Page 4 - AsiaElec Week 10 2023

AsiaElec COMMENTARY AsiaElec

Fossil fuel consumption subsidies

hit record $1 trillion

Pain ahead for many nations in Asia and elsewhere as excesssive subsidies must
be cut before full and proper green transition can take place

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

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