COLUMN-Time for governments to end energy subsidies: Wynn

Thu Oct 10, 2013 10:41am EDT

(The author is a Reuters columnist. The opinions expressed are his / her own)

By Gerard Wynn

LONDON Oct 10 (Reuters) - Governments are failing to deal with rising fossil fuel prices, preferring price caps to win votes and shield industry over efficiency measures which energy agencies say are better value for money.

Energy subsidies have risen year on year since 2008, to $480 billion annually in 2011, according to International Monetary Fund (IMF) figures. (See Chart 1)

That trend will probably continue so long as energy prices continue to rise, and in particular oil.

Energy agencies have long warned that subsidies are an inefficient way to protect consumers, using up funds which could be better spent on efficiency, energy infrastructure upgrades and targeted poverty relief.

Since 2009, annual meetings of G20 leading economies have agreed to phase out "over the medium term inefficient fossil-fuel subsidies that encourage wasteful consumption" (as stated in the 2009 Pittsburgh communique).

But governments evidently still prefer caps on consumers costs over more complex measures which may be harder to design and administer.

The IMF, OECD and the International Energy Agency (IEA) have tried to draw attention to the scale of subsidies, to try and trigger reform.

The IMF's Christine Lagarde on Tuesday said fossil fuel subsidies should be phased out and the head of the OECD, Angel Gurria, on Wednesday, that they should be reviewed, in typical examples of such efforts. ID:nL6N0HZ1ZJ]

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Chart 1: (page 10) goo.gl/Uj8gF

Chart 2: goo.gl/bTF3z

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DEFINITION

The IMF calculates subsidies in two ways: before and after accounting for artificially low taxes.

The pre-tax approach calculates how far the price paid by firms and households is below supply and distribution costs, in the case of consumer subsidies, or above international energy prices, in the case of producer subsidies.

Developing countries account for most pre-tax subsidies, as governments avoid passing through the full cost of rising, international energy prices to households and industry.

Energy producers are most generous, possibly feeling compelled to share their resource wealth: Iran, Saudi Arabia and Russia top the league table of fossil fuel consumption subsidies, according to the IEA.

The post-tax definition is far wider, and calculates whether tax rates on energy are below other forms of consumption, and notes any absence of corrective taxes to pay for environmental harm such as climate change and local pollution.

The absence of a carbon tax levied on fossil fuel consumption would therefore count as a subsidy.

By including the absence of carbon taxes such post-tax subsidies are more an estimate of failed environmental policy, and less relevant to a discussion about the short-term impact of energy subsidies.

The IMF calculated that in 2011, global pre-tax subsidies reached $480 billion (or 2 percent of total government revenue) and post-tax subsidies $1.9 trillion (8 percent of government revenue).

The IEA produces slightly higher estimates. It calculated that fossil fuel subsidies totalled $523 billion in 2011, using an equivalent methodology to the IMF's pre-tax measure.

The IEA also showed subsidies rising in line with oil prices, up 30 percent in 2011 compared with 2010. (Chart 2)

IMPACT

Energy subsidies displace other public spending.

The IMF calculated that pre-tax energy subsidies exceeded combined public spending on health and education in many Middle Eastern and African countries (and especially energy producers), including Algeria, Libya, Egypt, Zambia, Iran, UAE and Qatar.

By reducing consumer prices, they cut incentives for private sector infrastructure investment and boost consumption, and so add to inefficiency, resource depletion and environmental damage.

Subsidies will benefit high income households most, as the biggest consumers.

Alternative, efficiency policies can achieve the same goal of lower energy bills at lower cost.

That does not stop policymakers from preferring caps on consumer costs.

In a popular move last month, British opposition leader Ed Miliband said he would cap retail energy prices for 20 months if the Labour Party were voted back into office at the next election in 2015.

The implication was that utilities would pay from excess profits, but that may not happen; some suppliers are already making losses on gas-fired generation.

The price cap may instead reduce profitability further, forcing the government to pay more for gas-fired generation under planned intervention in electricity markets.

A better use of public funds may be to drive faster public uptake of a new, home retrofit programme through more generous grants for efficiency upgrades.

REFORM

One obvious hurdle to subsidy reform is the short-term impact on consumer prices.

Offsetting measures such as upgrades to electricity transmission and grid operation or building efficiency can take a decade or more.

In the short-term, such problems can be mitigated by programmes targeting the worst hit households and industries.

But these are more complex to design and administer than a sweeping measure such as subsidised consumer price cap.

"This is particularly challenging in oil-exporting countries, where subsidies are seen as a mechanism to distribute the benefits of natural resource endowments to their populations; in addition, these countries typically lack capacity to administer targeted social programs," the IMF said.

The IEA has tried to bring pressure to bear by publishing data on subsidy rates, by country, in a promising approach.

For example, its data show that the public cost to subsidise fossil fuel consumption in Saudi Arabia in 2011 was $2,291 per person, rather more one suspects than the average energy bill. (Chart 2) (Editing by James Jukwey)

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