The International Energy Agency (IEA) annually estimates global fossil-fuel consumption subsidies that measure what many developing countries spend to provide below-market cost fuel to their citizens. In 2014, IEA found that fossil fuel consumption subsidies totaled $493 billion, 7 percent lower ($39 billion less) than in 2013.[i] According to IEA, this decrease is partly due to lower international energy prices. Oil subsidies make up over half of the total fossil fuel consumption subsidies, while electricity makes up 24 percent, natural gas 22 percent and coal 0.4 percent. According to the IEA, the United States does not have any consumption subsidies for oil, coal, electricity or natural gas.
The IEA is a part of the Organization for Economic Cooperation and Development (OECD), which represents the developed nations of the world. IEA’s subsidy study found that many developing countries artificially lower energy prices to their citizens, paying the difference from their government resources.[ii] These wealth transfers are differentiable from subsidies that are intended to support uneconomic energy sources such as wind and solar technologies toward commercialization. In contrast, the United States and other developed countries offer support to energy production in the form of tax credits, loan guarantees or use mandates, which are not included in IEA’s fossil fuel consumption subsidy calculations since they are directed towards production rather than consumption of the fuel.
Source: International Energy Agency, Energy Subsidies, http://www.worldenergyoutlook.org/resources/energysubsidies/
According to the IEA, global fossil fuel consumption subsidies are over 4 times higher than global renewable subsidies. In contrast to fossil fuel consumption subsidies, renewable fuel subsidies often take the form of tax credits for investment or production, or premiums over market prices to cover the higher production costs compared to traditional fuels.
Fossil Fuel Consumption Subsidies by Country
Fossil fuel consumption subsidies are most prevalent in the Middle East and in North Africa. (See chart below.) Iran leads the world in fossil fuel consumption subsidies providing $78 billion from its government resources in 2014 to lower the cost of fossil fuels to end-users in its country. Of the $78 billion in fossil fuel consumption subsidies Iran paid, 52 percent covered oil, 29 percent funded natural gas, and the remainder (20 percent) went to electricity. Saudi Arabia is the second largest country subsidizing end-use fossil fuel prices, providing 69 percent of its $71.3 billion in fossil fuel consumption subsidies to oil, 19 percent to electricity, and 12 percent to natural gas in 2014. Russia ranked third with $39.6 billion in fossil fuel consumption subsidies, 44 percent covering natural gas and 56 percent going to electricity. India came in fourth with $38.2 billion in fossil fuel consumption subsidies–oil garnered 78 percent, electricity 10 percent, and natural gas 13 percent. Venezuela ranked fifth with fossil fuel consumption subsidies totaling $31.4 billion, 67 percent covering oil, 11 percent covering natural gas and 22 percent covering electricity.
Indonesia and Egypt ranked sixth and seventh, respectively, both funding at least $23 billion in fossil fuel consumption subsidies. Indonesia’s fossil fuel consumption subsidies totaled $27.7 billion in 2014 with oil receiving the most (70 percent) and electricity, 30 percent. Egypt’s fossil fuel consumption subsidies totaled $23 billion in 2014 and mainly funded lower petroleum prices. The distribution of Egypt’s fossil fuel consumption subsidies was: 70 percent oil, 7 percent natural gas, and 23 percent electricity. Algeria, United Arab Emirates (UAE) and China ranked eighth, ninth and tenth in fossil fuel consumption subsidies, respectively, with subsidies totaling $20.2 billion (Algeria), $17.6 billion (UAE) and $17.4 billion (China).
Coal received $2 billion in fossil fuel consumption subsidies, just 0.4 percent of the total. The countries that subsided coal in 2014 were Kazakhstan, Thailand, and the Republic of Korea.
Many of the countries providing fossil fuel consumption subsidies own state energy companies, including countries that comprise the Organization of Petroleum Exporting Countries, such as Iran, Saudi Arabia, and Venezuela. Net exporting countries see these subsidies as an opportunity cost.
Fossil fuel consumption subsidies are often used to alleviate energy poverty, but are an inefficient means for doing so, creating market distortions that result in wasteful energy consumption.
Developed countries, such as the United States, do not have fossil fuel consumption subsidies, as seen in the following chart.
Source: International Energy Agency, Energy Subsidies, http://www.worldenergyoutlook.org/resources/energysubsidies/
The Push to End Fossil Fuel Subsidies
At the G20 summit in Hangzhou on September 4 and 5, President Obama pressed the leaders of major global economies to outline specific plans to phase out most fossil fuel subsidies. Prior to that meeting, the energy ministers from the G20 countries met, but did not reach an agreement on a timeline for the subsidy phase-out. But, the G7 nations (including the United States, United Kingdom, Canada, France, Germany, Italy and Japan, as well as the European Union) met in May, agreeing to end most “inefficient” fossil fuel subsidies by 2025.[iii]
Saudi Arabia, Russia and China oppose the elimination of fossil fuel subsidies. The royal Saudi government is inextricably linked with state-owned Saudi Aramco, the world’s largest energy company. Despite that, Saudi Arabia scaled back some fossil fuel consumption subsidies that artificially lowered the price of fuel for its citizens, increasing its country’s gasoline prices by 50 percent last year. Bahrain raised gas prices for its residents by 56 percent and Qatar by 30 percent, although their subsidized rates are still well below market levels. Oil consumption in the Middle East has grown nearly 4 times faster than the global average, partly because subsidized gasoline is so inexpensive. Russia, one of the world’s largest oil producers, is dependent on oil and gas industry revenue for half of its federal budget, and is unlikely to eliminate its fossil fuel subsidies.[iv]
Since 2010, the Obama administration put forward 11 proposals to eliminate what they say are subsidies for the exploration, development, and extraction of fossil fuels. These incentives are production incentives (e.g. tax credits) not consumption incentives that alter the market price of the fuel. Of the 16 policies that the Obama Administration marked for elimination, all but three indicated that the “United States Congress must pass enabling legislation for this proposal to become law”. None of President Obama’s proposals have passed the House of Representatives.
The Obama Administration’s self-assessment identified $8.2 billion in U.S. fossil fuel subsidies/incentives, categorizing $4.8 billion as inefficient. The remainder ($3.4 billion) is part of the Low Income Home Energy Assistance Program (LIHEAP) providing assistance to low income residential consumers and was not marked for reform. President Obama’s self-assessment resulted in a much larger set of U.S. fossil fuel subsidies than the OECD has estimated for the United States totaling $4.2 billion (including the LIHEAP).[v]
Conclusion
Many Americans are confused by the large amount of global fossil fuel consumption subsidies that the IEA calculates, not realizing that these subsidies have nothing to do with tax policy, research and development or loan guarantees, where most U.S. programs are directed. In fact, most liberalized countries do not offer fossil fuel consumption subsidies that artificially lower the end-use price of the fuel. Fossil fuel consumption subsidies are common and even pervasive in the developing world, particularly in economies with state-owned energy companies. The IEA has been advocating for years that fossil fuel consumption subsidies should be eliminated since they encourage wasteful consumption.
Fossil fuel consumption subsidies in developing countries are welfare transfers that can be differentiated from subsidies in the name of commercializing or sustaining uneconomic energy sources such as on-grid wind or solar, which the United States and other industrialized countries have been subsidizing. These latter forms of energy subsidies that help promote production of uneconomic energy sources can be abolished without detrimental effects to the U.S. economy or its citizens. In fact, they would increase economic efficiency since by their very nature, they are generally more expensive than competing forms of energy.
The OECD countries find fault with developing countries for subsidizing the costs of energy purchased by their citizens, but those same OECD nations are busy subsidizing and mandating the use of uneconomic and inefficient forms of energy which will make energy more expensive and less reliable for their citizens. The economies would be better off if all such supports by governments were abolished.
[i] International Energy Agency, Energy Subsidies, http://www.worldenergyoutlook.org/resources/energysubsidies/
[ii] International Energy Agency, Fossil Fuel Subsidies—Methodology and Assumptions, http://www.worldenergyoutlook.org/resources/energysubsidies/methodology/
[iii] Argus, Obama to push G20 to cut fossil fuel subsidies, August 31, 2016, http://www.argusmedia.com/news/article/?id=1303970
[iv] Washington Diplomat, The Burning Debate over Fossil Fuel Subsidies, September 1, 2016, http://www.washdiplomat.com/index.php?option=com_content&view=article&id=14052:the-burning-debate-over-fossil-fuel-subsidies&catid=1548&Itemid=428
[v] Guardian, U.S. and China release fossil fuel subsidy peer reviews, September 20, 2016, https://www.theguardian.com/environment/2016/sep/20/us-and-china-release-fossil-fuel-subsidy-peer-reviews
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