Fossil fuel subsidies increased in 2017, says IEA

Despite seeing the value of global fossil fuel consumption subsidies almost halve between 2012 and 2016, new data published this week by the International Energy Agency shows government support for coal, gas and oil increased to more than $300 billion in 2017, a 12 per cent jump.

In advance of the International Energy Agency’s (IEA) upcoming World Energy Outlook 2018 report (WEO), which is due to be published on November 13, Wataru Matsumura, WEO Senior Energy Analyst, and Zakia Adam, WEO Energy Analyst, penned a commentary which highlights the recent rise in global fossil fuel consumption subsidies that occurred in 2017.

Specifically, according to Matsumura and Adam, worldwide fossil fuel consumption subsidies were almost halved between 2012 and 2016, down from a 2012 high of over half a trillion dollars. This was due primarily to efforts to end subsidies for oil products, and for the first time, in 2016, subsidies to fossil-fuelled electricity exceeded subsidies for oil.

However, this trend switched in 2017, and saw the value of fossil fuel consumption subsidies increase by 12% to $300 billion.

There have been arguments to be made for subsidising fossil fuel consumption in the past – such as making energy cheaper and more accessible for the poorest and most vulnerable in society.

However, the reality of the situation is that subsidies are very rarely implemented with the sort of forward-thinking and precision as would make them justifiable, and they have instead disproportionately benefited wealthier segments of society and who use much more of the subsidised fuel.

As a result, according to the IEA, these sort of “untargeted subsidy policies encourage wasteful consumption, pushing up emissions and straining government budgets. Phasing out fossil fuel consumption subsidies is a pillar of sound energy policy.”

The IEA’s commentary notes that subsidies for oil consumption are impacting the overall market for fossil fuel consumption subsidies.

The current rise in international fuel prices seen this year is likely to undo the efforts of the past decade to reform oil subsidies, which stemmed from a similar period of high oil prices between 2010 and 2014.

In the wake of this period when prices began to fall again, a number of countries from India to Indonesia and Mexico to Malaysia began implementing pricing reforms.

However, as prices rise, these efforts might take a hit. Consumers across many oil-importing countries are being hit with a hike in retail prices – particularly in developing economies with local currencies depreciating against the almighty US dollar.

For example, a 75 per cent rise in the Brent crude price which is dominated by the US dollar has resulted in a 100% rise in Indian rupees and a 250% increase in Argentinian pesos since the beginning of the year.

Unsurprisingly, therefore, in the wake of such economic pressures, some countries have been forced into a position where they have postponed their reform schedules by pushing back price increases or otherwise protecting consumers – though they have simultaneously attempted to keep the overall policy goal of market-based pricing in place.

However, as Matsumura and Adam explain, “These price controls can shield consumers from short-term changes in international market price, but at a fiscal and environmental cost. Moreover, they diminish the potential for higher prices to curb demand and bring the market into balance.”