Opportunity in Copenhagen: take on energy subsidies
Their goal is to spur growth, but these billions spent on fossil fuels just drain budgets while helping the rich.
Baku, Azerbaijan — Global oil prices are inching up and energy security isn't going to get better at the rate the world is consuming energy.
Instead of waiting for the next big crisis to emerge, there is a way the US and other nations can enact policies to reduce energy consumption, moderate damage to the environment, save money, and even bring benefits to the poor by removing blanket energy subsidies.
In fact, world leaders at the Copenhagen climate summit should recognize that most nations still subsidize consumption of fossil fuels. Removal of these subsidies can be one of the most effective tools for reducing energy consumption and thus the danger of climate change. According to International Energy Agency data, energy subsidies worldwide amount to $300 billion a year.
Though they're designed to spur economic development, problems with them outweigh any economic benefit. One of the prevalent forms of subsidies is regulating general energy prices that aren't targeted to the neediest sectors of society.
Thus, energy subsidies chiefly benefit the rich. In most developing nations, the poor are still unable to afford significant energy use even with the subsidies. Barely half of the subsidized kerosene in India is consumed by the poor.
Moreover, in many developing countries such as India, large areas of the population do not have regular access to electricity, so they cannot consume the subsidized energy even if they could afford it.
Then there is the fact that these subsidies eat up a huge proportion of a nation's budget. Russia is the world's No. 1 energy subsidizer: It spends about $40 billion a year. Iran comes in second, spending close to $36 billion a year on consumption subsidies.
China, Saudi Arabia, Ukraine, and Egypt each spend more than $10 billion a year in energy subsidies. Until 2008, Malaysia allocated more funds to energy subsidies than to health, education, and welfare. Indonesia spends 4 percent of the nation's gross national product on energy subsidies, expending more in 2007 on energy subsidies than health and education combined.
Another problem is that energy subsidies lead to large-scale smuggling of oil to neighboring nations that do not subsidize – which results in shortages in the nation granting the subsidy.
In addition, because there is little incentive to provide for the domestic market, many energy-exporting countries that subsidize experience large-scale energy shortages at home. Look no further than the domestic shortages of natural gas in Iran and in Russia for evidence.
Also, there is a direct correlation between energy subsidies and low energy efficiency. In fact, the subsidies generate wasteful use of energy and aid fossil fuel consumption. Where nations subsidize energy consumption, when oil prices go up the public continues to consume at the same level.
In contrast, what has helped slow public thirst for oil are price squeezes: After the round of global oil price hikes that culminated in 2008, consumption dropped first and fastest in nations where consumer prices responded to the market.
In the US, for instance, extended high prices were the only factor to significantly reduce miles driven. When gasoline prices soared, miles driven in the US declined in 2007 by almost 10 percent. And it was only when gasoline prices fell in the fall of 2008 that they rebounded. Chinese gasoline consumption, meanwhile, dropped in response to a cut in fuel subsidies following the 2008 Olympics.
In crafting their energy policies, nations should remove these detrimental blanket energy subsidies. If subsidies are maintained at all, they should target specific areas, such as the needy, rather than "blanket" an entire industry. When reducing energy subsidies, governments should outline plans for using the saved funds to directly benefit the poor.
Governments should also publicize the data on the extent of fuel smuggling from subsidized nations to neighboring countries. Most are aware of the large-scale drain of the resources outside the nations' borders, and publication of this data would provide a political tool to mobilize support to end subsidies.
President Obama pressed leaders at the Group of 20 summit in September to end the billions of dollars of subsidies that encourage the use of fossil fuels around the world and help drive climate change.
That was a smart first step. The next one for Mr. Obama is to use direct market mechanisms to lower energy consumption, such as taxes that reflect the economic damage incurred from fossil fuel use.
Critics fear that ending subsidies would result in widespread political instability. Iran's president, Mahmoud Ahmadinejad, announced limitations on the amount of subsidized gasoline to each citizen, and demonstrators responded with the burning of hundreds of gasoline stations and government buildings. However, if offered a concrete alternative benefit, such as improved air quality and water supply, and meaningful improvement of health and education services, people would embrace the change.
Nations should redirect some of the funds from subsidizing fossil fuels to supporting new nonfossil technologies. This strategy would provide a true engine for economic growth, rather than letting fuel go down the drain.