• Ugurcan Turkkan

Sensitive issue: Fossil Fuel Subsidies

Reading about the civil unrest in Kazakhstan that was unleashed following the lifting of a government-enforced price cap on liquified gas on 1 January 2022 prompted me to wear my glasses, prepare a hot black coffee and dive into the world of fossil fuel subsidies.


Surely the removal of a fuel subsidy was not the only or fundamental reason — i.e. entrenched social and economic inequality, corruption and authoritarianism — behind 2022 Kazakh unrest. However, fossil subsidies were the ones that broke the camel’s back and led to thousands of protestors taking to the streets, leading to the death of more than 200 people, the resignation of the government, and a Russian military intervention. It doesn’t take long to realise this was not the first (or possibly last) time the removal of a fossil fuel subsidy triggered a significant protest. For instance, the Ecuadorian government’s announcement regarding the removal of fuel subsidies in 2019 resulted in violent protests that forced the government to revert its decision. Other countries that experienced civil unrest for the same reason include India, Jordan, Yemen and Indonesia. Similarly, consumers’ fuel price concerns ignited France's “yellow vest” protests and played a role in the Arab Spring.

Fossil fuel subsidies are public enemy number one for the growth of renewable energy.Fatih Birol (Executive Director of International Energy Agency)

There are two categories of fossil fuel subsidies. The first category encompasses mechanisms governments use to help the producers of the fossil fuel industry. The governments’ arsenal in doing so includes tools such as tax breaks, direct payments out of the government budget, mandated energy prices, and other indirect methods of supporting producers. The second category relates to the consumption fuel subsidies whereby the government underprices energy, making them cheaper for the public than it costs to produce and/or import. It is worth noting research shows that this type of fuel subsidy brings inequality as the higher-income segment of the population is more likely to have cars and use more electricity for their houses. It is also more expensive for the treasury relative to the first type, although it is challenging to have a complete account of the first type because of the prevailing lack of transparency.


The costs attached to fossil subsidies are twofold. Firstly, they have an environmental cost as they impede the slashing of greenhouse gas emissions. A 2021 study by IISD shows that removing consumption subsidies for fossil fuels could reduce greenhouse gas emissions by an average of 6.1 percent per country by 2030. In some countries, emissions would drop by more than 30 percent. Secondly, they are a burden on national economies. According to the IMF, on average, governments worldwide have spent around 500 billion USD per year since 2015 to fund fossil fuel subsidies. Instead of supporting this mammoth industry that significantly harms the environment on a timer, the hefty sum of 500 billion USD could fund donation of 4 billion solar panels to developing countries, quadruple spending on cancer medication, employ 14 million new primary school teachers, or support the Net Zero efforts by funding policies such as carbon dividends and renewable incentives. Moreover, it slows the adoption of renewable energies by making fossil fuels more attractive than they are. For example, in Egypt, they found that underpricing of natural gas was a severe problem for wind power, as natural gas at the mid-range of its market value cost the same as wind power, yet, the renewable alternative remained more expensive due to the natural gas consumption subsidy.


Closing Thoughts

There is no doubt that governments must ditch fossil fuel subsidies as fast as possible. Glada Lahn, an energy policy expert, points out that this is known by the government technocrats, too. Yet, it is ‘politically difficult’. Phasing out was agreed in 2010, but 12 years later, countries are still struggling to get out of their claws. Protests that were mentioned earlier suggest two things.


First, removing fossil fuel subsidies is a complex and sensitive issue that requires careful planning and transparent communication with the public. The coming months with soaring natural gas prices and the tension over Russia and Ukraine may present further danger for governments to roll back on the subsidies. The second observation is that people are not ready for the change required for Net Zero, voting to keep the system intact with cheaper energy prices and material benefits that they bring, rather than changing the system with energy security in mind, redirecting the income to renewable subsidies instead.


Sources:

https://www.imf.org/en/Topics/climate-change/energy-subsidies

https://edition.cnn.com/2022/01/20/energy/oil-subsidies-unrest-climate/index.html

https://www.mfat.govt.nz/en/environment/fossil-fuel-subsidy-reform-ffsr/

https://www.reuters.com/markets/commodities/kazakhstan-reminds-world-leaders-costly-fuel-subsidy-dilemma-2022-01-06/