Towards a green economy Coal
100 150 200 250 300
50 0 2007 2008 Figure 1: Economic value of fossil fuel
consumption subsidies by type. Source: World Energy Outlook 2010 © OECD/International Energy Agency 2010 Note: Subsidy estimates are made by the International Energy Agency and do not represent the official position of G20 countries.
goods through subsidization encourages inefficiency, waste and overuse, leading to the premature scarcity of valuable finite resources or the degradation of renewable resources and ecosystems. For instance, global subsidies to fisheries have been estimated at US$ 27 billion annually, at least 60 per cent of which have been identified as harmful, and are thought to be one of the key factors driving over-fishing (Sumaila et al. 2010). It is estimated that depleted fisheries result in lost economic benefit in the order of US$ 50 billion per year, more than half the value of global seafood trade (World Bank/FAO 2009).
Subsidies reduce the profitability of green investments. When subsidization makes unsustainable
activity
artificially cheap or low risk, it biases the market against investment in green alternatives. Fossil fuel consumption subsidies were an estimated US$ 557 billion worldwide in 2008 and production subsidies accounted for an additional US$ 100 billion (IEA/OPEC/OECD/World Bank 2010) (see Figure 1). By artificially lowering the cost of using fossil fuels, such subsidies deter consumers and firms from adopting energy efficiency measures that would otherwise be cost-effective in the absence of any subsidies.
Indeed, there is consensus that these
subsidies pose a significant barrier to the development of
renewable energy technologies (UNEP 2008a;
World Bank 2008; el Sobki, Wooders and Sherif 2009). Moreover, it is estimated that phasing out all fossil fuel consumption and production subsidies by 2020 could result in a 5.8 per cent reduction in global primary energy demand and a 6.9 per cent fall in greenhouse gas emissions (IEA/OPEC/OECD/World Bank 2010).
Subsidies can be of questionable benefit to the poor. Subsidies are often created to benefit low-income households, but unless the aid is targeted the majority of
562 2009 Oil Gas Electricity
the spending often flows to higher income households (UNEP 2010b). Similarly, subsidies intended to support small-scale businesses are often captured by large firms (Environmental Working Group n.d.). In other cases, subsidies in developed countries actively harm the poor. The level of government support provided to agricultural producers in OECD countries, for example, estimated at US$ 265 billion in 2008 (OECD n.d.), is significantly trade distorting, causing large welfare losses in developing countries. Similarly, half of global subsidies to fisheries are provided by developed countries, distorting prices and costs in favour of developed country fishing industries (Sumaila and Pauly 2006). It has been estimated that removing subsidies and tariffs to cotton alone would increase real incomes in sub-Sahara Africa by US$ 150 million per year (Roubini Global Economics 2009).
Reforming harmful subsidies The difficulty of reforming subsidies is practical and political: careful policy implementation is needed to offset undesired secondary impacts, and a combination of strong political will and compensatory policies may be necessary to overcome opposition from vested interests. In some cases, subsidy reform can negatively affect the welfare of the poor, and flanking measures will be required to ensure a socially neutral or ideally progressive outcome.
Subsidies are complicated and often poorly understood. The total support granted to a sector can come from a large number of programmes, given by different arms and levels of government, and the economic, environmental and social outcomes are complex to unravel. A consistent, methodical approach is for governments to adopt a three-stage process of: (i) defining their subsidies; (ii) measuring them; and (iii) evaluating them against the objectives of reform. Such an approach establishes which subsidies are harmful and helps decide priorities for implementation (GSI 2010).
Existing reporting and monitoring of subsidies varies considerably. It is most extensive and internationally standardised in agriculture, but in other sectors, such as energy and fisheries, it is weak. Every three years, WTO Members are required to provide new and full notifications of which subsidies are granted or maintained in all sectors, but reporting rates are low, notifications are often submitted late and there are problems with accuracy and completeness of data (Thöne and Dobroschke 2008).
Although national governments should theoretically have a strong interest in tracking their subsidy spending, as it facilitates the rational use of resources, there is often a lack of political will to act because of the way subsidies benefit vested interests. Where governments find it difficult to act for practical or political reasons, NGOs and IGOs can help fill the gap. Support can also be
Billion US$
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