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Subsidies encouraging fossil-fuel consumption

Getting rid of subsidies is tricky due to unrest and political concerns

At the UN-backed global climate talks in Copenhagen in 2009, governments agreed to phase out fossil-fuel subsidies, including those on transport fuels, by 2020. Each year since then, the hand-outs have only grown. The trend shows little sign of reversing, as governments try to limit the impact of high oil prices on their citizens' pockets.   

Transport fuel subsidies cost governments money and put a brake on clean energy initiatives by encouraging greater fossil fuel use, so there are strong arguments in favour of eliminating or reducing them, allowing the market to decide on the right pricing level for fuels. Few politicians say subsidies are a good thing. But when push comes to shove, many are loth to cut them, fearing civil unrest or the loss of votes from the hardest hit. This holds true in both developed and developing countries. This reluctance means that, despite years of lobbying by institutions such as the IMF, the scale of fuel subsidies around the world remains breath-taking.

The International Energy Agency (IEA) estimates that subsidies on consumption of all fossil fuels worldwide amounted to $523 billion in 2011, up from $412bn in 2010. Oil products got the best part of this costly munificence - an estimated $285bn, or 54% of the total. Much of that was spent in the transport sector, which accounts for around two-thirds of global oil use. 

The combination of differing subsidies and taxes results in vast discrepancies in fuel prices around the world. In Germany, a litre of diesel cost around €1.60 ($2.14) at the pumps in late January. In the Indian capital, New Delhi, the price was around 50 rupees ($0.92). Prices in big oil-producing countries can offer even cheaper fuel. In Venezuela, a litre of gasoline set you back around $0.02 cents in 2010. In Saudi Arabia, $0.07.

Spending on fuel subsidies comfortably outstrips investment into climate-change mitigation. The IEA estimates that financial support for renewable energy was $88bn in 2011, for example, or about 17% of the world's fossil-fuel subsidy bill. The agency also suggests that removing all fossil fuel subsidies would lower global carbon emissions by 10%. Even the wealthiest countries find it hard to shake their addiction to fuel subsidies.

The US maintains the largest fossil fuel subsidies in the West, estimated at around $13bn in a recent survey by Oil Change International, a group campaigning to cut oil use. The US government puts the figure at $4bn-5bn. US president Barack Obama has been vociferous in his condemnation of them. "You can keep subsidising a fossil fuel that's been getting taxpayer dollars for a century, or you can place your bets on a clean-energy future," he said on the election campaign trail last year. While US subsidies tend to go to oil companies" operations rather than to fuel retailers, the result is a cheap pump price. Diesel in the US, for example, costs around half the price paid by German drivers. US bioethanol production is also heavily subsidised.  

In the UK and other industrialised countries, the addition of a few cents to the price of petrol has triggered protests over the past decade. In developing countries, the impact can be much more severe, as was graphically illustrated in Nigeria early last year, when riots followed a subsidy cut and prompting a partial u-turn from the government.

In India, the country's largest fuel seller, Indian Oil, has said it loses around 9 rupees a litre on its diesel sales. Credit-ratings agencies do not like this state of affairs and their threats to downgrade India's debt to junk status has prompted the government to cut spending, including on diesel subsidies. The country is now increasing pump prices, but in small increments to avoid provoking protests. The process is fraught with difficulties, though. A bigger rise in the diesel price for businesses buying in bulk directly from oil companies has led to some of them buying their fuel straight from the retail pump, where the price is now cheaper. That has put pressure on supply.   

A number of other countries have flirted with subsidy cuts and then abandoned them. But there are signs of change, as nations faced with similar budgetary constraints to India's seek to cut costs. In November, the Egyptian government approved the removal of subsidies on 95-octane petrol and said it would restrict the sale of other types of subsidised fuel from April 2013. The move was tied to a deal under which the IMF provided the country with a $4.8bn loan to support its teetering economy. Meanwhile, in the face of public disapproval, the Mexican government has been gradually removing multi-billion dollar fuel subsidies since 2011, which have for years kept petrol prices considerably cheaper than those across the US border.   

Iran, Morocco, Jordan and the United Arab Emirates are also cutting off some hand-outs. So, while progress may be slow, there are signs that governments are becoming bolder, letting the market set rates and cut treasury costs and energy demand at the same time. 

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