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Fossil Fuel Subsidies

Estimates of fossil fuel production and consumption subsidies vary, due to differences in calculation methodology and availability of data.[1] As the G20 notes, “ [inefficient fossil fuel subsidies encourage wasteful consumption, reduce our energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change.”[2] However, different G20 countries have interpreted this language to minimize their reporting and action on fossil fuel subsidies, based on what counts as “subsidy,” an “inefficient subsidy” and a subsidy that is both “inefficient” and “encourage[s] wasteful consumption.”[3] While the WTO SCM Agreement requires Members to report their subsidies, incomplete reporting on subsidies makes WTO data on fossil fuel subsidies unreliable as well.[4] The WTO reporting obligation only applies to subsidies that meet the definition in Article 1.1 and are specific within the meaning of Article 2.[5] Notification of a measure does not prejudge its legal status under GATT 1994 and the SCM Agreement.34 Nevertheless, compliance with this reporting requirement would have the effect of bringing potentially illegal subsidies to the attention of other WTO Members, which could lead to WTO complaints, countervailing duties, or both, as we discuss below.

GHG emissions under different scenarios

Figure 8.1 GHG emissions under different scenarios

Source-. International Energy Agency, World Energy Outlook (2010) 585

Fossil fuel subsidies create incentives to use fossil fuels, thereby running counter to the objective of climate change mitigation. As Figure 8.1 shows, merely eliminating fossil fuel subsidies would achieve over forty percent of the reduction of concentrations of GHGs in the atmosphere required to achieve a concentration of 450 ppm by 2020, compared with the business-as-usual scenario.

As Figure 8.2 shows, developed countries spend over six times more on fossil-fuel subsidies than on aid pledged to help developing nations to mitigate and to adapt to climate change. At USD 57.664 billion, in 2010 these fossil fuel subsidies total more than half of the USD 100 billion of annual climate financing promised by 2020. At USD 66.79 billion, the combined total of fossil fuel subsidies and finance pledges is enough to achieve two-thirds of the 2020 climate finance goal.

As Figure 8.3 shows, a large number of developing countries also subsidize the consumption of fossil fuels. The world price of gasoline was slightly over 120 US cents in 2009. Venezuela sold it for two cents per gallon, and Iran for ten cents per gallon. In fact, all the OPEC countries sold gasoline below production cost. Since they produce oil themselves, it has been justified as a subsidy that does not “cost” anything. Of course, in terms of opportunity cost, it does cost. A better way of spending the money would have been to give general grants to the poor, if this was meant to be a poverty alleviation program. In the current discussion, it simply raises the question of why these resources are not dedicated instead to the acquisition or development of clean energy technologies (keeping in mind the limitations on subsidies in the SCM Agreement).

As Table 8.1 shows, many non-OECD countries spend significant amounts of money on fuel subsidies. Some large countries with over 100 million people spend the bulk ofthe money (such as Brazil, China, India, Indonesia, and Russia). Among them, India and China stand out for two reasons. First, both of them are large importers of oil and, second, each of them has over a billion people. They are

Fossil fuel subsidies versus climate finance pledges (USD millions)

Figure. 8.2 Fossil fuel subsidies versus climate finance pledges (USD millions)

becoming significant sources of GHG emissions on a global scale. During the course of this century, the other three, Brazil, Indonesia, and Russia, net exporters of oil, will also contribute significant amounts of GHG emissions as they become developed countries. At USD 408.8 billion, the total fossil fuel subsidies in these developing countries in 2010 represent over four times the 2020 climate finance goal.

In order to discuss the fossil fuel subsidy issue at a disaggregate level we need to understand the living conditions of the poor in developing countries and their dependence on fossil fuel. At the end of 2010, there were 1.3 billion people in the world who did not have electricity at all. In addition, there were another two billion people who did not have a reliable supply of electricity. Almost all of them live in the developing countries. In addition, in these countries, there are 2.7 billion people who still rely on the traditional use of biomass for cooking.

The fundamental justification for fossil fuel subsidies (either at the level of production or at the level ofconsumption) in the developing world is the following: subsidies are needed to help the poor gain or maintain access to minimum living standards. Unfortunately, studies have found that fossil-fuel subsidies are regressive, that is, they benefit higher income groups who can afford consumption.[6] The

Figure 8.3 Price of a liter of gasoline in US cents in 2009

Source-. GTZ Gasoline Price, 2009

Table 8.1 Developing country fossil fuel consumption subsidies (USD billions)

Country

2007

2008

2009

2010

Iran

64.56

101

64.63

80.84

Saudi Arabia

32.31

48.51

32.54

43.52

Russia

33.33

51.5

32.97

39.21

India

24.31

44.1

20.42

22.29

China

16.31

43.9

16.52

21.32

Egypt

19.39

27.93

14.86

20.28

Venezuela

18.02

24.21

14.08

19.97

UAE

8.03

15.02

11.16

18.15

Indonesia

13.17

19.02

12.56

15.94

Uzbekistan

8

15.21

11.5

11.9

Iraq

10.17

15.72

6.75

11.31

Algeria

5.6

8.83

5

10.59

Mexico

17.61

22.51

3.43

9.5

Thailand

2.82

7.38

3.8

8.47

Ukraine

6.09

9.78

6.35

7.67

Kuwait

6.44

9.52

6.19

7.62

Pakistan

7.62

12.74

5.38

7.3

Argentina

12.02

18.1

5.87

6.5

Malaysia

4.6

9.78

3.85

5.67

Bangladesh

2.08

4.4

3.6

5.03

Turkmenistan

3.55

4.82

3.11

5.01

Kazakhstan

1.75

2.71

1.27

4.32

Libya

3.35

4.32

2.21

4.21

Qatar

2.47

4.16

2.83

4.15

Ecuador

3.18

4.58

1.62

3.74

Vietnam

2.1

3.56

1.2

2.93

Nigeria

2.37

3.51

0.54

2.91

South Africa

5.16

5.74

2.96

2.12

El Salvador

0

0

0

1.19

Angola

0.64

1.18

0.27

1.12

Philippines

0.16

0.12

0.03

1.1

Azerbaijan

1.34

2.44

0.79

0.83

Taiwan

2.11

5.03

1.14

0.58

Sri Lanka

0.44

0.9

0.05

0.51

Colombia

0.68

1.01

0.25

0.48

Brunei

0.21

0.37

0.23

0.34

Korea

0

0.21

0.18

0.18

Peru

0.16

0.62

0

0

Total

342.15

554.44

300.14

408.8

Source: International Energy Agency, 2012

reason is simple. Poor households in developing countries not have access to subsidized energy directly. They do not have electricity, cooking facilities with natural gas, nor do they have vehicles that use gasoline or diesel. Moreover, low income households spend less (in absolute terms) on energy than higher-income households. Subsidizing fossil fuel consumption is an extremely inefficient way to alleviate poverty.

The World Energy Outlook of 2011 estimated “that out of the USD 409 billion spent on fossil-fuel consumption subsidies in 2010, only USD 35 billion, or 8 percent of the total, reached the poorest income group (the bottom 20 percent). This finding is based on a survey of 11 of the 37 economies identified as having fossil-fuel consumption subsidies and does not take into account subsidies specifically provided to extend access to basic energy services.”[7]

The countries in Figure 8.4 have a population of over 3 billion. Suppose the fossil fuel consumption subsidies are evenly spread across the population. The bottom 20 percent of the population would have received 20 percent of the total subsidy. However, that is not the case. The best case scenario is for Pakistan—the share of the total fossil fuel consumption subsidy that goes to the bottom 20 percent of the population reaches 10 percent. Among the countries surveyed, only 2 percent of the subsidy reaches to the bottom 20 percent in South Africa—the worst case ofthe distribution of the subsidy (see also Table 8.2).

Subsidies to kerosene seem to be best targeted on the poor—despite being sold in the black market not just in the targeted countries but also in the neighboring countries.[8] Subsidies for electricity and natural gas were in the middle of the range,

Percentage of subsidy going to the bottom 20 percent of the population

Figure 8.4 Percentage of subsidy going to the bottom 20 percent of the population

Table 8.2 Share of fossil fuel subsidies received by the lowest 20 percent income group by fuel in surveyed economies, 2010

Diesel

6%

Kerosene

15%

Gasoline

6%

Natural Gas

10%

LPG

5%

Electricity

9%

Note: Countries surveyed were Angola, Bangladesh, China, India, Indonesia, Pakistan, Philippines, South Africa, Sri Lanka, Thailand and Vietnam

Source: International Energy Agency, Recent Developments in Energy Subsidies (International Energy Agency, Paris 2012), page 103.

with shares of 9 percent and 10 percent to the bottom 20 percent of the income group. Subsidies to Liquified Petroleum Gas, gasoline, and diesel perform the worst—only 5 to 6 percent reach the bottom 20 percent of the population. A much more efficient way of implementing social welfare programs for the poorest households is conditional cash transfer programs.[9]

How much investment do we need to achieve GHG concentrations of450 ppm? Table 8.3 uses 2010-2030 figures estimated by McKinsey. We have added up those numbers. The bottom line is that, even if the euros are converted into USD, the financial needs of the developing countries are still smaller than their own energy subsidy expenditures.

Financial difficulties in developed countries, such as the United States and the European Union, reduce the likelihood that they will be willing to finance the acquisition of technology in developing countries to the degree that is needed to achieve sufficient climate change mitigation and adaptation. However, economic growth in major developing countries will increase the financial resources available to acquire technologies over time. Reallocating resources from fuel subsidies to the acquisition and development of clean energy technologies and adaptation technologies would increase the availability of financing for these ends.

At the WTO, generally available fuel subsidies are unlikely to be subject to multilateral action (dispute settlement to address the adverse effects of subsidies on the interests of other Members) or unilateral action (countervailing duties) under Parts III and V of the SCM Agreement, respectively, since they are not specific to one enterprise or industry. They may be prohibited under Part II if they are contingent upon export performance or upon the use of domestic over imported goods. However, subsidies that are targeted specifically to develop clean energy industries are more vulnerable to multilateral and unilateral action, as evidenced by recent WTO complaints. The United States has complained to the WTO about

Table 8.3 Investment needs per year for the world and the developing countries (in billions of euros of 2010) for 450ppm

Global

Investment

needs

Global

Investment

needs

Developing

Countries’

needs

Developing

Countries’

needs

2010-2020

2020-2030

2010-2020

2020-2030

Buildings (mainly energy efficiency)

€125

€155

€25

€45

Transportation (mainly energy efficiency)

€70

€215

€25

€100

Industry (mainly energy efficiency)

€75

€80

€40

€50

Power

€65

€125

€30

€70

Waste

€10

€10

€5

€5

Forestry and agriculture (terrestrial carbon)

€5

€5

€5

€5

Total

€350

€590

€130

€275

Source: Marcel Brinkman, “Incentivizing Private Investment in Climate Change Mitigation,” Chapter 14, Table 1, Richard B. Stewart, Benedict Kingsbury, and Bryce Rudyk (eds.), Climate Finance: Regulatory and Funding Strategies for Climate Change and Global Development (New York University Press, New York 2009)

Chinese and Indian subsidies, including those for clean energy technologies.39 The United States also initiated a WTO dispute against Chinese wind power products and applied countervailing duties on Chinese solar panel imports. China initiated a WTO dispute against the United States regarding the countervailing duties on Chinese solar panel imports.40

As we noted in Chapter 3, while the SCM Agreement initially contained an exception for environmental subsidies, the exception expired. Thus, the current subsidies rules create perverse incentives for WTO Members to grant generally available fossil fuel consumption subsidies, but not subsidies to develop and disseminate clean energy technology. Countervailing duties increase the cost ofclean energy technology, when the objective should be to lower the cost. Countervailing duties

Keith Bradsher, “200 Chinese Subsidies Violate Rules, U.S. Says” New York Times, October 6, 2011 (accessed December 15, 2012); Office of the United States Trade Representative, “United States Details China and India Subsidy Programs in Submission to WTO” October 2011 (accessed December 15, 2012).

China—Measures Concerning Wind Power Equipment, DS419, (accessed December 15, 2012); United StatesCountervail- ing Duty Measures on Certain Products from China, DS437, (accessed December 15, 2012); United States—Countervailing and Anti-dumping Measures on Certain Products from China, WT/DS449, , in which China requested consultations regarding US antidumping and countervailing duties on September 17, 2012.

also create a barrier to international technology transfer. WTO complaints and countervailing duty investigations also can hamper international trade in clean energy technology regardless of the outcome, by increasing commercial uncertainty.

While the current state of national and international policy on energy subsidies is deplorable, there is good news. First, the foregoing figures demonstrate that there is ample energy financing available, both in developed and in developing countries. It simply is misallocated. Second, while multilateral negotiation paralysis at the WTO makes reforms to the SCM Agreement unlikely at the moment, it may be possible to structure clean energy subsidies in a way that minimizes the risk of violating the SCM Agreement, depending on how the issue of “benefit” is resolved.[10] It is also possible to structure adaptation financing for subsistence farmers in a manner that is consistent with the Agreement on Agriculture. We analyze these issues further in the following two sections.

  • [1] G-20, Report to Leaders on the G20 Commitment to Rationalize and Phase Out InefficientFossil Fuel Subsidies (26 June 2010) 1—2 (accessed January 3, 2013).
  • [2] G-20, Leader’s Statement, The Pittsburgh Summit (September 25, 2009) para. 24 (accessed January 3, 2013).
  • [3] Doug Koplow, Phasing Out Fossil-Fuel Subsidies in the G20: A Progress Update (Earth Track, Inc.and Oil Change International, Cambridge, MA 2012).
  • [4] Koplow, Phasing Out Fossil-Fuel Subsidies in the G20 SCM Agreement art. 25.
  • [5] SCM Agreement art. 25.2. 34 SCM Agreement art. 25.7.
  • [6] Javier Arze del Granado, David Coady, and Robert Gillingham, “The Unequal Benefits of FuelSubsidies: A Review of Evidence for Developing Countries” (2010) IMF Working Paper WP/10/202.
  • [7] International Energy Agency, World Energy Outlook (International Energy Agency, Paris 2011)ch. 13.
  • [8] International Energy Agency, World Energy Outlook ch. 13.
  • [9] Conditional Cash Transfer programs provide cash payments to poor households that meetcertain “family behavioral requirements.” Typically, these requirements are tied to health care andeducation of the children in the family.
  • [10] Appellate Body Report, Canada—Certain Measures Affecting the Renewable Energy GenerationSector (Canada—Renewable Energy), WT/DS412/R, and Canada—Measures Relating to the Feed-inTariff Program (Canada—Feed-In Tariff Program), WT/DS/426/AB/R, adopted May 24, 2013.
 
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