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Fossil Fuel Subsidies Six Times More Than Renewable Energy

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Texas Governor Rick Perry
Republican contender Rick Perry has pledged to end all federal energy subsidies. Photographer: Patrick Semansky/Bloomberg

Nov. 9 (Bloomberg) -- Fossil-fuel consumers worldwide received about six times more government subsidies than were given to the renewable-energy industry, according to the chief adviser to oil-importing nations.

State spending to cut retail prices of gasoline, coal and natural gas rose 36 percent to $409 billion as global energy costs increased, the Paris-based International Energy Agency said today in its World Energy Outlook. Aid for biofuels, wind power and solar energy, rose 10 percent to $66 billion.

While fossil fuels meet about 80 percent of world energy demand, its subsidies are “creating market distortions that encourage wasteful consumption,” the agency said. “The costs of subsidies to fossil fuels generally outweigh the benefits.”

The Group of 20 nations in 2009 pledged to phase out state aid for carbon-based fuels dug or pumped out of the earth. In the U.S., energy subsidies are becoming an issue in next year’s presidential election after Solyndra LLC went bankrupt with $535 million of loan guarantees by the federal government. Republican contender Rick Perry, the governor of Texas, has pledged to end all federal energy subsidies.

Hydroelectric power provided 2.3 percent of energy demand worldwide while biomass and waste supplied 10 percent and other renewable sources contributed 0.8 percent, the IEA said, citing 2009 data. The biggest electricity producer using clean energy is Spain’s Iberdrola SA, which benefits from above-market prices subsidized by consumers and governments.

Saudi Arabia

Nuclear power made up 5.8 percent of total energy use in 2009. State aid to atomic energy wasn´t calculated in the report, nor were subsidies to producers of fossil fuels, due to “data limitations,” the IEA said. The largest oil producer is Saudi Arabian state-owned Saudi Aramco.

G-20 nations spent $160 billion supporting the production and consumption of fossil fuels last year, led by Saudi Arabia’s outlay of $44 billion, the IEA said in its World Energy Outlook. Iran spent the most overall, shelling out $81 billion to support fuel sales.

Seven of the nine G-20 nations the IEA identified as having subsidies for fossil fuel consumers have published plans for eliminating the aid and some have managed to raise energy prices. Still, they have failed to identify many subsidies benefitting producers of fossil fuels which are also covered by the G-20 pledge, the report said.

Phase-Out

“Much remains to be done to fulfill the commitments made in these international forums, both in terms of defining the fossil-fuel subsidies to be phased out and following through with durable and well-designed reform efforts,” it said.

The Organization for Economic Cooperation and Development estimated its member countries gave oil, coal and natural gas producers between $45 billion and $75 billion a year in support for production from 2005 through 2010.

Onshore wind generators will become competitive without subsidies by 2020 in Europe and by 2030 in China, the agency predicted. In the U.S., where the cost of power is reduced by new supplies of shale gas produced by Chesapeake Energy Corp. and ConocoPhillips, wind turbines will need aid until at least 2035.

All other renewable energy sources will also need support for at least 25 years, with total payments projected to reach $250 billion annually by 2035.

Higher-Income Benefit

While governments argue that fossil fuel subsidies are designed to help the poorest members of society, they generally fail to meet that goal, the IEA said. Just 8 percent of aid reached the poorest 20 percent of each country’s population last year.

“Fossil-fuel subsidies as presently constituted tend to be regressive, disproportionately benefiting higher income groups that can afford higher levels of fuel consumption,” the report said. “Social welfare programs are a more effective and less distortionary way of helping the poor than energy subsidies.”

Cutting the payments would also help tackle climate change, the report said. Eliminating subsidies by 2020 would cut global energy demand by 3.9 percent in that year, the equivalent of 600 million tons of oil, the report said. The saving would rise to 4.8 percent by 2035.

Perry’s approach may hurt renewable energy more than fossil fuel producers that have $4 billion of annual subsidies written into the tax code. Aid for oil and coal producers would require congressional action to change while aid for wind and solar power will simply expire, according to Michael Graetz, a tax law professor at Columbia University in New York.

To contact the reporter on this story: Ben Sills in Madrid at bsills@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net

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