Energy

‘Production Subsidies are Driving the World to Burn More Fossil Fuel than it Needs’

Unfortunately, these environmentally damaging subsidies are often ignored during discussions on fossil fuel pricing and use, which tend to focus on the quantifiably larger and more politically controversial consumer-focused subsidies

Scholven Power Station, a coal-fired power plant, in Germany. Credit: Guy Gorek

Scholven Power Station, a coal-fired power plant, in Germany. Credit: Guy Gorek

Chennai: With global climate talks set to happen in Paris in less than three weeks and a number of major economies having pledged to take action to limit climate change, a new report shows that the governments of G20 countries spend over $450 billion a year on propping up the production of fossil fuels.

According to the report, which was put out by the Overseas Development Institute and Oil Change International on Thursday, this number is nearly four times the entire global subsidies for renewable energy, which was $121 billion in 2014.

Some of the biggest offenders include Russia (nearly $23 billion in both 2013 and 2014), the US ($20 billion) and the UK ($9 billion). China, on the other hand, provided national subsidies of just over $3 billion annually on average between 2013 and 2014, including tax breaks for oil, gas and coal producers.

Fossil fuel production subsidies – or subsidies that are aimed at producers and often handed out in the form of state investment, tax breaks and public financing – are often ignored during discussions over fossil fuel subsidies, which tend to focus on the quantifiably larger and more politically controversial consumer-focused subsidies.

For instance, while this report places India’s national production subsidies at $103 million in both 2013 and 2014, India’s total fuel subsidy bill in 2014 alone was a little over $10 billion; which takes into account the vast jungle of taxes and consumer-aimed differential pricing for fuel that exist in India, especially for kerosene and diesel.

More Attention

And yet, as Alex Doukas, who is one of the report’s co-authors, points out, production subsidies are an area within climate change action that need more attention.

“It’s true that a lot of other research and analysis focusses on consumer subsidies, which do have a significant impact on climate change and the budgets of the world’s major economics. But in some ways, production subsidies are very scandalous. Because they represent money flowing from governments to private companies and because it drives us to produce more than what we would produce otherwise without subsidies,” Doukas, a senior campaigner at Oil Change International, told The Wire.

One of the more startling figures that the report throws out in favour of focusing on production subsidies, a statistic that comes from the IPCC’s fifth assessment report, is that in order to stay within the two degree limit needed to avoid dangerous climate change, the world must leave three-fourths of its existing fuel reserves in the ground.

“What you see is that a lot of the more developed and large countries continue to be some of the biggest financiers for fossil fuel production. And a lot of these countries lecture other countries on the need to reduce consumer subsidies. A lot of rich countries don’t like to talk about production subsidies,” Doukas added.

When it comes to the question of international public financing for fossil fuels, the report points out that Japan and China are the largest players, with Japan providing an annual average of $19 billion for 2013 and 2014 and China providing the second largest amount at almost $17 billion annually.

A separate report by Oil Change International shows that India is not a large recipient of international public finance, receiving only $4.1 billion between 2007 and 2014, most of which came from G20 countries.

While the report places India and China at the lower end of the list of G20 countries – with only South Africa being lower at $20 million in national annual production subsidies – it may not be a cause for jingoistic chest-thumping in Paris and certainly isn’t a cause for celebration just yet.  Some of the data that the report depends upon isn’t wholly complete: in countries such as Indonesia and Saudi Arabia for instance, national subsidies could not be identified.

Also, investment by state-owned enterprises (SOEs) represents a major source of support for fossil-fuel based production. While China’s annual national production subsidy may be around $3 billion a year, the report also highlights the fact that SOE investment in China’s fossil-fuel production activities is more than double that of any other G20 country. “On average, Chinese SOEs invested $77 billion a year in fossil fuel production in 2013 and 2014,” the report’s authors write.

Annual expenditure on fossil fuel production by ONGC, IOCL, CIL and other SOEs in India amounted to nearly $15 billion on average in 2013 and 2014.

“While yes, India is certainly not the worst offender as far as our research goes, subsidies do come in different shapes and forms. India does provide a significant amount of public finance, mostly domestic. State-owned banks provided an annual average of nearly $2 billion in finance over 2013 and 2014, with the large majority of this going to coal-fired power plants,” Doukas said.