As addictions go, the world’s addiction to fossil fuels is a killer. US President Barack Obama has a big idea on how to help the world kick the habit: the elimination of fossil fuel subsidies globally, amounting to over $300bn every year.
It will not escape the notice of G20 participants in Pittsburgh – a city built on coal – that America has become rich on fossil fuels. Petrol taxes are far lower in the US than in Europe; many complain that US oil, gas and coal companies still get too many tax breaks. Such observations are a reminder of what the US has yet to do. But they should not detract from the case, both principled and self-interested, against fuel subsidies globally. Elimination of fuel subsidies– for producers and consumers – is an idea whose time has come.
Fuel subsidies are often seen as a form of poverty alleviation. But blanket fuel subsidies are a crude weapon in this fight. Worse, they tend to lock developing countries into a needlessly profligate development path, heavily skewed towards fossil fuel. Energy poverty is a real problem; fuel subsidies are not the solution. They can have a particularly pernicious effect in apparently energy-rich countries. In Nigeria, subsidies have managed to both undermine local refining (turning one of Africa’s largest oil producers into a gasoline importer) while providing an incentive for smuggling oil out of the country. In Russia, artificially low gas prices for the home market leads to inefficient consumption, reducing the gas available for export, while reducing incentives for investment in new production.
There is a positive case for eliminating fossil fuel subsidies, too. If effective in promoting efficient consumption, elimination would reduce the risk of runaway global warming. A less noble but perhaps more effective argument is that if the world does eventually set a carbon price, those who use less of it will gain. Best to get the short-term pain out of the way and prepare to reap the future benefits.
The threat of withdrawing fuel subsidies is no vote-winner. But with time and counterbalancing financial measures, this obstacle can be overcome. Cutting them would release money which could be better targeted to help the poor.
If the world really wants to get to grips with reducing its dependency on fossil fuels, eliminating subsidies both in the developing and developed world – over a period of years – is a good start. If there are transition problems, perhaps revenues from a tax on aeroplane kerosene could help.
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