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- July 26th, 2015
ENERGY prices have been falling for a year. Over the last month that trend has accelerated. On July 24th, the price of a barrel of oil in Americareached a low of $48. In spite of this, governments are still splurging on subsidies to prop up production. Fossil fuels are reaping support of $550 billion annually, according the International Energy Agency (IEA), an organisation that represents oil- and gas-consuming countries, more than four times those given for renewable energy. The International Monetary Fund’s estimates are substantially higher. It said in May that countries will spend $5.3 trillion subsiding oil, gas and coal in 2015, versus $2 trillion in 2011. That is equivalent to 6.5% of global GDP, and is more than what governments across the world spend on healthcare. At a time of low energy prices, high government debt and rising concern over emissions there is scant justification for such spending. So why is the world addicted to energy subsidies?
Governments have devised several different ways of giving handouts for fossil fuels. Most surveys analyse “consumption” subsidies, rather than support or tax breaks for producers. Traditional “pre-tax” measures keep prices below supply costs for folk filling up their cars, or switching on the lights, and are particularly popular with developing countries. In oil-producing nations like Nigeria and Venezuela, low fuel prices are seen by poor populations as one of the few benefits of having large natural resource endowments. Rich countries subsidise too—the IMF says America is the world’s second biggest culprit, spending $669 billion this year—but mostly by “post-tax” systems which fail to factor the costs of environmental damage into prices.
This is a problem because it wastes fiscal resources and hardly benefits the poor, as the wealthy drive more and guzzle more power. The IEA believes that only 8% of subsidies accrue to the poorest fifth of the population. That money would better spent on roads, hospitals and schools instead. The schemes can also be shady. In Nigeria, billions of dollars are siphoned off while funding fuel importation, leaving locals suffering crippling shortages. Environmentalists argue that supporting fossil fuels represses the development of clean energy, promotes air pollution and climate change. IMF number-crunchers reckon that if the subsidies were cut, global carbon-dioxide emissions would fall by over 20% and government revenues would increase by $2.9 trillion, or 3.6% of GDP.
Most countries realise this is not sustainable, but removing subsidies can be a political hot potato. Nigeria, for instance, reversed its efforts in 2012 after days of violent street protests. Nevertheless there have been improvements. Low oil prices have recently allowed dozens of countries from Indonesia to India, Malaysia and Mexico to change their policies without vast price hikes. Others are simply allocating less cash to subsidies now that crude is cheaper. The IMF’s headline figures overshadow this because “post-tax” environmental costs are ballooning. Discounting those, countries will spend $330 billion plugging the gap between “true” prices and what consumers actually pay this year—down from $500bn in 2014. The IEA, which does not measure environmental costs, thinks that subsidies have been declining since 2013. But the real test will come when oil prices start rising, and demands to keep prices low begin again.