Fuel Subsidies Are the World's Dumbest Policy

EghtesadOnline: Many things have gotten harder as the world settles into a protracted spell of low oil prices and sluggish growth -- from avoiding deflation to creating jobs. One thing has gotten easier, as well as more urgent: eliminating fossil-fuel subsidies.

News ID: ۷۳۶۴۳۸

01 September 2016

Governments have long paid lip service to this idea. The G-20 has been promising to phase out fuel subsidies since 2009, but the measures remain widespread and resilient, according to Bloomberg.

Nations from the U.S. to the U.K. to Russia continue to spend billions on tax breaks and other subsidies for the production of oil, gas and coal. Japan, South Korea and China support massive fossil-fuel projects outside their borders. For years, many countries -- including some of the world’s biggest energy producers -- have also used subsidies to lower gasoline and diesel prices, supposedly to help the poor.

The sums involved are huge. The International Energy Agency estimates that countries spent$493 billion on consumption subsidies for fossil fuels in 2014. The U.K.’s Overseas Development Institute suggests G-20 countries alone devoted an additional $450 billion to producer supports that year.

These ridiculous outlays would be economically wasteful even if they didn’t also harm the environment. They fuel corruption, discourage efficient use of energy and promote needlessly capital-intensive industries. They sustain unviable fossil-fuel producers, hold back innovation, and encourage countries to build uneconomic pipelines and coal-fired power plants. Last and most important, if governments are to have any hope of meeting their ambitious climate targets, they need to stop paying people to use and produce fossil fuels.

Right now, the conditions for doing that could hardly be better. While oil is cheap, governments can phase out demand-side subsidies without hurting consumers too much. And the possibility of slower growth in the longer term caused by demographic pressures and faltering innovation makes it all the more vital to use resources efficiently. Wasteful subsidies crowd out public spending on infrastructure and education that would help to put growth back on track.

Protecting the poor will be important, but it needn’t be difficult: Spending less on fuel subsidies would free revenues to be used for that purpose. Note, though, that fuel subsidies mainly benefit the rich and middle class. (In low- and middle-income countries, rich households use far more subsidized fuel than poor households.) Political resistance to reforming subsidies often arises more from the cost it would impose on the better-off than from the burden it would place on the poor.

That’s why explaining the policy to voters will be crucial. Governments need to make clear how much the existing policy is costing all citizens in higher taxes, wasted resources (hence lower living standards) and avoidable environmental damage.

Promises such as the G-20’s pledge in 2009 are no use. Too vague. At the upcoming G-20 meeting, governments need to do better. They should agree on a standard method to measure and report their various subsidies, then set strict timelines for eliminating them. That way, there’s a better chance of holding them to account. Anything less than a clear and testable commitment will perpetuate an egregious policy failure that has been allowed to persist for far too long.