Can we say “no” to fuel subsidies?

Not a single country in the world sets a “fair” price for fossil fuels. The fossil fuel industry benefits from subsidies around the world – $11 million per minute. Subsidies on oil, gas and coal amounted to $5.9 trillion in 2020, and could reach $6.4 trillion in 2025, estimates the International Monetary Fund.

Last year’s detailed IMF report showed that subsidies for both producers and consumers put fuel prices at least 50% below their true costs – 99% for coal, 52% for diesel and 47% for natural gas. Five countries – China, the United States, Russia, India and Japan – accounted for two-thirds of global fuel subsidies in 2020.

Direct subsidies and tax breaks keep fuel prices artificially low, lead to overconsumption and pollute the air further, bolstering calls for fossil fuel subsidy reform. The call was reiterated at the Glasgow climate conference in November. Rich industrialized countries are major producers and users of fossil fuels. They are big contributors to global emissions, and at the same time they are declared crusaders against these “dirty fuels” repeating pledges at global forums.

Setting fossil fuel prices that reflect their true cost would cut global CO2 emissions by more than a third and take the world a big step towards the 1.5 degree Celsius target, an analysis by the IMF last July. Appropriate pricing of fossil fuels would encourage power producers to switch from coal to renewables and accelerate the production of electric cars. Automotive giants announce their intention to revolutionize the automotive industry by replacing oil motors with battery motors within a decade or two.

More than 600 global companies, including Siemens, Volvo, Unilever, Aviva and Ikea, are urging industrialized countries to end fossil fuel subsidies by 2025, according to a report by British daily The Guardian. suggested that the United States should lead global fuel subsidy reform by accelerating the pace of the Group of 20 (G20) initiative to raise fossil fuel prices to meet Paris Agreement goals, as well as by developing a program to help least developed countries (LDCs) eliminate fuel subsidies and promote their economy. recovery.

So why isn’t it happening? Why are countries that boast of rapid progress in green energy being too slow to reduce fossil fuel subsidies and fix their “true costs”?

It’s easier said than done. Because there is no easy alternative to fossil fuels. After the 1973 OPEC embargo, the United States, the largest consumer of fossil fuels, struggled to explore all possible ways to extract fossil fuels to ensure energy security. For decades, America has pledged to end costly “dirty industry” subsidies. But in practice, no progress has yet been made to eliminate a series of tax giveaways to the oil and gas industry that fuel harmful pollution for people, despite a recent move by the Biden administration to pass a advanced clean energy bill. It still provides $20 billion in direct subsidies to the fossil fuel industry annually, while tax subsidies amount to an additional $11.5 billion.

The G20 also remained almost firm on fuel subsidies, although it reiterated its commitment to phase out subsidies and rationalize prices. It includes the United States, China, Germany, Russia, Saudi Arabia and India, all among the biggest grantmakers to date. The International Institute for Sustainable Development (IISD) says G20 countries spent $290 billion a year on coal, gas and oil production subsidies even before the coronavirus pandemic. Another $320 billion was spent globally in 2019 on consumer subsidies. Due to their powerful political lobbies, fossil fuel extraction and supply companies have even managed to increase their subsidies by 30% over the years in OECD countries. Producers received subsidies in the form of tax breaks, production credits, guaranteed sales or accelerated depreciation for capital investments, which increased their profitability.

By contrast, consumer subsidies have fallen on average, except in India. India provided consumers with $21.9 billion in fuel subsidies in 2019, according to IEA data.

Amid soaring global gas and oil prices in 2021, India has prevented domestic fuel price hikes and instead lowered tariffs to relieve consumers from price shocks. European countries have also offered tax breaks and transfers to consumers.

Bangladesh was perhaps the only exception to place the blame directly on consumers. This has helped the state oil monopoly BPC retain its profits, but has left industries and consumers suffering direct and indirect shocks from the upward adjustment in oil and LNG prices.

As the depletion of national gas supplies gradually falls below demand, LNG imports continue to grow. The global LNG spot price is still too high, inflating Bangladesh’s import bills and there is demand for higher subsidies. The grant request will amount to Tk 70,000 crore – more than three times allocated in the budget of the current financial year. Of that amount, Tk 25,000 crore is for fertilizer and the rest for electricity and LNG, according to a report by The Business Standard last week. The government is seeking to adjust upwards the prices of gas used in industries and power stations to finance LNG imports and offset some subsidy pressures, after the Prime Minister rejected a proposal to raise the price of fertilizers.

Electricity generation consumes 61% of the gas, followed by industries with 16% and fertilizer plants with 5%. If gas prices rise for power plants and industries, this will ultimately trickle down to end users, consumers of goods and services. If the price is not increased, the subsidy burden will be too high for the Treasury.

Economists say it is difficult for the government to choose one or the other.

“If the government has to face an additional subsidy burden of about Tk 60,000 crore, it will just have to print money, which will only fuel inflation. What the government should do, c It’s making users pay,” says Dr Ahsan. H Mansur, executive director of the Policy Research Institute, a research firm, refers to the expected revenue shortfall. If global gas prices fall, the government could choose not to raise prices, but there is no indication when the global energy market will cool down, he said.

“So adjusting the gas price upwards seems to remain a rational fiscal management option, at least for now. It’s a tough choice, but it’s true,” said the former economist of the IMF, saying Bangladesh “no longer has the luxury” of subsidizing gas as its own resource is rapidly running out.

However, Dr. Fahmida Khatun, executive director of a research organization, the Center for Policy Dialogue, believes that providing subsidies in certain areas is necessary to protect low-income people from price shocks. “Fuel prices were increased a few months ago and consumers are still suffering. While adjustment in some areas is inevitable, it should come in phases, not all at once. Similarly, subsidies should also be targeted and not random,” she added. suggests.

Despite the fact that the continuation of subsidies has a negative impact on financial sustainability, bearing in mind the pandemic, the increase in energy prices does not seem logical at the moment because it is directly linked to the inflation and business recovery, says Dr. Monzur Hossain, research director at the Bangladesh Institute of Development Studies, the state-owned think tank. “It will have an impact on the cost of living for people and the cost of inputs for businesses. Considering people’s well-being, subsidies should be maintained for one or two more years,” he said. .

Criticisms of fossil fuel subsidies are numerous; they create market distortions by artificially lowering the prices of dirty fuels and causing overconsumption and pollution. Consumer subsidies have also proven ineffective in reducing inequality as in the case of Indonesia where the richest decile of households consumed 40% of the subsidized gasoline and the poorest decile less than 1%. In Bangladesh, privileged households use highly subsidized piped cooking gas while rural households and people in most parts of the south-west use expensive bottled cooking gas.

Subsidies are not the best use of public funds. However, they are in practice very widely everywhere. No country in the world – rich or poor – has ended fuel subsidies and set “real prices” for fossil fuels. There is pressure from oil, gas and coal companies. There are fears of losing business competitiveness and negative consumer feedback. Bangladesh cannot think outside the box and say goodbye to subsidies and fix the “true costs” of fuels. But it may at least require some people to pay more.

To help targeted groups of people, direct benefit transfers may be a better way, as is practiced in some Indian states where cash assistance is sent directly to the bank accounts of users of bottled cooking gas. The Ministry of Finance is working on a strategy document to directly provide cash support to farmers who use diesel-powered irrigation pumps. Other such means must be devised to ensure that subsidies and transfers, which represent 34% of public spending, only benefit the targeted groups and do not end up in the wrong pockets.

About Christopher Easley

Check Also

Ecuadorian president seeks ‘balance’ between US and China

Ecuador’s interests are best served by “balanced” relations with the world’s two superpowers, President Guillermo …