‘Cut Fossil Fuel Subsidies but Compensate the Poor’

Posted on 14 December 2009 by editor

Credit: Claudia Ciobanu/IPS

Credit: Claudia Ciobanu/IPS

By Claudia Ciobanu

COPENHAGEN (IPS/TerraViva) – Cutting government subsidies for fossil energy could lead to a 10 percent reduction in greenhouse gas emissions by 2050 as compared to 1990 levels, says a recent study by the Organisation for Economic Cooperation and Development.

That represents a fifth of the maximum global commitment of emission reductions envisaged by negotiators at the COP15, and could play an important part in keeping global warming under 2 degrees Celsius above preindustrial levels.

Governments around the world are currently spending an estimated 500 to 700 billion US dollars annually to subsidise fossil fuels. This represents five times the amount of money countries worldwide spend on development assistance.

The largest part of these subsidies is being allocated by governments of developing countries.

According to estimates by the Environmental Law Institute, the United States government has given over 72 billion dollars in subsidies for fossil energy between 2002 and 2008.

However, in September 2009, during a G20 summit in Pittsburgh, Pennsylvania in the U.S., the leaders of the 20 most important industrialised and developing economies in the world made a commitment to phase out subsidies for fossil energy in the medium term.

Figuring out a means to adhere to this commitment may represent a challenge “as important as what happens next door (during the CoP15 negotiations),” said Per Callesen, deputy permanent secretary at the Danish ministry of finance, speaking on Monday at Crowne Plaza hotel, close to the Bella Center (where the CoP15 conference is taking place).

“We are pushing the pedal with fossil energy subsidies and the push of the pedal is much stronger than the brakes,’’ he added.

While, from an environmental perspective, it makes complete sense to stop subsidising fossil fuels, governments are reluctant to engage in such radical reforms because the resulting rise in fuel prices could lose them political capital.

More importantly, many are worried about the consequences that eliminating these subsidies could have for poor households around the world as well as for the employees of industries in the fossil energy sector.

Fatih Birol, chief economist at the International Energy Agency, also speaking at Crowne Plaza on Monday, argued that subsidies for fossil energy do not actually benefit the poor, but the middle classes, so there is no reason to worry about negative impacts on the poor if subsidies are scrapped.
In Birol’s view, the main beneficiaries of fossil subsidies are the middle classes; the poorest do not own cars and in some cases do not even have access to electricity.

Birol’s argument was supported by former Costa Rican president Jose Maria Figueres, who is renowned for breaking the social-democratic line of his party to implement liberal economic reforms.

Figueres shared with the Copenhagen audience the political costs he had to pay for cutting subsidies, and argued that “the problem of the 80 percent emission reductions by 2050 can be solved only through phasing out fossil energy subsidies and improving energy efficiency.”

Figueres delivered an impassioned speech against subsidies in general. But he did not address the question of the possible negative social impacts that rising fuel costs could have on the poor.

Clear policies must be set out to make sure that some of this money is directly channeled to the most vulnerable in society, argued Callesen and William Pizer, deputy assistant for environment and energy at the U.S. Treasury Department.

“It is clear that the countries getting rid of fossil fuels subsidies must move to income support,” said Callesen, in response to a question from TerraViva. “A state system capable of administering state support for the low income families must be put in place.”

Income support measures to protect the most vulnerable against the negative impact of rising fuel costs would cost governments much less that what they now spend on subsidising fossil energy, Callesen said. “For every dollar saved from getting rid of subsidies, only 0.2 or 0.3 would need to be spent on efficient measures of income support,” he estimated.

Pizer gave examples of policies implemented by the administration of U.S. President Barack Obama to help poor households adapt to the reductions in fossil fuel subsidies which the new administration is trying to implement.

Poor households, he said, are receiving financial help in order to pay for their heating bills, and insulation for houses of low-income families is done with state support. Pizer put the cost of such measures at five billion dollars.

“It would be better and cheaper if governments compensated only the poor, not everyone,’’ Pizer told TerraViva. “And for the poor it is better to get one dollar directly rather than for it to be given to fossil fuel industries.”

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