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Oil Prices Are Plummeting and Nations Are Cutting Subsidies for Fossil Fuels

The International Energy Agency says nations have slashed fossil fuel subsidies by nearly $27 billion, improving market conditions for the development of renewables.
January 30, 2015, 10:45pm
Image via AP/Matt Rourke

Oil prices have dropped by half since this past summer and some environmentalists and policymakers have worried that the low cost might stymie efforts at cutting the world's greenhouse gas emissions. But, according to the International Energy Agency (IEA), conditions for the development of renewables might be improving, as governments in even key oil-producing countries ease up on subsidies that keep costs low for fossil fuel consumers.

In a November report, the France-based agency reversed earlier predictions that global fossil fuel subsidies could reach $660 billion by 2020. Instead, it found that in 2013, subsidies had actually declined for the first time in four years to $548 billion — a $26.5 billion drop — which could spell good news for renewable energy boosters.

"In the absence of subsidies, all of the main renewable energy technologies would be competitive with oil-fired plants," IEA Chief Economist Fatih Birol told Bloomberg News.

Just 10 countries accounted for nearly 75 percent of global subsidies, five of which are in the Middle East and North Africa. In 2012, Iran spent more than $80 billion on subsidies; Saudi Arabia spent more than $60 billion.

'Fossil fuel subsidies rig the game against renewables and act as a drag on the transition to a more sustainable energy system.'

Only eight percent of the money spent went toward helping the poorest 20 percent of the global population.

"Let us be clear: fossil fuel subsidies are an extremely inefficient means of achieving their stated objective, which is typically to help the poor," IEA Executive Director Maria van der Hoeven told an audience at the Oxford Energy Colloquium on Tuesday.

Subsidies are decreasing or ending entirely in at least 27 nations, according to the November report. In early 2014, Jordan eliminated fossil fuel subsidies and later raised electricity prices. Egypt has raised the price of residential fuels, which van der Hoeven said could ultimately reduce the country's subsidies by $5 billion.

"The more a government subsidizes fossil fuels, the more it has to subsidize renewables if it wants to keep a level playing field," van der Hoeven said. "Fossil fuel subsidies rig the game against renewables and act as a drag on the transition to a more sustainable energy system."

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In 2013, the world spent about $121 billion on subsidies for wind, solar, and other forms of renewables, up 15 percent from the previous year. The United States spent $15 billion of that, second only to Germany, which spent $22 billion.

Numbers vary widely for how much the United States incentivizes oil and natural gas production, largely depending on what's considered a subsidy. The Brookings Institution has estimated that subsidies have totaled $41 billion over the last 10 years, while Oil Change International places the total value of US subsidies to the fossil fuel industry at $37.5 billion annually.

In its analysis, the IEA defined a subsidy as any government action that lowers the cost of energy production, increases how much producers are paid, or decreases the price for energy consumers. In the United States, that can include performance-based tax incentives and state-regulated monopolies.

"The conventional energy resource industries have had years and years of policy and incentive support relative to renewables," Todd Foley, a senior vice president with American Council on Renewable Energy, told VICE News. "That has to be factored into the renewable equation. Energy is one of the most policy-oriented sectors in the economy."

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The IEA's report forecast that subsidies for renewables will continue to rise over the next two decades and then begin to fall as government commitments expire. With a 25 percent decrease in carbon from the power sector by 2040, the report states, the world would be halfway to the agreed-upon goal of limiting global temperature rise to 2 degrees Celsius (about 3.6 degrees Fahrenheit) above the pre-Industrial Age level.

"I'm pleased to hear that the IEA's report found that fossil fuel subsidies are declining worldwide," Robert Stavin, director of the Harvard Environmental Economics Program, told VICE News. "If this is true, it's another important step toward sensible pricing of energy sources and thereby a key step toward reducing the risk of global climate change."

Follow Laura Dattaro on Twitter: @ldattaro