Energy subsidies: more harm than good
Sussex researcher calls for a rethink on energy subsidies, highlighting their financial and environmental costs
No student enjoys paying the electricity bill; it seems an extortionate expense for something that isn’t drinkable and if you’re unlucky enough to be in charge of ‘the house bills’, then you also have the arduous task of chasing up your housemates for their share. What you may be unaware of is that your energy bill could be far more expensive if it wasn’t for government energy subsidies keeping costs low. While these subsidies may seem like a good idea, Benjamin Sovacool from the Science Policy Research Unit (SPRU) at Sussex has written a paper unveiling the hidden costs of energy subsidies.
One of the most obvious costs is larger government budget deficits and higher taxes. In the Middle East, oil is so heavily subsidized that governments need $80 per barrel to provide public services and in 2014 Saudi Arabia encountered budget deficits as a consequence. Venezuela is an extreme example, gasoline costs the consumer just 6 cents per gallon but this is only possible because of a subsidy expenditure of $1017 per person.
“We’re talking about trillions of dollars here, enough to potentially solve things like world hunger, spent instead on waste and inefficiency, or on supporting industries that don’t need additional support” says Sovacool. The numbers are staggering, with an IMF study estimating world expenditure on energy subsides being $1.9 trillion. This figure could provide reproductive healthcare for all women, provide clean water for all and immunize every child with cash to spare.
Furthermore, these subsidies don’t help the poorest households, the group supposed to be receiving benefit. In 2010, of the billions spent on fossil fuel subsidies in India, less than $2 billion of the total sum benefitted the poorest 20% of the population. Meanwhile, wealthier households tend to gain more from energy subsidies because they use more energy.
If this wasn’t enough already, energy subsides also harm the environment. By lowering the price of energy to the consumer, energy subsidies encourage higher energy use and increased waste. One of the most extravagant examples of this is the former Soviet Union, where district heating was heavily subsidized and sometimes free, people kept windows open in winter and grew tropical flowers inside.
On the production side of things, subsidies can hold back innovation in the sector as producers are guaranteed a profit so have little motivation to operate efficiently. In Europe, subsides have discouraged efforts to capture methane from empty coalmines and in the UK they have stopped producers from developing better coal pollution equipment.
On top of all this, energy subsides tend to go towards environmentally damaging fossil fuels or nuclear energy rather than ‘clean energy’ sources. However Sovacool doesn’t think that subsidies for renewable energies are the solution “the trick is not to become addicted to the subsidies, and to create self-sustaining markets. Most renewable systems, especially biomass, hydro and wind, are already there, and others such as solar or geothermal, are nearly there.”
At the end of the article, Sovacool puts forward a plan for the future. He calls for more impact studies on energy subsidies. Governments and communities can then use this information to decide which subsidies to get rid of and which ones might be worth holding on to. He also suggests the insertion of sunset clauses into subsidy legislation, stopping them from operating indefinitely. Expiry dates have already been added to some subsides such as the reintroduction of coal subsides in the UK, which began in 2000 and expired in 2002.
However it is important that subsidies are removed cautiously; a study by the IMF found that of 22 cases, only 12 didn’t result in major social and economic disruption. The poorest in society are often the worst effected when subsidies end but adjustment packages can help in the short term and in the long term the world’s poorest have the most to gain.