The International Energy Agency (IEA) annually estimates global fossil-fuel consumption subsidies that measure what many developing countries spend to provide below-market cost fuel to their citizens. In 2016, IEA found that fossil fuel consumption subsidies totaled around $260 billion, 16 percent lower (about $50 billion less) than in 2015. According to IEA, this decrease is partly due to lower international energy prices of subsidized fuels. Oil subsidies made up 40 percent of the total fossil fuel consumption subsidies, while electricity made up 41 percent, natural gas 19 percent and coal 0.8 percent. According to the IEA, the United States does not have any consumption subsidies for oil, coal, electricity or natural gas.
The IEA is a part of the Organization for Economic Cooperation and Development (OECD), which represents the developed nations of the world. IEA’s subsidy study found that many developing countries artificially lower energy prices to their citizens, paying the difference from their government resources. These wealth transfers are differentiable from subsidies that are intended to support uneconomic energy sources such as wind and solar technologies toward commercialization. The United States and other developed countries support energy production of all types in the form of tax credits, loan guarantees or mandates, which are not included in IEA’s fossil fuel consumption subsidy calculations since they are directed towards production rather than consumption of the fuel.
Source: International Energy Agency, Energy Subsidies, IEA
Fossil Fuel Consumption Subsidies by Country
China leads the world in fossil fuel consumption subsidies providing $36 billion from its government resources in 2016 to lower the cost of fossil fuels to end-users in its country. Of the $36 billion in fossil fuel consumption subsidies China paid, 34 percent covered oil and 66 percent went to electricity. Iran is the second largest country subsidizing end-use fossil fuel prices, providing 46 percent of its $34.8 billion in fossil fuel consumption subsidies to oil, 14 percent to electricity, and 40 percent to natural gas. Saudi Arabia ranked third with $29.7 billion in fossil fuel consumption subsidies, 65 percent covering oil, 12 percent covering natural gas and 23 percent going to electricity. Russia came in fourth with $28.2 billion in fossil fuel consumption subsidies–electricity garnered 66 percent, and natural gas 34 percent. Venezuela ranked fifth with fossil fuel consumption subsidies totaling $16.1 billion, 74 percent covering oil, 9 percent covering natural gas and 17 percent covering electricity.
Indonesia and India ranked sixth and seventh, respectively, both funding at least $13 billion in fossil fuel consumption subsidies. Indonesia’s fossil fuel consumption subsidies totaled $15.6 billion in 2016 with oil receiving 28 percent and electricity, 72 percent. India’s fossil fuel consumption subsidies totaled $13.4 billion in 2016; the distribution of India’s fossil fuel consumption subsidies was: 77 percent oil, 6 percent natural gas, and 18 percent electricity. Egypt, Algeria and Mexico ranked eighth, ninth and tenth in fossil fuel consumption subsidies, respectively, with subsidies totaling $11.1 billion (Egypt), $0.97 billion (Algeria) and $0.93 billion (Mexico).
Coal received almost $2 billion in fossil fuel consumption subsidies, just 0.8 percent of the total. The countries that subsidized coal in 2016 were Kazakhstan, Vietnam, Argentina and Korea.
Many of the countries providing fossil fuel consumption subsidies own state energy companies, including countries that comprise the Organization of Petroleum Exporting Countries, such as Iran, Saudi Arabia, and Venezuela. Net exporting countries see these subsidies as an opportunity cost that benefits their citizens by providing lower cost transportation fuels and reducing other energy costs.
Developed countries, such as the United States, do not have fossil fuel consumption subsidies, as seen in the following chart.
Energy Consumption Subsidies by Country, 2016 (Million USD)
Source: International Energy Agency, Energy Subsidies, IEA
Energy Consumption Subsidies were Intended to Alleviate Poverty
Fossil fuel consumption subsidies are often used by developing countries to alleviate energy poverty, but are an inefficient means for doing so, creating market distortions that result in wasteful energy consumption. As such, there is political pressure to remove fossil fuel consumption subsidies. In 2016, the G20 leaders reaffirmed an earlier pledge to phase them out.
Their reaffirmation is backed up by studies that show that fossil fuel consumption subsidies are a poor means of alleviating poverty. An IMF study of 20 developing countries showed the poorest fifth of the population received on average 7 percent of the overall subsidy benefit, and the richest fifth received almost 43 percent. Another study looking at India found that, of the $22.5 billion spent on fossil fuel subsidies in 2010, less than $2 billion benefited the poorest 20 percent because poorer households in poor countries use less fuel than wealthier households, even when energy is subsidized.
Subsidies can also lead to energy shortages. In Myanmar, fixed prices for electricity, diesel and petrol resulted in shortages when those prices fell below international market levels because suppliers exported to China and Thailand rather than supplying domestic use. It also deprived the country of revenues needed for infrastructure.
An article in Nature shows that, if fossil fuel subsidies were removed worldwide, emissions reductions would occur primarily in oil and gas exporting regions: Russia, the Middle East, North Africa and Latin America. Most subsidies originate in these regions, but they also benefit fewer people living below the poverty line than in lower income countries such as India.
A way to reduce or remove energy consumption subsidies is to combine them with effective pro-poor policies. Examples include India paying for cooking gas for those households which fall below a certain income level, or reallocating the energy subsidy money for other uses. In India’s case, subsidized liquid petroleum gas (propane) replaced open wood–and even dung–fires for cooking, thus reducing adverse health effects. In Indonesia, it was used to help finance infrastructure development, and in Iran it was used for universal health care.
Many Americans are confused by the large amount of global fossil fuel consumption subsidies that the IEA calculates, not realizing that these subsidies have nothing to do with tax policy, research and development or loan guarantees, where most U.S. programs are directed. In fact, most liberalized countries do not offer fossil fuel consumption subsidies that artificially lower the end-use price of the fuel. Fossil fuel consumption subsidies are common and even pervasive in the developing world, particularly in economies with state-owned energy companies. The IEA has been advocating for years that fossil fuel consumption subsidies should be eliminated since they encourage wasteful consumption.
Fossil fuel consumption subsidies in developing countries are welfare transfers that can be differentiated from subsidies in the name of commercializing or sustaining uneconomic energy sources such as on-grid wind or solar, which the United States and other industrialized countries have been subsidizing and/or mandating. These latter forms of energy subsidies that help promote production of uneconomic energy sources can be abolished without detrimental effects to the U.S. economy or its citizens. In fact, they would increase economic efficiency since by their very nature, they are generally more expensive than competing forms of energy.
The OECD countries find fault with developing countries for subsidizing the costs of energy purchased by their citizens, but those same OECD nations are busy subsidizing and mandating the use of uneconomic and inefficient forms of energy which will make energy more expensive and less reliable for their citizens. The economies would be better off if all such supports by governments were abolished.