It’s time to stop subsidizing fossil fuels
BJORN LOMBORG
Contributed to The Globe and Mail
Published Friday, Apr. 17 2015, 7:21 AM EDT
Last updated Friday, Apr. 17 2015, 7:24 AM EDT
Each year, the world spends $548-billion subsidizing fossil fuels, according to the
International Energy Agency. That’s $548-billion that could have been spent
much better.
Fossil fuel subsidies are concentrated in the developing world. In Venezuela, you
can typically get gas for less than 10 cents a gallon. This is not because gasoline
is cheap, but because the government of Venezuela subsidizes gasoline
consumption to the tune of more than $25-billion each year. It spends $1,250
per person to reduce the real cost of oil, gas and electricity by more than 92 per
cent, costing it 10 per cent of its GDP. This drains the public budget, leaving less
money to provide health and education services to the population. Over the past
five years, Indonesia has spent more money on fossil subsidies than on
infrastructure and welfare programs. That’s crazy.
A disproportionate share of the subsidies goes to the middle class and the rich –
after all, they are the ones who can afford a car in poor countries. And the
subsidies make fossil fuels so inexpensive that consumption increases, thus
exacerbating global warming.
Iran is at the top of the list of countries that subsidize fossil energy to the tune
of more than $84-billion in annual subsidies, or 23 per cent of GDP. Saudi Arabia
subsidizes fossil fuel with more than $60-billion, defraying more than threequarters of the real cost of fossil fuels for its population. Russia, Venezuela, and
India spend between $35-billion and $45-billion annually, while Egypt,
Indonesia, the United Arab Emirates, China, and Algeria pay out more than $20billion each. Compare that to the U.S.: The Energy Information Administration
estimated in 2010 that fossil-fuel subsidies amounted to $4-billion a year, or two
one-hundredths of a per cent of GDP. Renewable energy received more than
triple that figure, roughly $14-billion.
But why do many developing countries hand out such massive subsidies, even
when the economy is struggling? Primarily the goal is to buy political support
and avoid popular protests.
There is no question that the money could be spent far better. Back in 2000, the
international community agreed to a set of important development goals, the
Millenium Development Goals, in order to improve conditions for the world’s
poorest by 2015. Many of these targets were highly successful in important
areas, such as the reduction of poverty and hunger. Through the UN, the world’s
leaders are now working on the next set of development goals for 2016-2030.
In this context, my think thank, the Copenhagen Consensus, has asked 60
teams of the world’s top economists and several Nobel laureates to analyze the
economic, social, and environmental costs and benefits of the different
suggested targets in areas from health and nutrition to environment and
education. This can help the world choose the targets that will do the most good
per dollar spent.
Our analysis by economists Isabel Galiana and Amy Sopinka shows that phasing
out subsidies for fossil fuels would be a phenomenal target. It will slash waste,
reduce inequality, and cut CO2 emissions. The economists estimate that every
dollar spent (you still need to help the most vulnerable to energy access) will
create benefits for society and the environment of more than $15. The billions of
dollars that governments could save from phasing out fossil fuel subsidies could
be spent on providing better health, education and nutrition, which could benefit
hundreds of millions of people.
Now is the time to cut fossil fuel subsidies. Thanks to plummeting oil prices, it is
easier to reduce the subsidies needed to guarantee regulated consumer prices,
taking off public pressure against such reforms. Egypt, for example, paid 30 per
cent less in subsidies than originally forecast due to cheap oil. It is encouraging
that Egypt, India, Indonesia and Malaysia have recently announced to
restructure their state budgets and to phase out energy subsidies.
Cutting fossil fuel subsidies will help the environment by emitting less CO2. It
will help developing countries grow less unequal and will free up much needed
resources for health, nutrition and education. Phasing out fossil fuel subsidies is
an obvious target for the world’s next development goals.