Governments and
taxpayers spent about half a trillion dollars last year supporting
the production and consumption of fossil fuels. Removing
inefficient subsidies would raise national revenues and reduce
greenhouse-gas emissions, according to OECD and IEA analyses.

The G-20 Leaders in 2009 agreed to phase out subsidies that
“encourage wasteful consumption, reduce our energy security, impede
investment in clean energy sources and undermine efforts to deal
with the threat of climate change”. OECD and IEA data and analysis
are contributing actively to the follow-up on this commitment by
the G20.

“Both developing and developed countries need to phase out
inefficient fossil fuel subsidies. As they look for policy
responses to the worst economic crisis of our lifetimes, phasing
out subsidies is an obvious way to help governments meet their
economic, environmental and social  goals,” said OECD
Secretary-General Angel Gurria.

“For this to succeed, we need well-targeted, transparent and
timebound programmes to assist poor households and energy workers
who might be adversely affected in the short-term. OECD and IEA
data and analysis can help guide the process. “

The OECD Secretary-General and IEA Executive Director Maria van
der Hoeven emphasised that subsidies to fossil-fuel consumers often
fail  to meet their intended objectives: alleviating energy
poverty or promoting economic development, and instead create
wasteful use of energy, contribute to price volatility by blurring
market signals, encourage fuel smuggling and lower competitiveness
of renewables and energy efficient technologies.

“In a period of persistently high energy
prices, subsidies represent a significant economic liability.” IEA
Executive Director Maria van der Hoeven.

IEA estimates that subsidies that artificially reduce the price
of fossil-fuels amounted to USD 409 billion in 2010 - almost USD
110 billion higher than in 2009. This is based on the IEA’s global
survey to identify economies that artificially lower end-use prices
for fossil fuels to below the full cost of supply.

Phasing out fossil-fuel subsidies will also provide an impetus
for investment, growth and jobs in renewable energy and energy
efficiency.

Despite the many benefits of phasing out fossil-fuel subsidies,
reform efforts have been hampered by a lack of information on the
support measures in place, particularly in OECD countries.

To assist governments’ understanding of the nature and scale of
their policies supporting fossil fuels, the OECD has compiled the
first-ever Inventory of Estimated Budgetary Support and Tax
Expenditures For Fossil Fuels.

With detailed information of over 250 mechanisms that support
fossil fuel production and use in OECD countries, the Inventory
will be updated regularly and expanded over time to cover more
countries and more support mechanisms.

Overall, the support to fossil-fuel
production and consumption in OECD countries was USD 45 - 75
billion annually during the 2005 - 2010 period.

Covering 24 countries, which account for about 95% of OECD’s
total primary energy supply,  the Inventory shows that 54% of
this support was for petroleum.

The Inventory furthers  transparency and accountability,
providing  estimates that will help governments and
stakeholders assess these policies as they look at ways to reform
subsidies. For example:

*       Germany’s historically
generous subsidies to hard-coal mining fell  from EUR 4.9
billion in 1999 to EUR 2.1 billion in 2009, and should be
phased-out entirely  by 2018.

*       France gradually phased out
its support to the coal industry:  from more than EUR 1
billion in 1990, producer support decreased to EUR 92 million in
2007 and then ended. This was accompanied by a range of measures
meant to address the social costs associated with mine
closures.

*       Government energy support to
consumers in Mexico was USD 629 million in 2009, but will decrease
as the new national energy strategy is put into place and the
government better targets subsidies directly to low income
households, rather than to energy use.

*       And in the United States,
where support for energy producers was about USD 5 billion on 2009,
the 2012 federal budget proposes eliminating a broad group of
subsidies - thereby increasing government revenues by more that USD
3.6 billion.

Work by the IEA, to be published in the World Energy Outlook
2011 on November 9, demonstrates that phasing out subsidies to
fossil fuels, if well-executed, can generate important economic,
energy security and environmental benefits.

Fortunately there are some signs of progress: nearly half of the
countries identified by the IEA as artifically lowering the price
of energy to below the full cost of supply have taken steps since
the since the beginning of 2010 to rationalise energy prices.

“While this is an encouraging start, much work remains to be
done in order to realise the full extent of benefits. It is crucial
that countries follow through on their commitments by implementing
reforms that are well-designed and durable”, said IEA Executive
Director van der Hoeven.

Some of the strategies that governments are using to phase out
fossil fuel subsidies as reviewed by the OECD and IEA analyses
highlight keys to success:

*       Available and transparent
data are essential to inform objective discussion.

*       Financial support for
economic restructuring and assisting poor households can help to
protect vulnerable groups.

*       Integrating reforms to fossil
fuel subsidies into broader structural reforms can help build
support for the reforms, particularly when the money saved is used
to benefit the wider public.

“The room for policy manoeuvres is increasingly limited,
especially in more advanced economies” noted OECD Secretary General
Angel Gurría. “In this context, structural reforms are essential to
stimulate growth and employment.

There are very few quick fixes though. One of them is the
removal of inefficient fossil fuel subsidies. Countries must seize
this opportunity and we stand ready to help”, said Mr. Gurría.

More OECD and IEA work on fossil fuel subsidies can be
found href=”http://www.oecd.org/document/57/0,3746,en_2649_37465_45233017_1_1_1_37465,00.html”
target=”_blank”>here.