Energy subsidies

Energy subsidies

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Energy subsidies are measures that keep prices for consumers below market levels or for producers above market levels, or reduce costs for consumers and producers. Energy subsidies may be direct cash transfers to producers, consumers or related bodies, as well as indirect support mechanisms, as tax exemptions and rebates, price controls, trade restrictions, planning consent and limits on market access. They may include also energy conservation subsidies.


Main arguments for energy subsidies are:
  • Security of supply - subsidies are used to ensure adequate domestic supply by supporting indigenous fuel production in order to reduce import dependency, or supporting overseas activities of national energy companies.
  • Environmental improvement - subsidies are used to reduce pollution, including different emissions, and to fulfil international obligations (e.g. Kyoto Protocol
    Kyoto Protocol
    The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change , aimed at fighting global warming...

  • Economic benefits - subsidies in the form of reduced prices are used to stimulate particular economic sectors or segments of the population, e.g. alleviating poverty and increasing access to energy in developing countries.
  • Employment and social benefits - subsidies are used to maintain employment, especially in periods of economic transition.

Main arguments against energy subsidies are:
  • Some energy subsidies counter the goal of sustainable development, as they may lead to higher consumption and waste, exacerbating the harmful effects of energy use on the environment, create a heavy burden on government finances and weaken the potential for economies to grow, undermine private and public investment in the energy sector.
  • Impede the expansion of distribution networks and the development of more environmentally benign energy technologies, and do not always help the people that need them most.
  • The study conducted by the World Bank finds that subsidies to the large commercial businesses that dominate the energy sector are not justified. However, under some circumstances it is reasonable to use subsidies to promote access to energy for the poorest households in developing countries. Energy subsidies should encourage access to the modern energy sources, not to cover operating costs of companies. The study conducted by the World Resource Institute finds that energy subsidies often go to capital intensive projects at the expense of smaller or distributed alternatives.

Types of energy subsidies are:
  • Direct financial transfers - grants to producers; grants to consumers; low-interest or preferential loans to producers.
  • Preferential tax treatments - rebates or exemption on royalties, duties, producer levies and tariffs; tax credit; accelerated depreciation allowances on energy supply equipment.
  • Trade restrictions - quota, technical restrictions and trade embargoes.
  • Energy-related services provided by government at less than full cost - direct investment in energy infrastructure; public research and development.
  • Regulation of the energy sector - demand guarantees and mandated deployment rates; price controls; market-access restrictions; preferential planning consent and controls over access to resources.
  • Failure to impose external costs - environmental externality costs; energy security risks and price volatility costs.
  • Depletion Allowance - allows a deduction from gross income of up to ~27% for the depletion of exhaustible resources (oil,gas,minerals).

Allocation of subsidies

A 2009 study by the Environmental Law Institute assessed the size and structure of U.S. energy subsidies over the 2002-2008 period. The study estimated that subsidies to fossil-fuel based sources amounted to approximately $72 billion over this period and subsidies to renewable fuel sources totaled $29 billion. The study did not assess subsidies supporting nuclear energy. The three largest fossil fuel subsidies were:
  1. List item Foreign tax credit ($15.3 Billion)
  2. List item Credit for production of non-conventional fuels ($14.1 Billion)
  3. List item Oil and Gas exploration and development expensing ($7.1 billion)

The three largest renewable fuel subsidies were:
  1. List item Alcohol Credit for Fuel Excise Tax ($11,577 Billion)
  2. List item Renewable Electricity Production Credit ($5,224 Billion)
  3. List item Corn-Based Ethanol ($5,007 Billion)

History shows that no energy sector was developed without subsidies.

The most important subsidies to the nuclear industry have not involved cash payments. Rather, they have shifted construction costs and operating risks from investors to taxpayers and ratepayers, burdening them with an array of risks including cost overruns, defaults to accidents, and nuclear waste management. This approach has remained remarkably consistent throughout the nuclear industry’s history, and distorts market choices that would otherwise favor less risky energy investments.

Many energy analysts have suggested that energy subsidies need to be shifted away from mature and established industries and towards high growth clean energy. They also suggest that such subsidies need to be reliable, long-term and consistent, to avoid the periodic difficulties that the wind industry in the USA has had.

According to the OECD, subsidies supporting fossil fuels, particularly coal and oil, represent greater threats to the environment than subsidies to renewable energy. Subsidies to nuclear power contribute to unique environmental and safety issues, related mostly to the risk of high-level environmental damage, although nuclear power contributes positively to the environment in the areas of air pollution and climate change. Subsidies to renewable energy are generally considered more environmentally beneficial, although the full range of environmental effects should to be taken into account.

In 2011, IEA chief economist Faith Birol said the current $409 billion equivalent of fossil fuel subsidies are encouraging a wasteful use of energy, and that the cuts in subsidies is the biggest policy item that would help renewable energies get more market share and reduce CO2 emissions.

IEA position on subsidies

According to IEA
IEA can stand for several different things, such as those listed here:* Institute of Economic Affairs* Institute of International and European Affairs, formerly the Institute of European Affairs* Institute of Ethnology and Anthropology, Moscow...

 (2011) energy subsidies artificially lower the price of energy paid by consumers, raise the price received by producers or lower the cost of production. "Fossil fuels subsidies costs generally outweigh the benefits. Subsidies to renewables and low-carbon energy technologies can bring long-term economic and environmental benefits". In November 2011, an IEA report entitled Deploying Renewables 2011 said "subsidies in green energy technologies that were not yet competitive are justified in order to give an incentive to investing into technologies with clear environmental and energy security benefits". The IEA's report disagreed with claims that renewable energy technologies are only viable through costly subsidies and not able to produce energy reliably to meet demand. "A portfolio of renewable energy technologies is becoming cost-competitive in an increasingly broad range of circumstances, in some cases providing investment opportunities without the need for specific economic support," the IEA said, and added that "cost reductions in critical technologies, such as wind and solar, are set to continue."

Fossil-fuel consumption subsidies were $409 billion in 2010, oil products ca half of it. Renewable-energy subsidies were $66 billion in 2010 and will reach according to IEA $250 billion by 2035. Renewable energy is subsidised in order to compete in the market, increase their volume and develop the technology so that the subsidies become unnecessary with the development. Eliminating fossil-fuel subsidies could bring economic and environmental benefits. Phasing out fossil-fuel subsidies by 2020 would cut primary energy demand 5%. Since the start of 2010, at least 15 countries have taken steps to phase out fossil-fuel subsidies. According to IEA onshore wind may become competitive around 2020 in the European Union.

See also

  • Feed-in tariff
    Feed-in Tariff
    A feed-in tariff is a policy mechanism designed to accelerate investment in renewable energy technologies. It achieves this by offering long-term contracts to renewable energy producers, typically based on the cost of generation of each technology...

  • Renewable Energy Certificates
  • Renewable energy payments
    Renewable energy payments
    Renewable Energy Payments are a competitive alternative to Renewable Energy Credits .Although the intent with both methods is the same, to stimulate growth in the alternative and renewable energy space, REP's have proven to offer benefits to local jobs, businesses and economies while making the...

  • Financial incentives for photovoltaics