News Column

Fuel subsidies rising in emerging markets

May 19, 2014

Reuters



London: Fossil fuel subsidies cost governments in emerging markets more than $500 billion every year and are a major contributor to climate change, according to the International Energy Agency (IEA) and International Monetary Fund (IMF).



The biggest subsidies are concentrated in the Middle East, North Africa, Asia and parts of Latin America, according to the IEA's Fossil Fuel Subsidy Database.



Moreover energy-exporting countries accounted for three quarters of all consumption subsidies in 2012, according to the IEA and Opec members account for more than half the world's subsidies.



Subsidies account for 82 per cent of the cost of electricity and fuel in Venezuela, 80 per cent in Libya, 79 per cent in Saudi Arabia, 74 per cent in Iran, and 56 per cent in Iraq and Algeria. By contrast, the average rate of subsidy is just 18 per cent in India and three per cent in China.



In cash terms the world's biggest subsidies are in Iran, Saudi Arabia and Russia, all of which are major oil producers. Subsidies cost these three countries a combined total of $180 billion per year in 2012.



Rational pricing

In September 2009, the leaders of the world's largest economies meeting at the G20 summit in Pittsburgh committed themselves to phase out inefficient fossil fuel subsidies over the medium term.



According to the IEA, phasing out subsidies for oil, gas and electricity and aligning prices with international benchmarks would cut growth in energy demand by five per cent and carbon dioxide emissions by two billion tonnes a year by 2020 equivalent to the current combined emissions of Germany, France and the UK.



Raising gasoline, diesel and kerosene tariffs to market levels would save 4.7 million barrels of oil a day by the end of the decade ("World Energy Outlook 2011").



Cutting subsidies would also dramatically improve government budgets. Of 58 countries which subsidised gasoline, diesel or kerosene in 2010, 46 were running budget deficits, and in 27 cases the deficit amounted to more than 3 percent of GDP, the IMF explained in a staff note highly critical of the burden on taxpayers. Halving subsidies would have reduced the average deficit from 2.1 per cent of GDP to just 0.8 per cent ("Petroleum product subsidies: cost, inequitable and rising" Feb 2010). Subsidies often crowd out spending on infrastructure, development and social welfare. Indonesia spends more on fuel subsidies than on education or healthcare.



Venezuela sells gasoline for just six US cents per gallon. The cost in lost export revenues is $30 billion, more than the combined value of all state spending on social programmes, Jim Krane at Rice University explained in a briefing paper published this month ("Navigating the perils of energy subsidy reform" May 2014).



Waste and harm

Governments justify subsidies on the grounds that they alleviate poverty and promote economic development, but neither claim is really true.



Most of the benefits accrue to the middle class rather than poor because middle class families have more electrical appliances and their own cars.



In Indonesia, for example, the top 40 per cent of high-income families absorb 70 per cent of subsidies, while the bottom 40 per cent of low-income families receive only 15 per cent of the benefits ("The scope of fossil fuel subsidies in 2009" Nov 2010).



Subsidies also promote wasteful consumption. Saudi Arabia's artificially cheap gasoline and electricity have made the country one of the highest per-capita energy users in the world and threaten to restrict the amount of oil left for export. Another problem is fuel adulteration. Most countries subsidise kerosene used in cooking and lighting more heavily than gasoline and diesel used to fuel vehicles. But the resulting price gap encourages the illegal blending of kerosene into the diesel supply. Policies aimed at providing cheap cooking fuel for the poor end up helping middle class families drive motor cars.



And subsidies promote smuggling. Diesel sells for as little as 12 US cents per litre in Iran compared with $1.20 per litre across the border in Pakistan. As a result the IEA estimates 60,000 barrels of diesel are smuggled out of Iran to Pakistan and Afghanistan every day.



Social compact

The theoretical case for reducing or eliminating subsidies is overwhelming, but in practice progress has been slow.



The fact that subsidies are concentrated in exporting countries and typically benefit middle-income and lower middle-income groups is no accident. Subsidies have a political dimension that makes them especially hard to reform.



Cheap electricity and fuel is often an important part of the social compact between governments and the population. "In major energy-producing countries consumption subsidies that artificially lower energy prices are seen as a means of sharing the value of indigenous natural resources," the IEA explains.


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Source: Times of Oman


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