March 23, 2017

A Look At The Big Impact Of Fossil Fuel Subsidy Reform

If you’re unsure of what fossil fuel subsidies are, they’re basically measures that lower the cost of fossil fuel energy production, raise the price collected by energy contractors, or lower the price paid by the consumers. A study released by Science Direct, How Large Are Global Fossil Fuel Subsidies?,  looks at the economic and environmental benefits of reforming fossil fuel subsidies, concentrating on consumer prices, environmental costs, and overall taxes.

These are the key points from the study:

• Fossil fuel subsidies amount to 6.5% of global GDP in 2015
• Incorrect pricing is responsible for a sizeable amount of the subsidy
• Coal subsidies account for about half of global subsidies, making it the largest segment
• Subsidies are concentrated in a few substantial countries
• There are considerable environmental, fiscal, and welfare benefits from subsidy reform

Subsidy reform has been an important international policy agenda, especially ever since the December 2015 Paris Agreement on climate change that called on countries to reduce emissions. The call for subsidy reform demonstrates the awareness of how harmful fossil fuel subsidies are environmentally, fiscally, and socially. These are some of the damages these subsidies create:

• Environmental: increase air pollution, which leads to premature deaths, and an increase in greenhouse gas emissions.
• Fiscal: expenses that need to be financed by a blend of higher public debt, greater tax burdens, and reduced public spending can strain economic growth
• Macroeconomics: investments in energy efficiency, renewable energy, and energy infrastructure is greatly diminished while an increase in the vulnerability of countries susceptible to unstable international energy prices

Although the economic argument for fossil fuel subsidies may seem apparent, reform has been challenging. There are a number of factors that must be considered when crafting an appropriate legislation, such as the size of energy subsidies, and because of this, it is difficult to move the policy agenda forward.

A point of contention is the definition of what would be considered an energy subsidy. This affects the estimated size of energy subsidies on a global and country level. The study looks at post-tax subsidies, which result when consumer prices are lower than supply costs, to present a better estimate of global energy subsidies, provide comprehensive assessments on regional and country-level energy subsidies, and present a clear estimate of the global and regional environmental, fiscal, and social welfare benefits from disposing energy subsidies.

Here are the primary findings from the report:

• Global energy subsidies are substantial: post-tax energy subsidies are estimated at $4.9 trillion worldwide in 2013 and predicted to stretch to $5.3 trillion in 2015 or 6.5% of global GDP in both years. The post-tax subsidies in 2015 are 16 times as high as pre-tax subsidies, which comes in at $333 billion.
• Mispricing from a domestic perspective is responsible for a large majority of the global subsidy: in 2013, local air pollution totaled 46% of the subsidy, under-taxation of broader vehicle externalities (e.g., congestion, accidents) accounted for 13%, 11% of the subsidy came from undercharging for inventory costs, and general consumer taxes amounted to 8%. For that same year, global warming only covered 22% of the subsidy. This means 78% of the subsidy was due to domestic pricing distortions which suggest that unilateral subsidy reform is in countries’ domestic interests.
• Coal subsidies are notably sizeable: in 2013, 52% of the post-tax subsidy was due to coal, while petroleum accounted for 33% and natural gas 10%.
• Post-tax subsidies are similarly prevalent in advanced and developing economies and oil-producing and non-oil-producing countries. However, they are particularly extensive relative to GDP in Emerging and Developing Asia, the Middle East and North Africa region, and the Commonwealth of Independent States.
• Subsidies are condensed in a few major countries: in 2013, the subsidy in China was $1.8 trillion, $0.6 trillion in the United States, followed by Russia, The European Union and India at about $0.3 trillion each, and $0.2 trillion in Japan.
• The advantage of subsidy reform are significant and varied: appropriate energy prices would reduce global carbon emissions in 2013 by 21% and fuel-related air pollution deaths by 55%, while simultaneously boosting extra revenue of 4% of global GDP and increasing social welfare by 2.2% of global GDP. It is important to note, however, that there is a substantial fluctuation in these improvements between regions and countries.

 

You can read the full report here or download the PDF version here.

[Via: Science Direct]

Source: Visual News