A WORD ABOUT ENERGY SUBSIDIES

While the U.S. enwraps itself in the entertaining distractions of a presidential horse race and debates the irrelevant issue of pointless drilling for a useless amount of oil while continuing to consume an absurdly excessive proportion of the world’s dwindling reserves, the rest of the world grapples with the serious question of how to extend its noble if so far ineffective struggle against global climate change.

From the courageous thinkers at the UN who are working against all the world’s forces of inertia and selfishness to make the Clean Development Mechanism (CDM) a workable part of the EU Emissions Trading Scheme (ETS) comes a bold new idea: A level playing field.

Reforming Energy Subsidies; Opportunities to Contribute to the Climate Change Agenda is a new United Nations Environment Program (UNEP) report calling for the end of energy subsidies.

This may come as a surprise to NewEnergyNews readers who so often see on this web page arguments on behalf of New Energy incentives like production tax credits (PTCs) and investment tax credits (ITCs). In a country that has long subsidized its fossil fuels industries, subsidies and incentives are the only way New Energy can get in the game.

There IS a simpler way to go: End ALL subsidies. Let every energy compete on a level playing field. Make every energy pay for the costs it imposes on society and let consumers pick the winners.

Now bear in mind, this means coal must pay for its greenhouse gas emissions (GhGs) and the cancers and lung diseases it causes and the environmental degradations it wreaks.

Nuclear must pay for its own insurance and it must pay the costs of the waste it generates without a safe place for storage or disposal.

Oil and gas can no longer have its golden gimmick, protecting it from U.S. taxes. And it can no longer have its depletion allowance, an "inventory" deduction the U.S. tax code granted the oil and gas industry for selling off its customers' supplies of oil and gas. The solar and wind and wave energy industries need tax credits but have need to deduct for the sun and wind they consume, as the next day sees a completely replenished "inventory."

When Old Energy gives up its subsidies, New Energy will not need tax credits. New wind is now the economically preferred source of new power generation in the U.S. and solar power plants are approaching grid parity.

The new UNEP report came in response to concerns with how EU subsidies for ethanol and other AGROfuels have had serious unintended consequences.

The report’s 4 Key Messages: (1) Subsidies often cause increased consumption and waste of energy, worsening environmental harms. (2) Subsidies burden government finances, weakening economic growth and impeding investment in social equity. (3) Subsidies undermine private and public investment in the energy sector, slowing the expansion of distribution networks and the development of New Energy technologies and distributed generation. (4) Despite intent, subsidies often fail to help the needy and often benefit the affluent.

Achim Steiner, UNEP director and U.N. undersecretary general: "In the final analysis, many fossil fuel subsidies are introduced for political reasons but are simply propping up and perpetuating inefficiencies in the global economy…"

From the UNEP report. (click to enlarge)

UN urges phasing out energy subsidies
Arthur Max, August 26, 2008 (AP via Yahoo News)

WHO
The United Nations Environment Program (UNEP)

WHAT
Reforming Energy Subsidies; Opportunities to Contribute to the Climate Change Agenda is a new report from the UNEP calling for the phase-out of all subsidies to Old Energy or, at least, significant reforms in existing subsidies.

From the UNEP report. (click to enlarge)

WHEN
- Last year: Riots in Myanmar when authorities short of funds raised fuel prices 500%.
- Last few months: India, China, and Indonesia were forced to cut fuel subsidies due to rising oil prices.
- The report was presented at 2008’s 3rd UN conference to work out details of the Kyoto Protocols’ next phase, beginning in 2013.

WHERE
- Top 10 fossil fuel-subsidizing nations: Russia, Iran, China, Saudi Arabia, India, Indonesia, Ukraine, Egypt, Venezuela, Kazahkstan.
- The Indonesian government’s direct spending on petroleum products and electricity is close to one-quarter of its budget, 5% of the country’s GDP, and it has led to acute pressure on the government budget.
- Indonesia and Yemen currently spend more on oil subsidies alone than on health and
education combined.
- Cuba subsidised oil and ended up rationing it.
- Iran, a major oil exporter, had to import 40% of its gasoline in 2006 to meet demand for subsidised fuel.
- The conference at which the UNEP report was presented was in Accra, Ghana.

WHY
- The best subsidies must be (1) Well-targeted; (2) Efficient; (3) Soundly based;
(4) Practical; (5) Transparent; (6) Limited in time.
- Justifications for subsidies: (1) To protect a domestic industry and promote jobs, (2) to stimulate economic development for national and social unity, (3) to cut import dependence and build energy-security, (4) to make energy more affordable and raise living standards, and (5) to protect the environment.
- Governments spend as much as $300 billion a year total in subsidies that encourage consumption and discourage efficiency.
- Losses of efficicency due to subsidies: (1) Lower energy prices lead to more energy consumption and discourage conservation. (2) Lower prices create lower returns to suppliers and discourage improvements to infrastructure, resulting in old, dirty technology. (3) Subsidies drain government finances. (3) Caps below “market-clearing levels” may lead to shortages and costly rationing. (4) Consumption subsidies boost import demand or cut energy available for export, worsening balance of payments and energy supply security. (5) Subsidies encourage smuggling. (6) Subsidies to Old Energy undermines the development of New Energy.
- Subsidies do not help the poor because (1) the poorest cannot afford even subsidised energy or may have no physical access to it, (2) the poorest do not use enough energy for a subsidy to matter much (while the rich use much and therefore benefit much), and (3) subsidies often lead to rationing and rationing benefits the more affluent and the black market.
- Reforms: (1) Should be introduced in a gradual, programmed way, easing harms. (Ex: Subsidies to coal in France and Germany.) (2) Should have targeted compensating
Measures to those whose losses are significant. (3) Should be justified clearly by leaders to counter political inertia and opposition.

From the UNEP report. (click to enlarge)

QUOTES
- The Report: “An energy subsidy is any government action that influences energy market outcomes by lowering the cost of energy production, raising the price received by energy producers or lowering the price paid by energy consumers.”
- The Report: “A good subsidy is one that enhances access to sustainable modern energy or has a positive impact on the environment, while sustaining incentives for efficient delivery and consumption.”
- The Report: “Eliminating environmentally harmful subsidies must play a central role in national efforts to achieve a long-term transition to a truly sustainable and
secure energy system.”