Reforming Energy Subsidies: Opportunities to Contribute to the Climate Change Agenda

Scrapping fossil fuel subsidies could play an important role in cutting greenhouse gases while giving a small but not insignificant boost to the global economy a new report by the UN Environment Programme (UNEP) says.

The Programme’s Division of Technology, Industry and Economics has published a short but informative overview on how reforming energy subsidies can contribute to climate change and sustainable development. The report challenges the widely held view that such subsidies assist the poor arguing that many of these price support systems benefit the wealthier sections of society rather than those on low incomes.

Globally around $300 billion or 0.7 per cent of global GDP is being spent on energy subsidies annually. The lion’s share is being used to artificially lower or reduce the real price of fuels like oil, coal and gas or electricity generated from such fossil fuels. Cancelling these subsidies might reduce greenhouse gas emissions by as much as six per cent a year while contributing 0.1 per cent to global GDP.

The report acknowledges that some subsidies or mechanisms, whether in the form of tax breaks, financial incentives or other market instruments can generate social, economic and environmental benefits. A case in point are feed-in tariffs that have kick-started a renewable energy revolution in countries such as Germany and Spain.

The report also accepts that there may be cases where some subsidies can, if well- devised and time-limited meet important social and environmental goals.

For example ones to encourage a switch from dirty, health-hazardous or environmentally harmful fuel such a charcoal.

But the report argues that many seemingly well intentioned subsidies rarely make economic sense and rarely address poverty. The report therefore challenges the widely-held myth that scrapping fossil fuel supports would hit the poor.

The report cites the example of Liquid Petroleum Gas subsidies in India where $1.7 billion was spent in the first half of the current financial year on trying to get the fuel into poor households. "LPG subsidies are mainly benefiting higher-income households…despite the ineffectiveness of the subsidy the programme is being extended until 2010,"says the study.

Greenhouse gas emissions, primarily caused by fossil fuels, are the main drivers of climate change. Through the Intergovernmental Panel on Climate Change, the international community agreed that global greenhouse gas emissions need to be halved relative to 1990 by 2050 to avoid irreversible and possibly catastrophic changes for millions of people.

Nevertheless, many governments continue to subsidize the use of fossil fuels. In recent years, some have even intensified their financial support for social reasons to compensate for the steep increase in international oil prices. However, such subsidies often do not reach those that they are intended for. They are also very costly in economic terms, creating a large drain on government budgets and distorting national and international markets. On the other hand, energy subsidies can be beneficial, where they are aimed at promoting cleaner and more efficient technologies and at improving poor households’ access to modern forms of energy.

Energy subsidies come in different forms and guises. Their effects on the economy, society and the environment are wide-ranging and complex.

However, it is becoming increasingly apparent that many types of energy   subsidies today run counter to the goal of sustainable development:

  • Subsidies often lead to increased levels of consumption and waste, exacerbating the harmful effects of energy use on the environment.
  • They can place a heavy burden on government finances, weakening the potential for economies to grow and reducing the potential to invest in social equity.
  • They can undermine private and public investment in the energy sector, which can impede the expansion of distribution networks and the development of more environmentally benign energy technologies such as decentralized renewable energy technologies.
  • They do not always end up helping the people who need them most.

Eliminating environmentally harmful subsidies must play a central role in national efforts to achieve a long-term transition to a truly sustainable and secure energy system. Many countries have already taken great strides in abolishing the most ineffective and costly subsidies or adapting them to changing market conditions and policy goals.

Nonetheless, much more needs to be done, including in developing countries where subsidies are generally bigger and their harmful effects - on economic growth, the environment and social welfare - greater. An increased focus on the issue of energy subsidies by the international community is of utmost importance in accelerating the reform process.

Action is urgently needed in three main areas:

(1) Reporting and compiling consistent data on energy subsidies as well as analysing their effects (transparency and accountability);

(2) enhancing mechanisms of communication with policymakers to show them the need for and benefits of reforming subsidies as well as to assist them in implementing policy reforms at the national level; and

(3) capacity building for government officials and other stakeholders from both developed and developing countries, and assistance in reforming subsidies. UNEP, in partnership with other international organisations, can play an active role in carrying forward work in these areas.

The report is available for download from the UNEP website

Source: United Nations Environment Programme

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