As energy prices soar, governments seek the dirtiest tool in the box

“TITS REFORM will increase our energy security … and this will help us tackle the threat posed by climate change. These hopeful words were spoken by Barack Obama, then President of the United States, after a meeting of the g20 group of countries in Pittsburgh in 2009. The assembled leaders agreed to phase out fossil fuel subsidies which, by encouraging the use of polluting fuels, tip the scales against cleaner alternatives. Twelve years later, however, fossil fuel subsidies are still relevant. And as a severe energy supply crisis is causing prices to skyrocket around the world, they are making a comeback.

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European Union ministers held an emergency meeting this week to discuss how to respond to the price hike, but failed to agree on a plan. National politicians, however, are turning to subsidies and price caps. Italy plans to spend more than 5 billion euros (5.8 billion dollars, or 0.3% of GDP) this year and next year to reduce the price of natural gas and electricity for consumers. France will extend its cap on domestic gas prices until the end of next year.

Most people would agree that fossil fuel subsidies should, in principle, be scrapped. But no politician wants to expose voters to pain at home or at the gas station. Even before the energy crisis, subsidy policy was deviating from the right track. BloombergNAVE, a research organization, and Bloomberg Philanthropies, a charity, calculate that g20 countries offered direct subsidies on coal, oil, gas and fossil fuels worth more than $ 3.3 billion between 2015 and 2019. Tim Gould of the International Energy Agency, an official body notes that periods of falling energy prices offer governments an opportunity to reduce subsidies. Their failure to use the pandemic-induced decline in energy demand and prices last year to cut subsidies, he said, was “a missed opportunity.” In July g20 ministers couldn’t even agree on a date when fossil fuel subsidies would be phased out.

A new study of IMF powerfully exposes both the magnitude of subsidies and their impact. It estimates the effects of two types of support. Explicit subsidies, which include production tax breaks for oil companies, create a wedge between the cost of supplying fuel and the price consumers pay at the pump. Yet governments underestimate energy not only against supply costs, but also against social costs (such as damage to health and the environment from fossil fuels). Researchers call this an implicit grant.

They estimate that explicit subsidies will amount to just under $ 600 billion this year (or 0.6% of GDP) but that implicit subsidies could be ten times higher (see Figure 1). Even if the value of explicit support remains constant as a percentage of global production, the boffins believe that the damage from fossil fuels, especially coal, will worsen and the value of implicit subsidies will continue to rise (see graph 2).

If governments eliminated both explicit and implicit subsidies by 2025 – admittedly a huge if – then global carbon dioxide emissions would drop 36% and global tax revenues would rise 3.8% GDP, compared to a scenario without subsidy reform. Rather than a miserable world in which warming is 3 ° C above pre-industrial levels, rising temperatures would be kept “well below” 2 ° C and maybe even on track to 1.5. ° C, like UNthe Paris climate agreements hear. As world leaders prepare to gather in Glasgow for a climate summit, the hope is that these findings will re-energize their efforts to tackle subsidy reform.

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This article appeared in the Finance & Economics section of the print edition under the title “Pervers but persistent”

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