Should we support or oppose energy subsidies?

Should we support or oppose energy subsidies?

Depending on the facilitated definition, the estimated total size of energy subsidies (ES) varies drastically, for 2017 between 0.8% of global GDP (International Renewable Energy Agency [IRENA] 2020) and 6.5% of global GDP for fossil fuels alone (Coady et al. 2019). Notwithstanding the measurement difficulties related to definitional ambiguities (e.g. Kojima & Koplow 2015), ES account for comparatively large shares of state budget particularly in countries with vast domestic fossil fuel reserves (IEA 2020). Does this mean, however, that ‘we’¹ should unconditionally oppose them? Or - considering their economic and social potentials (e.g. IRENA 2020) - support them per se?² In this essay, it will be argued that firstly, from a conceptual viewpoint, ES must not be considered a monolith. Secondly, from a more empirical viewpoint, it becomes clear that most ES benefit particular interests more than supposedly global economic and climatic interests, making the case for the opposition of these ES, whether they are fossil fuel subsidies (FFS) or such for renewable energy sources (RES).³

Firstly, as expressions of political will ES play different roles across time and national contexts and are anything but uniform. A widely accepted definition that includes both FFS and RES stems from the International Energy Agency (IEA 1999). It understands ES broadly as any government action that is directed primarily at the energy sector and lowers the cost of energy production, raises the price received by energy producers or lowers the price paid by energy consumers.

These and further specifications (e.g. Coady et al. 2019) are crucial since the notion of ES tends to hide more than the merely quantitative distinctness between FFS and RES. More precisely, it can be assumed that ES are - to different extents - interrelated with the energy trilemma as a central challenge for energy governance. This is since, depending on the respective national context, they might affect its three competing aims of environmental sustainability, economic competitiveness and energy security (e.g. Heffron et al. 2015) differently and are equally subject to their preference order.

Regarding environmental sustainability, i.e. energy conservation and efficiency, FFS are hardly preferable to RES, even if one argues that the carbon intensity among fossil fuels and their shares of greenhouse gas (GHG) emissions varies significantly (e.g. Coady et al. 2019) or that renewables themselves are not fully carbon-neutral (e.g. Amponsah et al. 2014). RES foster and express the aim of environmental sustainability stronger (e.g. Setyowati 2020), ideally accelerate the substitution of more carbon-intense energy sources and lead to GHG reductions as the only thing that “the atmosphere sees” (Climate Action Tracker 2020).

Regarding economic competitiveness, i.e. energy prices and infrastructure costs, ES as economic instruments can be considered to distort prices and affect the levelized costs of energy/electricity as a widely used measure for comparing the grid parity of energy sources.⁴ Specifically for FFS, they are even found to aggravate fiscal imbalances and reduce aggregate welfare (e.g. Plante 2014). Bearing in mind that fossil fuels are significantly higher subsidised globally, it is little wonder that FFS further represent a significant obstacle to a global low- carbon energy transition (e.g. McLynn et al. 2016).

Regarding energy security, FFS rather than RES historically took a supportive role (e.g. Whitley and van der Burg 2015). Similar to the aim of economic competitiveness, this energy- political bias towards FFS is little wonder: Energy security is still widely understood as rather short-term national ‘energy supply continuity’ (Winzer et al. 2012), sometimes specified to be “at an affordable price” (IEA 2019); environmental stewardship is frequently missing (e.g. Sovacool & Brown 2010) and related concepts such as ‘climate security’ vastly ignored.

Secondly, in more empirical regards, most ES benefit particular interests rather than supposedly global economic and climatic interests. The current 19:1 ratio between the (in)direct subsidisation of fossils fuels and renewables (IRENA 2020) can be considered to contradict the aggregated interests of the world’s taxpayers.

Admittedly, for many decades, consumer-side FFS have been rendering energy - petroleum products in particular - more affordable in many countries. In 2019, their weighted- average rate was 15% of the competitive market reference price (IEA 2020). This circumstance, however, does not automatically answer crucial questions related to energy access/poverty, and only represents an insufficient criterion of judgement; the question of “who profits more?” points towards those with higher energy consumption (e.g. Rentschler & Bazilian 2017).

At the same time, RES do not have to be in the interest of most citizens either, suggesting a stronger focus on the particular policy design and its considerations. For example, Germany’s solar-feed-in-tariffs (FIT) as producer-side RES have been increasing (income) inequalities to some extent since lower-income deciles are relatively more affected by the induced electricity price increases and profit less from FIT (e.g. Winter & Schlesewsky 2019). Consequently, coming back to the energy trilemma, the case could be made for an additional criterion of ‘energy justice’ (e.g. Heffron et al. 2015), as the classical three competing aims seemingly have not been considering aspects of economic inequality sufficiently.

By a similar token, the necessity of ES themselves can be questioned, occasionally expressed as ‘levelling the playing field’. Indeed, for 85% of the world renewable electricity is already the cheapest source of new baseload (Carbon Tracker Initiative 2020); but considering that FFS have been receiving disproportionally more support (e.g. IRENA 2020), a historically informed ‘levelling’ viewpoint should rather support the continuation of RES. This does not exclude temporal elements: IRENA, for example, calculates with a dwindling share of total ES of the global GDP by 2050, which would still foster the accelerated deployment of renewables.

Besides economic questions, climate concerns arise from ES. This is because the domestic nature of FFS indirectly contributes to the global nature of climate change by rendering the combustion of fossil fuels more lucrative, if not financially enabling it at all. Expressed quantitatively, as only one form of pricing fossil fuels and their externalities efficiently, in 2015 abolishing FFS would have contributed to lowering global GHG emissions by as much as 28% (Coady et al. 2019), by coming closer to the ‘true costs’ of fossil fuels.

It speaks louder than words that ES play a negligible role in the UN’s Sustainable Development Goals (2015) and are not discussed in the climate-ambition-guiding Paris Agreement at all. Undoubtedly, FFS undermine one of the latter’s key goals⁵ and contradict calls for leaving most fossil fuels in the ground in order to stay within the remaining and ever- faster shrinking global carbon budget (e.g. CONSTRAIN 2020). As important as networks such as the non-G20 countries’ ‘Friends of Fossil Fuel Subsidy Reform’ and promising FFS- reforms as in Indonesia (e.g. Kennedy 2018) are: Their combined efforts are still far from sufficient, i.e. to contribute avoiding irreversible climatic tipping points with a higher likelihood (e.g. Climate Action Tracker 2020).

Summing up, this essay firstly argues that ES must not be considered a monolith, making the case for avoiding a simple support/opposition-dichotomy as this does not reflect political realities: If the understandings or preference order of the three competing aims of the outlined energy trilemma (environmental sustainability, economic competitiveness, energy security) change, their interrelationship with and scope of specific ES may alter as well. Secondly, FFS and RES are empirically characterised by a persistent and striking imbalance in favour of the former. This imbalance and specific ES - not only FFS - benefiting particular interests more than supposedly global economic and climatic interests should be opposed.

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¹ Understood as the global community rather than in terms of national interests.

² Including, among others, market corrections for unpriced externalities, reduced import dependence and jobs.

³ Nuclear power subsidies will not be discussed since robust global estimates are not available for them (IRENA 2020).

⁴ See for discussions of its shortcomings, for example, Nissen and Harfst (2019) and Choi et al. (2015).

⁵ As stated in Art. 2(c) of “making financial flows consistent with a pathway towards low [GHG] emissions and climate-resilient development.”