch where nobody seems to understand what is going on anymore. By allowing this confusion to continue and deepen, the chance of achieving rational, effective energy and climate policy goals is undermined further and further. We need to kick out the propagandists and frauds who are deliberately feeding us lies and destroying our intelligence! Cui bono? Follow the money…

 

Bart Johnson's picture
Bart Johnson on Nov 18, 2014 4:38 pm GMT

Excellent comment. I expect a little better from this website than the rote repetition of anti-fossil-fuel propaganda that we are seeing here.

Joris van Dorp's picture
Joris van Dorp on Nov 20, 2014 5:36 pm GMT

Youll find all sorts of articles here. Some are spot on, some are hopelessly misguided. Some are blatant propaganda. It would seem to be up to commenters here to point these things out. Please consider this an invitation to join in.

One thing I would like to see more of on this website is that the sources of the articles are invited by the site management to respond to some of the most relevant comments on their articles. Others on this site have also requested this in the past. I suppose that the site management does already do something along these lines.

Finally, for what it’s worth, after nearly 20 years of joining in online debate on energy and our common future starting with the early Usenet discussion groups, I currently view this website as the best (English language) energy discussion website there is. Moderation is minimal but effective. Search and commenting tools are good. Site layout and useability is great. <end praise for TEC>

 

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