Reforms to subsidize fossil fuels that have been achieved through hard work are under threat

Translation of an article by the International Energy Agency.

Over the years, The World Energy Outlook has been tracking fossil fuel subsidies, and recent data shows that it is growing again. All data are available on the page of the International Energy Agency in the section "Energy Subsidies" . The data mentioned in this article are taken from the new issue of the World Energy Outlook 2018 (hereinafter - WEO 2018), which will be published on November 13, 2018.

Global subsidies for the use of fossil fuels almost halved between 2012 and 2016 (in 2013, subsidies reached just over half a trillion US dollars). However, according to the new calculation data in WEO 2018, in 2017, the subsidy increased again. In addition, the rise in oil prices this year creates pressure on pricing in some countries.

The new data for 2017 shows a 12 percent increase in the estimated value of these subsidies to more than $ 300 billion. Most of the growth relates to petroleum products, which reflects a higher price for oil (which, if the price for the end user is artificially maintained at the same level, increases the estimated cost of the subsidy). For the first time in 2016, the volume of fossil energy subsidies was higher than for oil, but in 2017, everything came back.

Volumes of fossil fuel consumption subsidies

  • Left scale: billion US dollars.
  • Right scale: dollars per barrel.
  • Signature: Oil, Gas, Coal, Electricity, average import prices for crude oil according to the International Energy Agency.

Fossil fuel consumption subsidies are used in many countries. These subsidies reduce the cost of fossil fuels or electricity based on fossil fuels for the end user. This is often done as part of the social policy pursued by the state, with the aim of providing the population with energy.

Governments may have good reason to make energy more accessible, especially for the poorest and most vulnerable groups. But many subsidies are poorly targeted, the richer segments of the population, who use much more subsidized fuel, disproportionately benefit.

Such a policy of unearmarked subsidies encourages wasteful consumption, increases emissions and creates a deficit in government budgets. The phasing out of fossil fuel consumption subsidies is the basis of energy policy.

The period of high oil prices from 2010 to 2014 was strongly motivated by many importing countries in implementing reforms to subsidize the use of fossil fuels. The fall in prices that began in 2014 provided such an opportunity. In recent years, many countries, from India to Indonesia and from Mexico to Malaysia, have introduced pricing reforms.

Price reforms have also been applied in countries exporting fossil fuels. In many cases, subsidies represent opportunity costs, that is, lost profits, and not a clear financial burden. However, this state of affairs gave impetus to changes in energy pricing in the countries exporting oil and gas. In recent years, domestic prices for gasoline, natural gas and electricity have increased in Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

Dynamics of growth of oil prices in the selected national currency

  • Left scale: Brent oil price indexation.
  • Right scale: dollars per barrel.

Rising prices on international markets for fuel in 2018 may put an end to efforts to phase out fossil fuel subsidies. Consumers in many oil-importing countries are facing rising retail prices, especially in developing countries with depreciating local currencies against the US dollar. A 75% increase in the price of Brent crude oil, expressed in US dollars since January 2018, is more than 100% growth, expressed in Indian rupees, and a 250% increase in Argentine pesos.

Faced with this pressure, some countries began to shift their reform plans, postponing price increases or otherwise protecting consumers from their actions — at the same time, in most cases, maintaining the overall strategic goal of market pricing. For example, despite higher international prices, Indonesia and Malaysia kept domestic prices at previous levels, while India reduced the excise tax on gasoline and diesel, and Brazil increased the diesel subsidy.

This price control can protect consumers from short-term changes in the international market, but at the expense of budget and environmental costs. Moreover, they reduce the potential price increase, which would reduce demand and balance the market.

The International Energy Agency continues to actively support international efforts to phase out inefficient fossil fuel consumption subsidies. The World Energy Review constantly focuses on this issue, providing data and analysis. The recently released Survey for Producer Countries noted low tariffs for end-use electricity consumption in many parts of the Middle East, which is the basis for very rapid growth in residential electricity consumption — mainly for home appliances and refrigeration.

Estimated data on the volume of subsidies for the population, in the absence of price reforms

  • Signature data: Subsidies, Demand for electricity for the population, per capita

Some progress has been made in raising electricity prices for the population in some countries, including Saudi Arabia, but they still remain relatively low throughout the region, which in many cases does not cover the cost of supply. If electricity subsidies remain at the current level, then by 2040 in the Middle East, due to the growing demand for electricity for the population, the amount of subsidies will increase by about $ 65 billion - this will be a huge fiscal burden.

Further price reform efforts are an important part of problem solving. Raising the price of fuel and electricity reduces the payback period for products with higher efficiency and helps raise public awareness of the links between efficiency and the cost of the energy they use.

However, efforts are also required on the part of suppliers to ensure that more efficient products are present in the market. A number of countries are implementing efficiency policies: the UAE has implemented a labeling program on the effectiveness of refrigerators and air conditioners, while Saudi Arabia has implemented minimum efficiency standards (MEPS). But much more can be done.

The cessation of fossil fuel subsidies has also facilitated the efficient deployment of the enormous potential of renewable energy sources in the region, whose development is limited by the availability of subsidized oil and gas for electricity generation. The Middle East has the best rates of solar insolation in the world, amounting to about 2,400 kWh per square meter per year, but the share of solar energy in the generated capacities is very low. The share of all renewable energy sources is only 6% of the regional generating capacity and 2% of electricity production.

Also popular now: