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World Fossil Fuel Subsidy Continues to Grow: Analysis

October 6, 2011

There has been a massive expansion in fossil fuel subsidy globally, representing a signficant economic liability.  In the period 2005-2010, subsidies amounted to $45-75 billion annually.  This is despite a commitment by G20 leaders in 2009 to phase out wasteful consumption and production subsidies.

The basis for these findings is set out in an International Energy Agency report published this week.

The report – ‘Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels‘ – shows that a little over half of subsidies go to petroleum.

“subsidies that artificially reduce the price of fossil-fuels amounted to USD 409 billion in 2010 – almost USD 110 billion higher than in 2009. This is based on the IEA’s global survey to identify economies that artificially lower end-use prices for fossil fuels to below the full cost of supply.

Australia gets a relatively positive scorecard, with a relatively low subsidy level.   The majority of subsidy is associated with consumer vehicle fuel tax credits, and a far smaller amount to production tax incentives.

Comparison of fuel subsidies between countries is very difficult to achieve – and is explicitly stated early in the report.

The IEA’s annual World Energy Outlook report for 2011 (to be published in November) is expected to point to the methods and benefits of subsidy phase-out.

Structural issues and social implications of subsidy removal are elaborated in an earlier IEA paper.

One figure that caught our interest in the Inventory relates to social aspects of energy subsidies in the United States:

In 2008 the Low-Income Home Energy Assistance Program received $250m in fossil fuel support.  In 2009, that figure more than doubled to $570m and stayed constant for 2010 (out of an overall program appropriation of $5.1 billion).

The measure provides one-off assistance to those typically within 150% of federal poverty level, or 60% of State median poverty level, to pay for heating and cooling.  There is some scope for States to vary allocation, including with a view to prioritising ‘households with the highest energy costs or needs in relation to income‘.  In that the program is capped and changes year-to-year, it is  not a good indicator of US fuel poverty levels.  US Poverty rates rose in 2010 to 15.1% – the third consecutive increase, according to the US Census bureau – during a time in which energy prices rose.  The problems with fossil fuel subsidy reform are clear.

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