Page 4 - AfrElec Week 11 2023

AfrElec COMMENTARY AfrElec

Fossil fuel subsidies hit record

high of $1 trillion in 2022

The fossil fuel spending by world governments in 2022 was more than twice
the total investment in renewable energy sources.

GLOBAL ACCORDING to the International Energy around 85%, while natural gas and electricity
Agency (IEA), worldwide subsidies for fossil fuel consumption subsidies more than doubled. As
consumption increased dramatically in 2022, noted in the latest IEA’s World Energy Outlook,
WHAT: surpassing $1 trillion for the first time. high fossil fuel prices were the main reason for
The 2022 subsidies, This surge in subsidies was caused by energy upward pressure on global electricity prices,
driven by the global market turbulence, which led to international accounting for 90% of the rise in the average
energy crisis resulting fuel prices soaring well above what many con- costs of electricity generation worldwide. Natu-
from Russia’s invasion of sumers paid. Consumption subsidies are energy ral gas alone accounted for more than 50%.
Ukraine, were twice the price cuts for consumers, for example setting The IEA only looked at consumption subsi-
levels seen in 2021 and fixed prices of retail gasoline. dies and did not account for production subsi-
almost five times those The 2022 subsidies, driven by the global dies, such as tax breaks or direct payments that
in 2020. energy crisis resulting from Russia’s invasion of reduce the cost of producing fossil fuels.
Ukraine, were twice the levels seen in 2021 and As long ago as 2020, before the current rise
WHY: almost five times those in 2020. This is according in consumption subsidies, the International
The surge in subsidies to the IEA in a recently published report, Fossil Monetary Fund (IMF) found that global fossil
was caused by energy Fuel Consumption Subsidies 2022. fuel subsidies were $5.9 trillion, or 6.8% of GDP,
market turbulence, which However, the IEA found that the government and were expected to climb to 7.4% of GDP in
led to international fuel measures taken to protect consumers were not 2025 as the share of fuel consumption in emerg-
prices soaring well above well-targeted, and although they may have ing markets – where price gaps are generally
what many consumers helped to alleviate the impact of skyrocketing larger – continued to rise. Just 8% of the 2020
paid. costs, they artificially maintained the competi- subsidy reflected undercharging for supply costs
tiveness of fossil fuels compared with low-emis- (explicit subsidies) and 9% for undercharging for
WHAT NEXT: sions alternatives. environmental costs and foregone consumption Nearly all of the
Phasing out fossil fuel The finding of the report underlines the prob- taxes (implicit subsidies).
subsidies is crucial for a lem of governments dealing with high fuel infla- The IEA has been monitoring fossil fuel consumption
successful clean energy tion, while still trying to encourage the energy subsidies for many years, identifying situations subsidies
transition, as emphasised transition. The fossil fuel spending by world where consumers pay less than the market price
in the Glasgow Climate governments in 2022 – not just consumption of fuel. Preliminary estimates for 2022 indicated identified were
Pact. subsidies but total spending – was more than that oil subsidies increased by around 85%,
twice the total investment in renewable energy while subsidies for natural gas and electricity found in emerging
sources, according to BloombergNEF. consumption more than doubled, said the new and developing
These rising consumption subsidies indeed report.
contrast sharply with the Glasgow Climate Pact, Governments worldwide implemented var- economies.
which called for countries to phase out inefficient ious measures to mitigate the worst effects of
fossil fuel subsidies while providing targeted the energy crisis, such as fixing end-user tariffs,
support to the poorest and most vulnerable. capping fuel or electricity price increases, and
The November 2021 Glasgow Climate Pact introducing price ceilings. However, many sub-
effectively proposed to accelerate efforts to close sidy reform programmes were interrupted, and
the 2030 emissions gap by asking countries to some countries extended existing subsidies.
align their commitments with Paris Agree- Nearly all of the consumption subsidies
ment goals and with a just transition to net zero, identified were found in emerging and devel-
according to the World Resources Institute. oping economies, with over half in fossil-fuel
exporting countries. While most interventions
Consumption, not production in advanced economies did not meet the defi-
The pact called on countries to “phase out … nition of fossil fuel consumption subsidies, they
inefficient fossil fuel subsidies, while provid- were still a significant drain on fiscal resources,
ing targeted support to the poorest and most with over $500bn in extra spending committed
vulnerable”. to reducing energy bills in 2022.
The IEA found that oil subsidies grew by The IEA logged various ways of fixing prices

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