Business and finance
MOST economists agree that fossil-fuel subsidies are a bad idea. They promote a misallocation of resources in the economy, namely, the over-consumption of fossil fuels. They can be a burden on the public finances. What's more, this waste increases global carbon emissions.
Some countries have already wised up to the foolhardy nature of energy subsidies and have sought to trim them back. Over the past year or so, Jordan, Morocco, Indonesia and Malaysia have all cut subsidies and raised fuel prices. But as we explain in this week’s print edition, this is more due to economic and fiscal concerns than environmental ones:
It is the growing cost of subsidies, rather than worries about climate change, that explains the renewed interest in cutting them, says Fatih Birol at the International Energy Agency (IEA). They have become unaffordable as global oil prices have more than doubled between 2009 and 2012. In Jordan, for instance, their cost increased more than tenfold in just two years. And in many other countries they now account for more than 5% of GDP.
Globally, the cost of government subsidies for fossil fuels increased from $311 billion in 2009 to $544 billion in 2012, the IEA estimates. Once lost tax revenues are included, this figure rises to around $2 trillion, equal to over 8% of government revenues, according to a recent IMF report.
Much of this spending is wasted; overconsumption of energy does not lead to higher levels of economic output but instead lower levels of efficiency:
Other research suggests that most of this spending leads to big “deadweight losses”, meaning lost economic efficiency as a result of government intervention. In the case of fuel subsidies for road transport, worth $110 billion globally in 2012, these losses reached $44 billion, reckons Lucas Davis at the University of California, Berkeley, in a new paper.
This waste is a shame. For scrapping fossil-fuel subsidies can provide part of the answer to a question gripping much of the developed world: how to reduce global carbon emissions without damaging economic growth or living standards. No less than 15% of global carbon emissions are now caused by the overconsumption effects of these policies, according to IMF research. By scrapping such policies, many countries, at a stroke, would almost immediately reach their carbon-reduction targets for the next decade. And as removing subsidies, in the long term, would increase economic efficiency and free up government spending to follow more sustainable pro-growth policies, such as education and public-transport infrastructure, this could both save carbon and boost growth.
But, unfortunately, subsidy policies cannot be abolished entirely overnight. Public opinion across the world is hostile to higher energy prices, however highly taxed or subsidised they may already be. Eliminating them without producing an adverse public reaction takes around five years of gradual reductions, new IMF research reckons. Even better then to start now, rather than wait until the economic case forces more immediate action.