Fossil Fuel and Renewable Energy Subsidies on the Rise

Total subsidies for renewable energy stood at $66 billion in 2010, but are still dwarfed by the total value of global fossil fuel subsidies estimated at between $775 billion and more than $1 trillion in 2012, according to new research conducted by the Worldwatch Institute (www.worldwatch.org) for its Vital Signs Online service. Although the total subsidies for renewable energy are significantly lower than those for fossil fuels, they are higher per kilowatt-hour if externalities are not included in the calculations, write report authors from Worldwatch's Climate and Energy team.

Estimates based on 2009 energy production numbers placed renewable energy subsidies between 1.7C/ and 15C/ per kilowatt-hour (kWh), while subsidies for fossil fuels were estimated at around 0.1-0.7C/ per kWh. Unit subsidy costs for renewables are expected to decrease as technologies become more efficient and the prices of wholesale electricity and transport fuels rise.

The production and consumption of fossil fuels add costs to society in the form of detrimental impacts on resource availability, the environment, and human health. The U.S. National Academy of Sciences estimates that fossil fuel subsidies cost the United States $120 billion in pollution and related health care costs every year. But these costs are not reflected in fossil fuel prices.

"These so-called hidden costs, or externalities, are in fact very real costs to our societies that are not picked up by the polluter and beneficiary of production but by all taxpayers," said Alexander Ochs, Director of Worldwatch's Climate and Energy program and report co-author. "Local pollutants from the burning of fossil fuels kill thousands in the U.S. alone each year, and society makes them cheaper to continue down their destructive path."

Shifting official support from fossil fuels to renewables is essential for decarbonizing the global energy system. Such a shift could help create a triple win for national economies by reducing global greenhouse gas emissions, generating long term economic growth, and reducing dependence on energy imports.

According to projections by the International Energy Agency (IEA), if fossil fuel subsidies were phased out by 2020, global energy consumption would be reduced by 3.9 percent that year compared with having subsidy rates unchanged. Oil demand would be reduced by 3.7 million barrels per day, natural gas demand would be cut by 330 billion cubic meters, and coal demand would drop by 230 million tons of coal. And the effects of the subsidy removal would extend beyond the end of the phaseout period. By 2035, oil demand would decrease by 4 percent, natural gas by 9.9 percent, and coal demand by 5.3 percent, compared with the baseline projection.

Overall, carbon dioxide emissions would be reduced by 4.7 percent in 2020 and 5.8 percent in 2035. The IEA's chief economist recently estimated that eliminating all subsidies in 2012 for coal, gas, and oil could save as much as Germany's annual greenhouse gas emissions each year by 2015, while the emission savings over the next decade might be enough to cover half of the carbon savings needed to stop dangerous levels of climate change.

"At the same time, a phase-out of fossil fuel subsidies would level the playing field for renewables and allow us to reduce support for clean energy sources as well," said Ochs. "After all, fossil fuels have benefited from massive governmental backing worldwide for hundreds of years."

Progress toward a complete phaseout, however, has been minimal. The 2009 pledge by the Group of 20 major economies to reduce "inefficient fossil fuel subsidies" has been left vague and unfulfilled. The lack of a definition has left countries to make their own determination if their subsidies are inefficient. As of August 2012, G20 countries had not taken any substantial action in response to the pledge----six members opted out of reporting altogether (an increase from two in 2010), and no country has yet initiated a subsidy reform in response to the pledge. Furthermore, there continues to be a large gap between self-reported statistics and independent estimates in some countries.

Some argue that reducing subsidies would disproportionately affect the poor. An IEA survey of 11 developing and emerging countries, however, found that only 2-11 percent of subsidies went to the poorest 20 percent of the population, showing that subsidies tend to be regressive.

Fossil fuel subsidies continue to far outweigh support for renewable energy. Although independent reporting on these subsidies has increased, global efforts to move forward with subsidy reform have been hindered by a variety of causes, leaving international pledges unfulfilled.

Further highlights from the report:

• Global production subsidies total an estimated $100 billion per year, and consumption subsidies add to roughly $675 billion.
• In 2010, developing countries spent roughly $193 billion, or 47 percent of all fossil fuel consumption subsidies, on oil, while industrial countries spent roughly $28 billion.
• Since 2007, roughly 80 percent of spending on consumption subsidies occurred in countries that are net exporters of fossil fuels.