International Monetary Fund (IMF) recently published
a study titled ‘Energy Subsidy Reform:
Lessons and Implications’. The study revealed that in the year 2011,
governments worldwide spend $1.9 trillion dollars in energy subsidies. They
also calculated that removing these subsidies would lead to 13% decrease
in the CO2 emissions. The study is highly pertinent to climate change
discussions as 57 % of carbon emissions come from burning fossil fuels (2). The
study shows that ending subsidies to fossil fuels could act as a powerful wedge
to reduce our carbon emissions and combat climate change.
Subsidies are an important economic tool that
governments and policymakers use to manipulate the market for a desired
outcome. Subsides depress the price, thus increasing the demand for that
product. Governments subsidize the price of energy, especially fossil fuels
since most of the economy depends on these fuels for transportation,
electricity and other vital functions. However, these subsidies come at huge
social costs. Subsidies give wrong price signal to the economy, as energy gets
cheaper the demand increases, which inextricably lead to more Green House Gas
(GHG) emissions. Low prices also decreases the value of energy, which means
that people can now afford to use energy in wasteful manner as there is no
incentive to energy conservation and efficiency.
In the year 2011, US spend $409 billion towards
energy subsidies. While 13% of the total went towards renewable sources, rest
of it was spent towards subsidizing fossil fuels. These large amounts of
subsidies on fossil fuels make it harder for renewable energy to compete in the
market. Generally new renewable energy technologies such as wind and solar tend
to be more expensive than fossil fuels. As the fossil fuels are subsidized it
becomes uneconomical to switch into renewable energy sources thus impeding its
growth.
It is important to understand that the fuel subsides
are not free, they have to be funded by the government through either taxes or
debt. This massive amount of money spend has great opportunity cost, this could
have been spend instead on education, healthcare or other important measures.
In summary, implementing subsidies generally have a
perverse effect on the market. Historically it has been seen that the bigger
industries who have more powerful lobby ends up getting larger subsidies.
Proving long term subsides to the industries such as the oil industries have
enjoyed is not sustainable. Subsidies should only spend towards research and
development and not towards subsidizing every drop of fuel or kWh sold.
IPCC 5th assessment report affirmed that
the climate change is unequivocal and that limiting climate change will require
our drastic and sustained actions. Based on our current trends, our CO2
emissions continue to rise well beyond the threshold limit to prevent
catastrophic consequences. The CO2 concentration for the first time reached the
record high of 400ppm on May 9th 2013 (3) and continues to increase at the rate
of 2 ppm per year. It is critical to work towards stabilizing GHG emissions
with all tools we have. Economic incentives such as taxes and subsides are no
doubt have strong potential, however we first need to make sure that these
economic tools are not working
against us with detrimental and
extraneous subsides going to wrong sources. In the future, Peruvian
carbon tax could also be considered however, right now let’s make sure that we
at least pay the real price for energy without subsidies. Let’s let the market
prevail and give renewables a fair chance to fight.
2) IPCC Fourth Assessment Report
