Fossil Fuel Subsidies or Demand Reduction?

Subsidies for fossil fuel consumption in 2022 hit a record $1 trillion. At the same time, total fossil fuel spending by the world’s governments last year was more than twice the total investment in renewable energy sources, according to international media.

The increase in subsidies was caused by the turbulence in the energy market, which led to international fuel prices rising far above what consumers paid. Under these circumstances, governments should focus on structural changes that reduce demand for fossil fuels, rather than on emergency aid when fuel prices rise.

However, the IEA found that government measures taken to protect consumers were not well targeted and, while they may have helped mitigate the impact of soaring costs, they artificially maintained the competitiveness of fossil fuels compared to low-emission alternatives.

The findings of the IEA report highlight the problem of governments facing high inflation caused by rising fuel prices, but also appreciate efforts to encourage energy transition.

 

Glasgow Climate Pact cancelled by crisis

Fossil fuel spending by the world’s governments in 2022 was more than twice the total investment in renewables. But these increasing consumption subsidies stand in striking contrast to the Glasgow Climate Pact, which called on countries to phase out inefficient fossil fuel subsidies while providing targeted support to the poorest and most vulnerable consumers.

The Glasgow Climate Pact of November 2021 effectively proposed accelerating efforts to close the 2030 emissions gap, calling for countries to align their commitments with the Paris Agreement targets and with a just transition to net zero CO2 emissions, according to the World Resources Institute.

 

Electricity prices hit by fuel price rises

The IEA found that oil subsidies have increased by about 85%, while subsidies for gas and electricity consumption have doubled. As noted in the IEA’s latest World Energy Outlook report, high fossil fuel prices have been the main reason for the upward pressure on global electricity prices, accounting for 90% of the increase in average global electricity generation costs.

Among fossil fuels, the rise in gas prices accounted for more than 50% of this increase in electricity prices.

 

Support schemes worldwide

Governments around the world have implemented various measures to mitigate the worst effects of the energy crisis, such as capping end-user tariffs, limiting fuel or electricity price increases etc.

The IEA has been monitoring fossil fuel subsidies for many years, identifying where consumers are paying less than the market price of the fuel.

Thus, almost all the consumption subsidies identified were found in emerging and developing economies, and more than half were in fossil fuel exporting countries.

Although most interventions by governments in advanced economies have not met the definition of fossil fuel consumption subsidies, they have still represented a significant loss of fiscal resources. They accounted for an additional $500 billion spent to reduce energy bills in 2022.

 

Price caps and tax eliminations on energy, gas, and fuel

The IEA has seen different ways of setting prices or capping price increases. Therefore:

• The Peruvian government decided in April 2022 to temporarily include several transport fuels in the State Fuel Price Stabilisation Fund to reduce price increases.
• Thailand has introduced a cap on diesel prices of THB 30 (USD 0.85) per litre.
• El Salvador has introduced price caps for gasoline and diesel.
• Egypt has extended the electricity subsidy period, while previously planning not to do so.
• France adopted a ‘tariff shield’ that initially froze retail electricity and gas tariffs for households and then limited the possibility of price increases.
• The South African government froze the general tax on gasoline and diesel from February 2022 and reduced it by ZAR 1.50 (USD 0.9) per litre from April to June 2022.
• Guyana abolished excise duties on gasoline and diesel in March 2022.
• The UK has cut fuel duty.
• Belgium reduced VAT on electricity bills from 21% to 6%.
• Japan has made it easier for those struggling to pay for gas and electricity.
• In Spain, from September 2021, a ‘minimum vital supply’ obligation for utilities has been put in place, ensuring that vulnerable households who cannot pay their electricity bills will not be disconnected for a period of 10 months.
• In India, a subsidy scheme has been implemented to ensure access to liquefied petroleum gas (LPG) for the poorest segments of the population.
• In Germany, the government has implemented several additional payments to help vulnerable communities pay their heating bills (households on housing benefit, apprentices, and students with student loans).
• In South Korea, vouchers for energy expenses – including electricity, gas, LPG, and heating – have been provided to about 1.2 million vulnerable households in 2022.

 

Fossil fuel phase-out, response to rising prices and volatility

Phasing out fossil fuel subsidies is crucial for a successful transition to clean energy, as outlined in the Glasgow Climate Pact, the IEA says in its report.

High and volatile fossil fuel prices highlight the unsustainability of the current energy system and the benefits of energy transitions. Volatility also comes with significant economic and social costs. High fossil fuel prices hit the poor hardest, but subsidies tend to help the wealthiest, the report points out, finally stressing the need to reduce demand for fossil fuels as a more viable measure than subsidies to ease the pressure on consumers caused by rising prices.