With the exception of a few environmental sceptics, there is now more or less consensus within the scientific community that human activity is largely responsible for global climate change.⁽²⁾ In addition, it has been acknowledged that climate change affects poor people disproportionately.⁽³⁾ One bi-product of fossil fuel burning, carbon dioxide (CO₂), is released into the atmosphere and subsequently causes the global climate to change.

Somewhat paradoxically, and despite the negative effects of fossil fuel burning on the global climate, this sector is heavily subsidised by governments of, foremost, developing countries.⁽⁴⁾ Conservative estimations predict the global fossil fuel subsidies to be worth as much as US$ 775 billion in 2012.⁽⁵⁾ This CAI paper examines the implications that these subsidies have on environmental, social and economic concerns, especially in Africa.

What are fossil fuel subsidies and how are they designed?

The World Trade Organisation (WTO) defines a subsidy as “(i) a financial contribution (ii) by a government or any public body within the territory of a Member (iii) which confers a benefit. All three of these elements must be satisfied in order for a subsidy to exist.”⁽⁶⁾ One of the sectors that annually receives the most governmental financial support is the fossil fuel sector. However, fossil fuel subsidies are not globally uniform;⁽⁷⁾ they differ from country to country, and sometimes they even differ regionally within the same country. While only a few developed countries subsidise fossil fuels, many developing countries do.

Fossil fuel subsidies can be divided into two groups: consumption subsidies and production subsidies. The first term is defined as “policies designed directly to hold the end price of fossil fuels below the cost of supply.”⁽⁸⁾ Production subsidies, conversely, are provided to the producers of fossil fuels, such as oil companies.⁽⁹⁾

Figure 1: Fossil fuel subsidies in 2012 ⁽¹⁰⁾

The subsidisation of fossil fuels can be divided into subsidies for oil, natural gas, coal, and for fossil fuel electricity. In 2010, oil was globally subsidised by US$ 193 billion, natural gas by US$ 91 billion, coal by US$ 3 billion, and fossil fuel electricity was subsidised with US$ 122 billion.⁽¹¹⁾ The total worth of fossil fuel subsidies in 2010 was thus US$ 409 billion. Even though the International Energy Agency (IEA), the Organisation for Economic Cooperation and Development (OECD), the Organisation for Petroleum Exporting Countries (OPEC) and the World Bank (WB) have all made phasing out fossil fuel subsidies a priority,⁽¹²⁾ these numbers are continually increasing, with the estimated value of fossil fuel subsidies in 2012 standing at US$ 775 billion, an almost 90% increase compared to the 2010 amount. As a comparison, this amount is roughly the same as the combined gross domestic product (GDP) of South Africa, Nigeria and Angola of 2011.⁽¹³⁾ Moreover, about six times more money is spent annually on subsidising fossil fuels compared to the renewable energy sector.⁽¹⁴⁾

The purpose of fossil fuel subsidies

A government typically uses subsidies as a tool for achieving its political ends; however, several studies have come to the conclusion that subsidies should be used only when they are absolutely necessary, such as for research support for new technology.⁽¹⁵⁾ Despite this, every year, large amounts of money are spent on subsidising sectors in which financial backing is not absolutely necessary; the subsidisation of fossil fuels being a case in point. This contradicts the aforementioned suggestion of not subsidising business areas that are not of utmost importance; moreover, the subsidisation of fossil fuel is environmentally appalling, and the environmental impacts of the subsidies will be discussed later on in this paper. This raises the question: What are the true purposes behind the widespread governmental support of fossil fuels?

Subsidisation of a product makes the price of that commodity artificially low. One argument for fossil fuel subsidisation is that it helps alleviate the burden of high fuel prices for people in low-income countries.⁽¹⁶⁾ This could be one reason for why fossil fuel subsidies are so much more common in developing countries than they are in developed countries.

The purpose of subsidisation of fossil fuels may nevertheless be deeper lying than simply lowering the fuel prices for people with limited means. A subsidy is a political instrument; thus, in order to understand the concept properly, political motives ought to be scrutinised. Any political administration aims for economic and political success,⁽¹⁷⁾ ergo, economic growth and political survival. A country can thus subsidise oil production, for example, in order to support export and hope that economic prosperity follows as a consequence of export revenues. A country can also subsidise fossil-fuelled heating or, with the help of subsidies, artificially lower gasoline prices in order to maintain political support. As this paper has shown, this is the case in many developing countries, and these fossil fuel subsidies are usually popular among the people in the countries where they subsist. For example, in January 2012, Nigeria experienced massive riots and strikes when the Nigerian government decided to refrain from its subsidisation of gasoline.⁽¹⁸⁾ The purposes of fossil fuel subsidies are thus not only a means to lower fuel and energy prices for the people, but they can also be perceived as a populist approach for a regime to stay in power and assure political survival.⁽¹⁹⁾

Environmental, social and economic aspects of fossil fuel subsidies

In the section above, the political and economic motives of subsidising fossil fuels were explored. This section will investigate whether or not subsidising fossil fuels is environmentally, socially and economically rational for poor and marginalised populations – especially in Africa, one of the poorest continents. Despite many African countries having limited economic means, the continent includes some of the biggest spenders on fossil fuel subsidies such as Egypt and Algeria.⁽²⁰⁾

The most common argument for subsidising the consumption of fossil fuels is to help alleviate the costs of fuel, heating and electricity for poor and marginalised people. However, according to a study carried out by the IEA, only between 2% and 11% of the subsidies benefit the bottom 20% of income earners.⁽²¹⁾ The reason for the biased and socially regressive nature of the consumption subsidies is that one needs to own a petrol-fuelled vehicle or a household that is connected to a power grid, in order to benefit from them.⁽²²⁾ For income groups that are living on less than US$ 1.25 per day, this is often not the case. Moreover, if these income groups do own a car, a motorcycle or a home that is connected to a power network, fuel and electricity are in any case often too expensive to be affordable, even at subsidised rates.⁽²³⁾

The subsidies are, of course, not disadvantageous to all groups of people. As seen, the poorest parts of the population do not, to a large extent, benefit from fossil fuel subsidies. However, the upper middle classes typically do. This leads to the creation of strong and well-organised interest groups with a vested interest to maintain the subsidies in their current form.⁽²⁴⁾ These interest groups often hinder the reformation of subsidisation politics. As seen in the Nigerian example, the gasoline subsidies are perceived as an issue that is such an important part of the ‘welfare state’ that their possible removal sparked riots and strikes. In Nigeria and elsewhere, there exists the political will to remove or reform these subsidies, but this will is hindered by the masses that perceive them as crucial. The fear of losing those subsidies goes hand in hand with low political trust. For example, the people in Nigeria may not trust their politicians to support them with pension, unemployment money and other aspects typical of a welfare state. Hence, even though subsidised fuel prices might not be perfect, in the eyes of the people, they are perceived as better than nothing.⁽²⁵⁾

Moreover, fossil fuel subsidies generally correlate with authoritarian regimes, which is why democratically governed countries on average have fuel prices that are about four times higher than in countries that are governed by authoritarian regimes.⁽²⁶⁾ In these authoritarian countries, the subsidies and low fuel prices are highly visible measures that serve to maintain satisfaction with the current political order. Hence the subsidies are sometimes an approach by authoritarian regimes to maintain their political survival, and democratic governance can consequently function as a foundation for the removal of fossil fuel subsidies.

One of the key reasons for why subsidisation of fossil fuels is controversial is the adverse effects they have on the global climate. Subsidising this sector and artificially lowering the prices of the commodity creates an overconsumption of fossil fuels. An IEA estimation shows that, were fossil fuel subsidies removed, the global energy demand would be reduced by circa 5% by 2020,⁽²⁷⁾ and 2.6 billion tons of CO₂ would not be ending up in the atmosphere by 2035.⁽²⁸⁾ This is equal to about 70% of the European Union’s (EU) total annual CO₂ emissions and about half of the reductions that would be needed to limit global warming to 2 ˚C.⁽²⁹⁾ Consequently, there is no doubt that the climate would benefit greatly from phasing out fossil fuel subsidies.

The subsidisation of consumption and production of fossil fuel is questionable not only in social and environmental terms, but also in economic considerations. Of the US$ 775 billion that is predicted to be spent on these subsidies in 2012, the vast majority will have been spent by developing nations, where the same amount of money could have been used for other, more productive sectors, such as infrastructure, education, health care and social safety nets. Fossil fuel subsidies mostly benefit the fossil fuel industry, which is typically not in need of external financing. Redirecting the money that is currently used for subsidising fossil fuel to suggested sectors could thus very well function as a means to promote economic growth.⁽³⁰⁾

Removing the subsidies would furthermore give renewable energy a welcome competitive edge compared to fossil fuels. This would not only be an important step in the transition to a green economy, it would also work for job creation since “investments in petroleum based projects generate 1 out of every 4 jobs created with the same amount of investment into clean energy jobs.”⁽³¹⁾ All things considered, the subsidisations of fossil fuels are hard to defend, from an environmental, social, and economic perspective. Fossil fuel subsidies are not socioeconomically beneficial, and Africa, as well as other regions, should aim at removing them, since the funds that are spent on subsidising fossil fuels could be used much more wisely in other sectors that to a larger extent benefit the people.

Concluding remarks

Removal of fossil fuel subsidies has been made a priority by OPEC, the OECD, the IEA as well as the WB. Nevertheless, the amount of money that goes into this sector every year is increasing and has in fact tripled since 2009. The artificially low prices that the subsidies give rise to create an incentive to use more energy, and in total, the global energy demand would be reduced by around 5% if subsidies were removed. From an environmental perspective, this decrease in energy demand would be hugely beneficial as estimations show that phasing out fossil fuel subsidies would represent half the CO₂ cuts needed to prevent dangerous climate change. In addition, both socially and economically, the subsidies are questionable at best; the benefits of fossil fuel subsidies rarely reach the bottom 20% of income earners, and spending the same amount of money that is currently spent on subsidising fossil fuels on education, health care and infrastructure could generate human and economic growth. Finally, a removal of fossil fuel subsidies could give renewable energy a welcome competitive edge which would not only lead to reduced greenhouse-gas emissions, but also job creation.

Despite political will, social, environmental and economic benefits, fossil fuel subsidies are still difficult to be rid of. The reason for this can be found in the political psychology of the people in countries where subsidies exist, as well as the structures that, once they are created, can be difficult to alter. The people who benefit from the subsidies create well-structured interest groups that work for the status quo. This paper has also shown that fossil fuel subsidies are linked to authoritarian regime types and thus, democratic governance can be a powerful tool for the removal of the subsidies. All in all, everyone loses from uncontrolled climate change, and by subsidising fossil fuels, we are in fact subsidising global warming. We now know that climate change poses the perhaps most serious challenge to mankind. To financially support fossil fuels is truly outdated and belongs on the scrap heap of history.

Written by Oskar Holst ⁽¹⁾

NOTES:

(1) Contact Oskar Holst through Consultancy Africa Intelligence’s Enviro Africa unit ( enviro.africa@consultancyafrica.com). This CAI discussion paper was developed with the assistance of Angela Kariuki and edited by Liezl Stretton.
(2) Wagner, N., ‘Climate change consensus is virtually unanimous’, Huffington Post, 11 December 2012, http://www.huffingtonpost.com.
(3) ‘Global warming exacerbates African conflict’, The Select Committee on Energy Independence and Global Warming http://globalwarming.markey.house.gov.
(4) Plumer, B., ‘Why $775 billion in fossil-fuel subsidies are so hard to scrap’, The Washington Post, 18 June 2012, http://www.washingtonpost.com.
(5) Swift, A., et al., ‘Governments should phase out fossil fuel subsidies or risk lower economic growth, delayed investment in clean energy and unnecessary climate change pollution’, NRDC, June 2012, http://www.nrdc.org.
(6) ‘Agreement on subsidies countervailing measures (“SCM Agreement”)’, The World Trade Organization, http://www.wto.org.
(7) Clark, D., ‘Fossil fuel subsidies: A tour of the data’, The Guardian, 19 January 2012, http://www.guardian.co.uk.
(8) Ibid.
(9) See Figure 1 on fossil fuel subsidies in 2012.
(10) Plumer, B., ‘Why $775 billion in fossil-fuel subsidies are so hard to scrap’, The Washington Post, 18 June 2012, http://www.washingtonpost.com. 
(11) Clark, D., ‘Fossil fuel subsidies: A tour of the data’, The Guardian, 19 January 2012, http://www.guardian.co.uk.
(12) ‘Fossil fuel subsidies’, OECD, http://www.oecd.org.
(13) ‘GDP (Current US$)’, The World Bank, http://data.worldbank.org.
(14) Ritter, K., ‘Fossil fuel subsidies in focus at Doha climate talks’, The Huffington Post, 3 December 2012, http://www.huffingtonpost.com.
(15) Victor, D., ‘The politics of fossil-fuel subsidies’, International Institute for Sustainable Development, October 2009, http://www.iisd.org.
(16) ‘Fossil fuel subsidies don’t protect the poor’, Oilchange International, May 2012, http://priceofoil.org.
(17) Victor, D., ‘The politics of fossil-fuel subsidies’, International Institute for Sustainable Development, October 2009, http://www.iisd.org.
(18) ‘Nigeria subsidy talks ‘fruitful’, strikes continue’, Reuters, 12 January 2012, http://www.reuters.com.
(19) Victor, D., ‘The politics of fossil-fuel subsidies’, International Institute for Sustainable Development, October 2009, http://www.iisd.org.
(20) Clark, D., ‘Fossil fuel subsidies: A tour of the data’, The Guardian, 19 January 2012, http://www.guardian.co.uk.
(21) ‘Fossil fuel and renewable energy subsidies on the rise’, Worldwatch Institute, 21 August 2012, http://www.worldwatch.org.
(22) Swift, A., et al.,  ‘Governments should phase out fossil fuel subsidies or risk lower economic growth, delayed investment in clean energy and unnecessary climate change pollution’, NRDC, June 2012, http://www.nrdc.org.
(23) ‘Fossil fuel subsidies don’t protect the poor’, Oilchange International, May 2012, http://priceofoil.org.
(24) Victor, D., ‘The politics of fossil-fuel subsidies’, International Institute for Sustainable Development, October 2009, http://www.iisd.org.
(25) Plumer, B., ‘Why $775 billion in fossil-fuel subsidies are so hard to scrap’, The Washington Post, 18 June 2012, http://www.washingtonpost.com.
(26) Victor, D., ‘The politics of fossil-fuel subsidies’, International Institute for Sustainable Development, October 2009, http://www.iisd.org.
(27) Swift, A., et al., ‘Governments should phase out fossil fuel subsidies or risk lower economic growth, delayed investment in clean energy and unnecessary climate change pollution’, NRDC, June 2012, http://www.nrdc.org.
(28) Ibid.
(29) Clark, D., ‘Fossil fuel subsidies: A tour of the data’, The Guardian, 19 January 2012, http://www.guardian.co.uk.
(30) Swift, A., et al., ‘Governments should phase out fossil fuel subsidies or risk lower economic growth, delayed investment in clean energy and unnecessary climate change pollution’, NRDC, June 2012, http://www.nrdc.org.
(31) Ibid.