Political, technical problems seen for energy-subsidy reform

Fossil-energy subsidies receive more talk than action, too much of it politically opportunistic.

A Council on Foreign Relations workshop last month took a balanced look at consumption subsidies, which some participants said account for 3-4 million b/d of global oil use.

A report from the workshop, held by CFR’s Maurice R. Greenberg Center for Geoeconomic Studies, said about 40 countries subsidize fossil-fuel consumption. Of those, 10 account for three fourths of all fuel subsidies.

In addition to inflating global fuel use, subsidizing consumption strains national budgets and aggravates environmental problems, including emission of greenhouse gases.

Subsidizing countries that understand the problem face two obstacles to reform, according to workshop participants:

“Removing economic subsidies is often perceived as a risky, unpopular move with broad swathes of society, and implementing market-oriented prices requires a degree of technical capacity that many national governments simply do not have.”

One technical obstacle in some countries is a lack of banking-system sophistication, which confounds an important component of subsidy-reform: direct-cash transfers to low-income energy consumers.

Another obstacle is the need to establish a politically independent, automatic price-setting mechanism able to replace energy prices set by governments with tariffs that follow market gyrations.

On political obstacles, the workshop challenged dominant suppositions.

Empirical evidence, one participant said, “does not support the perception that subsidy reform is a major driver of public unrest.” In the last 7 years, by one measure, fuel and energy prices were primary factors in about 4% of popular protests.

According to workshop participants, the larger political obstacle to subsidy reform “lies in the fact that the bulk of the economic rents from cheap energy typically accrue to a small segment of entrenched, politically well-connected segments of society.”

Technical and political obstacles such as these are problems for leaders who understand the need for subsidy reform.

A different set of obstacles applies in countries whose leaders, in the words of the workshop report, “do not fully understand or accept the problem in the first place.”

(From the subscription area of www.ogj.com, posted June 5, 2015; author’s e-mail: [email protected])