Reducing Shell Games with Energy Subsidies

Today, many governments simultaneously subsidize fossil fuels and clean energy. The fossil fuel subsidies tend to be hidden and complex, but the solar and wind subsidies are relatively transparent. This can create a shell game-like effect in which fossil fuel subsidies are embedded into business as usual while solar and wind subsidies are visible and are weakened.

International Institute for Sustainable Development (IISD) published a paper in December outlining how fossil fuel subsidies can make solar and wind power less competitive than they would be in a free market. The paper, “The Impact of Fossil Fuel Subsidies on Renewable Energy Generation,” takes a bird’s-eye view of global markets without focusing on specific countries.

“All subsidies have the potential for negative and positive consequences,” said Richard Bridle, coauthor of the report and project researcher at IISD. “The term subsidy really has negative connotations. But for us, it’s a neutral term to describe any payment or revenue for government.”

Subsidies can produce employment, reduce energy poverty, and support key industries, Bridle said.

Fossil fuel subsidies tend to operate behind a curtain of obscurity, Bridle said. Governments subsidize fossil fuels through providing tax breaks, land and mineral rights, low-cost finance, and sovereign guarantees. Because fossil fuels benefit from such a complex system of incentives, it is quite complicated to say how much this affects the price of producing or consuming a given gallon of gasoline.

Solar and wind energy subsidies, in comparison, are relatively transparent. Bridle said feed-in tariffs, tax credits, and other renewable energy incentives are relatively easy to track and document.

Weighing Costs and Benefits

According to Bridle, the key question to ask with any given subsidy is: Does this subsidy have more costs than benefits?

“The justification for any given subsidy has to rely on a case-by-case analysis,” Bridle said.

The report said this cost-benefit equation should account for health and environmental consequences – also known as externalities. Policy decisions should require attaching a price to carbon dioxide and estimating health impacts.

“We see numerous examples where there are clear negative externalities from fossil fuel use,” Bridle said. “Placing a price on that pollution clearly makes sense. We view that as being a first, best solution. Putting a price on carbon is a key challenge at the moment.”

The report said fossil fuels’ emissions of carbon monoxide, nitrogen oxides, sulfur oxides, hydrocarbons and particulates produce many health and environmental effects that can damage local communities and ecosystems.

Removing Subsidies Safely

According to the report, many justifications exist for fossil fuel subsidies to remain as they are today. These include energy access for the poor, economic development, small business growth, energy security, and support for energy-intensive manufacturing.

But Bridle takes a different perspective. “Fossil fuel subsidies disproportionately benefit the rich in society. Generally, the rich tend to use more fossil fuels – so if fossil fuels are subsidized, they tend to reap the benefits more.”

However, fossil fuel subsidies affect low-income communities too. “The poor tend to notice fossil fuel subsidy removal and can feel that very acutely,” Bridle said. “Reforms have to be designed so the overall impact on vulnerable groups is positive.”

Bridle recommends reallocating fossil fuel subsidies toward social programs, health and education. “There is an opportunity to provide additional public services.”

Subsidies can also reduce industries’ motivation to be efficient, Bridle said.

Exploring Examples

A casual glance at this report might imply there is a directly inverse relationship between fossil fuel subsidies and renewable energy’s competitiveness. However, Bridle explained this is not as simple as it looks. The exact scenario will vary from nation to nation.

In Tunisia, Bridle said, political pressure to keep fossil fuel prices low has led to subsidies for the nation’s centralized fossil fuel importer. To compete, wind power producers must keep their prices low. This makes wind energy less competitive.

In contrast, in Jordan, a decrease in fossil fuel supplies from Egypt has led a major utility to absorb the costs of international purchasing. The Jordanian government extended a loan to the utility to address this problem. Bridle said there is no evidence this has impacted interest in solar or wind energy directly, but the utility’s resources for innovation may be constrained.

Bridle said IISD’s next report on this topic will provide more concrete data and specific case examples.

Preventing Price Volatility

Why are oil’s low prices not affecting interest in solar investment substantially? Bridle responded that oil prices are quite volatile.

“I don’t know anyone who would like to make a bet on what oil prices would be in five years’ time,” Bridle said. “Up until a year or two ago, many people were saying the era of cheap oil was over. That volatility, and the fact that prices are falling now, does not mean that they are going to stay low. If you want to escape volatility, you have to reduce your reliance on oil even if it’s cheap today.”

Bridle said today’s low oil prices offer governments an opportunity to shift toward solar and wind power. Seizing this opportunity can make the transition easier.

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