Thursday, September 24, 2009

An End to Fossil Fuel Subsidies?

Simon writes each week on international issues relating to energy policy.

Among the most recent grand ideas to emerge in the pre-Copenhagen scrum is this from the US administration. President Obama has thrown his backing behind a plan to ban all government subsidies of fossil fuels, everywhere in the world.

It is a plan with considerable merit. New forms of electricity generation are constantly called on to prove themselves economically - a difficult enough task without their fossil fuel competition receiving both implicit and explicit subsidies in many countries.

However, fossil fuel subsidies are used to achieve a variety of policy objectives, and their removal will leave governments having to work out how to replace them. In the developing world, especially oil-producing countries, though they distort consumption patterns, they can be a more effective way of transferring wealth to the population. After all, in nations bedeviled by corruption, the choice is often not between cheap fuel and other government services, but between cheap fuel and embezzlement. In non-producing LDCs, subsidized fuel is not a perk for the very poorest, but can facilitate simple entrepreneurial activity - being able to run a tractor to improve land's productivity or have a generator so a factory no longer depends on unreliable municipal electrical utilities.

In the developed world, meanwhile, programs such as the Low Income Home Energy Assistance Program (LIHEAP) in the US or Britain's Winter Fuel Allowance program, fuel subsidies are a standard form of redistribution to the poor or elderly. Abandoning these programs risks leaving vulnerable communities bearing the brunt of switching to more efficient energy production.

Meanwhile, the tax breaks, competition protection and generous regulatory environments that western governments offer for a variety of industries, including oil and gas exploration and drilling, electricity generation and utilities could all come under pressure from the new agreement.

I think the idea is a good one - removing government subsidies for big business and polluting fuels is a necessary step towards leveling the marketplace for energy production and nurturing the next generation of energy solutions. However, as with almost all the big ideas in energy these days, the political obstacles are going to be large, with influential industry and citizen groups both being affected. Having resolved the question of what to do, it'll be interesting to see how to make it happen.

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