Rhein on Energy and Climate

Many countries continue subsidising the use of petrol and fuel, among these most oil producing countries, China and emerging countries like India, Malaysia, Taiwan and Sri Lanka.

The level of subsidies is generally quite substantial. Prices for petrol and fuel may be subsidised to less than half of, in the case of oil producers like Iran, Venezuela or Kuwait to as low as a quarter of present world market prices.

The effect of such subsidies is threefold.

  • They constitute a burden upon national budgets.
  • They offer an unfair competitive advantage.
  • They prevent necessary adjustments to a low-carbon economy.

The international community does not have to worry much about whatever budgetary impacts, certainly not for oil producing countries that bathe in oil revenues. Non-oil countries will be forced to reduce or abandon the subsidies, as world market prices for oil rise. Indonesia is a case in point. It has benefited from the most recent surge of oil prices to end its subsidy regime.

Thanks to its high oil subsidies, China continues to maintain a domestic oil price of $ 80/barrel. This gives its petrochemicals, air-traffic; cargo ships etc. a substantial advantage over international competitors. It is up to the EU and other affected countries to raise the case with the WTO and impose countervailing duties. But so far, the impact of these subsidies does not seem to hurt enough.

The international community should take issue with oil subsidies because of their negative impact on the global climate. China is the major villain of the game. Its oil subsidies amount to 1 percent of the GDP, roughly $ 30 billion, which is huge. No surprise that energy efficiency remains low and renewable energies find it difficult to compete with low-priced fossil fuels.

Oil subsidies have escaped the attention of the ongoing international debate on climate policy. One of the most effective instruments to cut C02 emissions is by making the use of fossil energy more expensive. Continuing oil subsidies is perverse from any perspective.

At the Copenhagen Climate Conference in December 2009 all countries, without exception, should commit themselves to abolish subsidies on the use of any fossil energy, in particular oil, before 2012.

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Comments

  1. thanks for your comment. Let me respond to your two points.

    1. Oil subsidies are no answer to poverty. They benefits those who are well enough off to afford a car. The money for the subsidies must come from taxation. It can be put to better use to help the poor, e. g. by spending on health, mother and child care and education. That is infinitely better than wasting it on petrol subsidies. Indonesia has well understood this, other countries will follow suit. Sooner or later with rising oil prices they can simply no longer afford to subsidise petrol
    Whether we like it or not, prices rise to signal there is a scarcity of supply: They tell us to change our behaviour and reduce demand.

    2. It is true China and a bit less are among the major subsiding countries. But the oil countries are much worse. China and India are too big and therefore exert too much influence on the the energy market and C02 emissions, to which they contribute to almost one third. No effective solution of any global issue is any longer possible without their cooperation. We can therefore not ignore what they are doing, no less than what the USA or EU are doing.

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