Developing Countries Subsidize Fossil Fuels, Artificially Lowering Prices

The International Energy Agency (IEA) annually estimates global fossil-fuel consumption subsidies that measure what developing countries spend to provide below market cost fuel to their citizens. The IEA is a creation of the Organization for Economic Cooperation and Development (OECD), which represents the developed nations of the world. In 2011, IEA found fossil fuel consumption subsidies total $523 billion, 27 percent higher than the 2010 total of $412 billion.[i] This increase is almost entirely due to the increase in international energy prices, particularly oil prices. Oil subsidies make up over half of the total fossil fuel consumption subsidies, while electricity makes up 25 percent, natural gas 20 percent and coal less than 1 percent.

Developing countries artificially lower energy prices to their citizens, paying the difference from their government resources.[ii] Such welfare transfers are akin to the U.S.’s Low Income Home Energy Assistance Program (LIHEAP)[iii], and are differentiable from subsidies in the name of commercializing uneconomic energy sources such as on-grid wind or solar. The United States and other developed countries offer support to energy production in the form of tax credits, loan guarantees or use mandates, which are not included in IEA’s fossil fuel consumption subsidy calculations since they are directed towards production rather than consumption of the fuel.

Source: International Energy Agency, World Energy Outlook 2012, Energy Subsidies, http://www.worldenergyoutlook.org/resources/energysubsidies/ 

According to the IEA, global fossil fuel consumption subsidies are almost 6 times higher than global renewable subsidies.[iv]  IEA’s estimate for global renewable subsidies (biofuels and renewable electricity) in 2011 is $88 billion, 33 percent higher than in 2010. In contrast to fossil fuel consumption subsidies, renewable fuel subsidies often take the form of tax credits for investment or production, or premiums over market prices to cover the higher production costs compared to traditional fuels.

Fossil Fuel Consumption Subsidies by Country

Fossil fuel consumption subsidies are most prevalent in the Middle East and in North Africa.  Iran leads the world in fossil fuel consumption subsidies providing over $82 billion from its government resources in 2011 to lower the cost of fossil fuels to end-users in its country.[v] Of the $82.19 billion in fossil fuel consumption subsidies, over 50 percent covers oil, 28 percent funds natural gas, and the remainder (21 percent) goes towards electricity. Saudi Arabia is the second largest country subsidizing end-use fossil fuel prices, providing 76 percent of its almost $61 billion in fossil fuel consumption subsidies to oil and 24 percent to electricity. Russia comes in third with over $40 billion in fossil fuel consumption subsidies, with natural gas getting 54 percent and electricity 46 percent of the total.

India and China rank fourth and fifth, respectively, both funding over $30 billion in fossil fuel consumption subsidies.  India’s fossil fuel consumption subsidies totaled $39.7 billion in 2011 and mainly fund lower oil prices. China is one of the few countries that subsidize coal consumption. Of China’s $31.05 billion in fossil fuel consumption subsidies in 2011, oil receives the most (59 percent), then electricity (36 percent), and coal at 4 percent.

Developed countries, such as the United States, do not have fossil fuel consumption subsidies, as seen in the following chart.

Source: International Energy Agency, World Energy Outlook 2012, Energy Subsidies, http://www.worldenergyoutlook.org/resources/energysubsidies/ 

Uzbekistan leads the world in the amount of its GDP that it subsidizes; its $12.74 billion in fossil fuel consumption subsidies represents 28 percent of its economy. Turkmenistan’s abundant natural gas supplies along with oil and electricity are subsidized to the level of 22.7 percent of its economy while Iraq’s subsidies for oil, natural gas, and electricity represent 19.3 percent of its economy. China has the largest coal subsidies among the 6 countries that subsidize coal, but China’s fossil fuel consumption subsidies represent only 0.4 percent of its GDP.

On a per-person basis, fossil fuel consumption subsidies are highest for the United Arab Emirates at $4,172 per person, Kuwait at $3,729 per person and Saudi Arabia at $2,291 per person.[vi]

Many of the countries providing fossil fuel consumption subsidies own state energy companies, including countries that comprise the Organization of Petroleum Exporting Countries, such as Iran, Saudi Arabia, and Venezuela. Net exporting countries see these subsidies as an opportunity cost.

Fossil fuel consumption subsidies are often used to alleviate energy poverty, but are an inefficient means for doing so, creating market distortions that result in wasteful energy consumption.

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Conclusion

Many Americans are confused by the large amount of global fossil fuel consumption subsidies that the IEA calculates, not realizing that these subsidies have nothing to do with tax policy, research and development or loan guarantees, where most U.S. programs are directed. In fact, most liberalized countries not only do not offer fossil fuel consumption subsidies that artificially lower the end-use price of the fuel, but in fact, tax energy consumption.  Fossil fuel consumption subsidies are common and even pervasive in the developing world, particularly in economies with state-owned energy companies. The IEA has been advocating for years that fossil fuel consumption subsidies should be eliminated since they encourage wasteful consumption.

Fossil fuel consumption subsidies in developing countries are welfare transfers that can be differentiated from subsidies in the name of commercializing or sustaining uneconomic energy sources such as on-grid wind or solar, which the United States and other industrialized countries have been heavily subsidizing. These latter forms of energy subsidies that help promote production of uneconomic energy sources can be abolished without detrimental affects to the U.S. economy or its citizens, and in fact would increase economic efficiency since by their very nature, they are more expensive than competing forms of energy.

The OECD countries find fault with developing countries for subsidizing the costs of energy purchased by their citizens, but those same OECD nations are busy subsidizing and mandating the use of uneconomic and inefficient forms of energy which will make energy more expensive and less reliable for their citizens.  Neither of these policies reflects markets or makes sense, and the economies of all concerned would be better off if all such supports by governments were abolished.