Call to stop fossil fuel subsidy

By Roger Harrabin Environment analyst

Political inertia may be one of the blockages to progress. A global energy think tank has urged nations to stop subsidising fossil fuels as soon as possible.It says that last year governments, mainly in the developing world, spent $312bn subsidising coal oil, gas and coal.This was even though they agree these fuels cause climate change.The International Energy Agency says removing the subsidies would be the quickest way to control the soaring demand for energy. It would also cut CO2 emissions by 5.8%

But the IEA report admits that vested interests and political inertia will be major barriers to making progress on the issue.

Cutting out fossil fuel subsidies by 2020 would allow fuel prices to rise and reduce overall energy consumption 5% - this equates to all the fossil fuel used by Japan, South Korea and New Zealand.

The move would cut greenhouse gas emissions by an estimate 5.8% - two gigatonnes - by 2020. It would also free up government cash to use on other measures.

Resource depletion

The IEA's World Energy Outlook 2010 says: "Subsidies that artificially lower energy prices encourage wasteful consumption and undermine the competitiveness of renewable and more energy-efficient technologies."

It also points out that the subsidies hasten the depletion of resources.

Subsidies have traditionally been granted to politically-connected industries with close links to politicians.

The majority are offered in developing countries, according to the IEA. Some countries say they need the subsidies to make energy affordable. But the report says very few schemes actually benefit the poor. The report notes that in 2009 APEC and the G20 agreed to phase out fossil fuel subsidies over time, but the IEA admits: "Steep economic political and social hurdles will need to be overcome to realise lasting gains."

For decades, Germany subsidised coal because it wanted to continue producing domestic coal and to avoid the political ramifications of the massive social disruption that would be caused by allowing mining areas to stop working. The subsidies are now slowly being phased out. Nobuo Tanaka, head of the IEA said: "Getting the prices right, by eliminating fossil-fuel subsidies, is the single most effective measure to cut energy demand in countries where they persist, while bringing other immediate economic benefits", said.

The IEA also warns that the failure to reach a strict emissions agreement at Copenhagen makes it much more difficult and expensive to achieve the stated UN goal of stabilised emissions at a level equated with a temperature rise of 2C.

It says the failure increased the cost by $1 trillion. And it warns that if countries adopt their Copenhagen pledges in a "cautious" manner, their emissions cuts would fall far short of the mark. Commenting on the report, Friends of the Earth's head of climate Mike Childs said: "The outlook for the planet is grim unless governments commit to tough international action to rapidly reduce our reliance on fossil fuels and tackle climate change."

UK Energy and Climate Change Secretary Chris Huhne said in response to the IEA report:

"The IEA delivers a blunt message ahead of the Cancun climate conference that cleaning up our energy systems now is cheaper than delay.

"The Copenhagen commitments would soften predicted oil price increases, but the IEA still thinks prices could be some 40% higher by 2035. The age of cheap energy is over.

"We need to go further and faster in getting ourselves off the oil hook - and on to clean green growth. Greater energy independence - with more renewables, clean coal and nuclear - is the best way to protect our consumers and our country from energy shocks to come."

The Outlook calculated subsidies by comparing the price of fuels to consumers with the price on the international markets. The most subsidies were offered by Iran (66$bn); Saudi ($35bn); Russia (£34bn); India ($21bn); and China ($19bn). IEA economist Marco Baroni told BBC News that the totals did not include government subsidies to fossil fuel producers. Some estimates, he said, suggested these could be as high as a further $100bn - but the data was hard to come by.

Nor does the total include the tacit subsidy given to fossil fuels because fuel taxes globally do not match the external damages caused by burning fossil fuels. Lord Stern estimated climate damages from fossil fuels of between 5 and 20% of GDP. A comprehensive estimate would also include damages to human health from local pollution and damage to buildings and crops by acid rain. The Chinese government admits that its soaring economic growth rate would be slashed if environmental damage from fossil fuels was fully taken into account.