Page 9 - MEOG Week 09 2023

MEOG POLICY & SECURITY MEOG

Subsidies hit record high $1 trillion in 2022

SUBSIDIES ACCORDING to the International Energy fuel subsidies were $5.9 trillion, or 6.8% of GDP,
Agency (IEA), worldwide subsidies for fossil fuel and were expected to climb to 7.4% of GDP in
consumption increased dramatically in 2022, 2025 as the share of fuel consumption in emerg-
surpassing $1 trillion for the first time. ing markets – where price gaps are generally
This surge in subsidies was caused by energy larger – continued to rise. Just 8% of the 2020
market turbulence, which led to international subsidy reflected undercharging for supply costs
fuel prices soaring well above what many con- (explicit subsidies) and 9% for undercharging for
sumers paid. Consumption subsidies are energy environmental costs and foregone consumption
price cuts for consumers, for example setting taxes (implicit subsidies).
fixed prices of retail gasoline. The IEA has been monitoring fossil fuel
The 2022 subsidies, driven by the global subsidies for many years, identifying situations
energy crisis resulting from Russia’s invasion of where consumers pay less than the market price
Ukraine, were twice the levels seen in 2021 and of fuel. Preliminary estimates for 2022 indicated
almost five times those in 2020. This is according that oil subsidies increased by around 85%,
to the IEA in a just published report, Fossil Fuel while subsidies for natural gas and electricity
Consumption Subsidies 2022. consumption more than doubled, said the new
However, the IEA found that the government report.
measures taken to protect consumers were not Governments worldwide implemented var-
well-targeted, and although they may have ious measures to mitigate the worst effects of
helped to alleviate the impact of skyrocketing the energy crisis, such as fixing end-user tariffs,
costs, they artificially maintained the competi- capping fuel or electricity price increases, and
tiveness of fossil fuels compared with low-emis- introducing price ceilings. However, many sub-
sions alternatives. sidy reform programmes were interrupted, and
The finding of the report underlines the prob- some countries extended existing subsidies.
lem of governments dealing with high fuel infla- Nearly all of the consumption subsidies
tion, while still trying to encourage the energy identified were found in emerging and devel-
transition. The fossil fuel spending by world oping economies, with over half in fossil-fuel
governments in 2022 – not just consumption exporting countries. While most interventions
subsidies but total spending – was more than in advanced economies did not meet the defi-
twice the total investment in renewable energy nition of fossil fuel consumption subsidies, they
sources, according to BloombergNEF. were still a significant drain on fiscal resources,
These rising consumption subsidies indeed with over $500bn in extra spending committed
contrast sharply with the Glasgow Climate Pact, to reducing energy bills in 2022.
which called for countries to phase out inefficient The IEA logged various ways of fixing prices
fossil fuel subsidies while providing targeted or capping price increases.
support to the poorest and most vulnerable. The Peruvian government decided in April
The November 2021 Glasgow Climate Pact 2022 to temporarily include a number of trans-
effectively proposed to accelerate efforts to close port fuels in the State Fuel Price Stabilisation
the 2030 emissions gap by asking countries to Fund to reduce the rise in prices. Thailand intro-
align their commitments with Paris Agree- duced a diesel price cap of THB30 ($0.85) per
ment goals and with a just transition to net zero, litre.
according to the World Resources Institute. El Salvador introduced price caps for gasoline
The pact called on countries to “phase out and diesel products. Egypt extended the period
… inefficient fossil fuel subsidies, while provid- for subsidising electricity, while it had previously
ing targeted support to the poorest and most been planning to stop doing so by the end of the
vulnerable”. fiscal year 2021-2022.
The IEA found that oil subsidies grew by France enacted a ‘tariff shield’ that ini-
around 85%, while natural gas and electricity tially froze electricity and gas retail tariffs for
consumption subsidies more than doubled. As households and then limited the possibility for
noted in the latest IEA’s World Energy Outlook, increases in price.
high fossil fuel prices were the main reason for Exemptions from various taxes and levies
upward pressure on global electricity prices, were common. The South African government
accounting for 90% of the rise in the average froze the general fuel levy on petrol and diesel
costs of electricity generation worldwide. Natu- from February 2022, and reduced it by ZAR1.50
ral gas alone accounted for more than 50%. ($0.9) per litre from April to June 2022.
The IEA only looked at consumption subsi- Guyana removed the excise tax on gasoline
dies and did not account for production subsi- and diesel in March. The United Kingdom cut
dies, such as tax breaks or direct payments that fuel duty, and Belgium reduced the VAT on elec-
reduce the cost of producing fossil fuels. tricity bills from 21% to 6%.
As long ago as 2020, before the current rise Easing payment terms or banning disconnec-
in consumption subsidies, the International tions were also in evidence. Japan eased gas and
Monetary Fund (IMF) found that global fossil electricity payment terms for those struggling

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