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Fossil Fuel Subsidy Removal to Provide Environmental, Economic Benefits.

October 13, 2010

According to the International Energy Agency, in 2008 India accounted for the fourth highest level of fossil fuel subsidies in absolute terms – over $40bn per annum.  Most of this subsidy – approximately $30bn per annum – is attributable to oil subsidies.

The IEA will make 2009 global fossil fuel subsidy data available for the G20 Summit in Korea in November.  

The IEA estimates that a global subsidy phase-out would reduce energy-related CO2 emissions by 6.9% compared to a baseline scenario, or by 2.4 Gt, by 2020.

The Korea summit has as a key objective a focus on fiscal sustainability.  This focus is in line with, and following, the Toronto G20 summit. 

The Toronto G20 declaration iterated an ongoing programme on reducing fossil fuel subsidies, delivering:

implementation strategies and timeframes (…) for the rationalization and phase out over the medium term of inefficient fossil fuel subsidies that encourage wasteful consumption

The nexus of fiscal sustainability on the one hand, and reduction of fossil fuel subsidies is clear when one examines the Indian context

In the IEA paper ‘Petroleum Prices, Taxation and Subsidies in India’ (published June 2009), the authors note that:

The current Indian system of effectively subsidised petroleum product prices has significant implications for the emergence of India as a major global energy consumer, for the integrity of India’s Central Government budget and for investment in India’s growing oil and petroleum sector

In 2008 India was the world’s fifth largest consumer of crude oil and petroleum products, with consumption growing at over 5%, and will become the fourth largest product consumer by 2025.  India’s domestic pricing and regulatory policy will impact domestic issues such as implementation of demand-side management, energy efficiency and fuel poverty.

India’s oil-sector loss expenditures by state-owned Oil Marketing Companies amounted to $40bn in 2008-2009, adding substantially to the Central Government budget deficit.  This, in turn, led to a threat to implement a downgrade of India’s credit rating status to ‘Junk’ by Standard and Poor’s.

India’s fossil fuel subsidies therefore contributes tangibly to increased fragility and instability, and deterioration in the health of India’s national budget and macroeconomic stability.  The reduction in subsidy levels would have a positive outcome from a greenhouse gas emissions perspective.


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