Groups call for fossil fuel subsidy reform

Oct. 5, 2011, Paris, France – The
Organization for Economic Cooperation and Development (OECD) and the
International Energy Agency (IEA) recommend reforming fossil fuel subsidies to
improve the economy and the environment.

Governments and taxpayers spent about
US$0.5 trillion in 2010 supporting the production and consumption of fossil
fuels. Removing inefficient subsidies would raise national revenues and reduce
greenhouse gas emissions, according to OECD and IEA analyses. The G20 leaders in
2009 agreed to phase out subsidies that “encourage wasteful consumption, reduce
our energy security, impede investment in clean energy sources, and undermine
efforts to deal with the threat of climate change.”

OECD secretary-general Angel Gurría and IEA
executive director Maria van der Hoeven emphasized that subsidies to fossil
fuel consumers often fail to meet their intended objectives: alleviating energy
poverty or promoting economic development. Instead they create wasteful use of
energy, contribute to price volatility by blurring market signals, encourage
fuel smuggling, and decrease the competitiveness of renewables and energy
efficient technologies.

“In a period of persistently high energy
prices, subsidies represent a significant economic liability,” says van der
Hoeven. She notes that IEA estimates that subsidies that artificially reduce
the price of fossil fuels amounted to US$409 billion in 2010, almost US$110
billion higher than in 2009. This is based on the IEA’s global survey to
identify economies that artificially lower end-use prices for fossil fuels to
below the full cost of supply.

Phasing out fossil-fuel subsidies will also
provide an impetus for investment, growth, and jobs in renewable energy and
energy efficiency. Despite the many benefits of phasing out fossil fuel
subsidies, reform efforts have been hampered by a lack of information on the
support measures in place, particularly in OECD countries. To assist
governments’ understanding of the nature and scale of their policies supporting
fossil fuels, the OECD has compiled the first Inventory of Estimated Budgetary
Support and Tax Expenditures for Fossil Fuels. With detailed information on
more than 250 mechanisms that support fossil fuel production and use in OECD
countries, the Inventory will be updated regularly and expanded over time to
cover more countries and more support mechanisms.

Covering 24 countries, which account for
about 95% of OECD’s total primary energy supply, the Inventory shows that
54% of this support was for petroleum. Overall, the support to fossil fuel
production and consumption in OECD countries was US$45–75 billion annually
during the 2005–2010 period. Other examples from the Inventory include:

• Germany’s historically generous subsidies
  to hard-coal mining fell from EUR 4.9 billion in 1999 to EUR 2.1 billion in
  2009, and should be phased-out entirely by 2018.
• France gradually phased out its support to
  the coal industry accompanied by measures to address the social costs
  associated with mine closures. Support went from more than EUR 1 billion in
  1990 to EUR 92 million in 2007 and then ended.
• Government energy support to consumers in
  Mexico was US$629 million in 2009, but will decrease as the new national energy
  strategy is put into place and the government better targets subsidies directly
  to low-income households, rather than to energy use.
• In the United States, where support for
  energy producers was about US$5 billion in 2009, the 2012 federal budget
  proposes eliminating a broad group of subsidies, thereby increasing government
  revenues by more than US$36 billion.

Work by the IEA, to be published in the
World Energy Outlook 2011 on November 9, demonstrates that phasing out
subsidies to fossil fuels, if well executed, can generate important economic,
energy security, and environmental benefits. Nearly half of the countries
identified by the IEA as artificially lowering the price of energy to below the
full cost of supply have taken steps since the since the beginning of 2010 to
rationalize energy prices.

More OECD and IEA work on fossil fuel
subsidies can be found at: www.oecd.org/iea-oecd-ffss.