Fossil Fuel Subsidies Fall in Gain for Renewables

Countries from Mexico to Germany and Malaysia are increasingly taking advantage of cheap oil by trimming fossil-fuel subsidies, easing the way for renewable power that can help the environment, according to the chief economist of the International Energy Agency.

With the global cost of crude cut by more than half, Fatih Birol said the IEA has scrapped a forecast that had subsidies reaching $660 billion by 2020. In the group’s latest report, fossil fuel producers were paid $548 billion in 2013, a $26.5 billion decline that was the first drop in four years.

At least 27 nations are decreasing or ending the subsidies that hold down costs for fuels used to generate electricity, including coal and natural gas, the IEA reported in November. That’s adding momentum to global efforts to limit greenhouse gases by increasing the use of clean energy.

“In the absence of subsidies, all of the main renewable energy technologies would be competitive with oil-fired plants,” Birol said.

Since gasoline prices are often linked to oil, lower oil prices are allowing politicians even in producing nations such as Iran, Angola and Indonesia to cut payments while limiting the wrath of consumers, according to Birol. Eventually, that could help bring costs for renewable energy, including solar and wind power, to parity with fossil fuels.

“Pricing reforms in energy exporting countries are a particularly delicate matter,” Birol said in an e-mail response to questions. “People often feel entitled to benefit directly from their nation’s resource wealth.”

Market Fluctuations

While lower oil prices may seem like a hindrance to sales of renewables, local and national incentives have generally insulated the clean energy industry from market fluctuations. By reducing fossil fuel subsidies, governments are giving solar and wind power a level playing field on cost at a time when their popularity is growing in response to global warming.

Cuts in subsidies started in 2013 and have gathered pace since. Iran and Angola are among the nations that have boosted state-controlled gasoline prices, while Indonesia raised the cost of liquid petroleum gas or propane at least twice last year, according to the IEA. India deregulated diesel costs, and Ghana abolished fuel subsidies last year.

“Subsidies lead to a distortion of the market in favor of energy sources we can’t afford to support anymore,” Martin Kaiser, the head of international climate politics at the environmental group Greenpeace, said in an interview. “It’s vital subsidies are cut.”

Developed Grids

Scaling back fossil fuels support will benefit low-carbon sources such as solar and wind, especially in nations where power grids aren’t fully developed. In the Middle East, for instance, the IEA says a third of all electricity is generated using subsidized oil, absorbing almost 2 million barrels a day, or about 7 percent of the output of the Organization of Petroleum Exporting Countries.

“Anybody that has consumption subsidies for fossil fuels is looking to remove them now,” said Stephen Kretzmann, the head of Oil Change International, a Washington-based advocate for less fossil fuel use.

Renewable subsidies rose by $11 billion to a record $96.5 billion in 2013, the same year that saw fossil fuel subsidies fall for the first time in four years, according to the IEA.

The shift is sending ripples across the industry. Oil and gas-exporting nations face plummeting income and budget holes, while consuming nations have extra money they can use to invest in cleaner economic growth.

Nations Listed

Nations that have or plan to cut subsidies include Germany, Morocco, Mexico, Egypt and Malaysia. Morocco, which imports all its oil, is seeking to phase out diesel subsidies this year. Mexico raised fuel prices 1.9 percent and may seek further increases, El Universal newspaper reported Jan. 2. Egypt lifted gasoline and electricity prices last year while Malaysia boosted the cost of both motor fuels and electricity.

The IEA’s definition of subsidy covers “government action that lowers the cost of energy production, raises the price received by producers or lowers the price paid by energy consumers.” It excludes the sort of favorable tax treatment countries such as the U.S. and U.K. grant to oil drillers in the Gulf of Mexico and North Sea. By the IEA’s measure Iran, Saudi Arabia, India, Russia, Venezuela, Egypt and Indonesia provide the most generous aid.

“Consumption of oil and natural gas in the U.S. is taxed, not subsidized,” Brian Straessle, a spokesman for the American Petroleum Institute, a Washington-based group that represents oil producers, said in an e-mail response to questions.

Protected Environment

Cutting subsidies saves governments money and allows them to protect the climate at the same time, Kretzmann said.

Oil Change International estimates there are “at least $750 billion, if not $1 trillion” in annual fossil fuel subsidies, Kretzmann said, citing internal calculations using IEA, Organization for Economic Cooperation and Development and national data.

While the low oil price may delay some clean-energy projects, most of them are going ahead, said Christiana Figueres, the United Nation’s top climate official. Moreover, it’s making unfeasible the most costly drilling projects like those in the Arctic, she said Jan. 22 in Davos.

“You’re already beginning to see that the expensive oil exploration is being scrapped,” Figueres told a panel at the World Economic Forum. “That’s very good for the climate and opens the space for more renewables.”

Still, some governments are likely to channel money into domestic production as a way to protect jobs, said Konstantinos Chalvatzis, a lecturer in business and climate change at the University of East Anglia. He expects the U.K. to cut taxes for North Sea drillers that are suffering “big time.”

“Companies will carry on investments in renewables even though oil is cheap,” Chalvatzis said by phone. “And once the oil price rises then the business case for renewables gets even better.”

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE