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Subsidies That Need a Cleanup

The recently published IMF report reveals data demonstrating that global fossil fuel subsidies are much greater than previously thought. The IMF calls the revelation “shocking” and says the figure is an “extremely robust” estimate of the true cost of fossil fuels. Subsidies must be re-routed from fossils towards clean energy sources, say environmental NGOs.

According to the report by the International Monetary Fund (IMF) (http://www.imf.org/external/pubs/cat/longres.aspx?sk=42940.0), fossil fuel companies are benefitting from global post-tax subsidies of $5.3 trillion a year, equivalent to $10 million a minute every day! The $5.3 trillion subsidy estimated for 2015 is greater than the total health spending of all the world’s governments.

The vast sum is largely due to polluters not paying the costs imposed on governments by the burning of coal, oil and gas. These include the harm caused to local populations by air pollution as well as to people across the globe affected by the floods, droughts and storms being driven by climate change.

Besides providing estimates for fossil subsidies, the IMF said that ending subsidies for fossil fuels would cut global carbon emissions by 20%. That would be a giant step towards taming global warming, an issue on which the world has made little progress to date. Ending the subsidies would also slash the number of premature deaths from outdoor air pollution by 50% – about 1.6 million lives a year.

Furthermore, the IMF said the resources freed by ending fossil fuel subsidies could be an economic “game-changer” for many countries, by driving economic growth and poverty reduction through greater investment in infrastructure, health and education, and also by cutting taxes that restrict growth.

Russia is on the list of the countries that provide the largest amount of fossil fuel subsidies. Russian subsidies are mostly aimed at natural gas and electrical energy production, while most of the latter is produced by utilizing natural gas. According to the estimates provided by the International Energy Agency (IEA), the annual loss of Russia’s state budget due to subsidizing fossil fuels is around $35 billion.

An economy’s dependency on the export of fossil fuels makes a country’s state budget very vulnerable to any possible fluctuations and changes in the dynamic of crude hydrocarbons extraction. Russia is not alone in having such an approach. Iran and Saudi Arabia provide large fossil fuel subsidies as well.

Many experts say that energy subsidies limit the economic development potential, and are not an efficient way of helping the poor, not mentioning their negative environmental impact. Both the IMF and the World Bank have noted that existing fossil fuel subsidies overwhelmingly go to the rich, with the wealthiest 20% of people getting six times as much as the poorest 20% in low and middle-income countries.

From the economics point of view, subsidies help decrease prices artificially, thus raising the level of consumption. They hinder the inflow of investments into the new energy infrastructure, as well as the development of measures to increase energy efficiency.

Compared to other countries, Russia has not been very successful in using its richness in energy resources to boost its own economic growth. For instance, natural gas consumption per capita in Russia is at the same level as in Canada, although its expenditure per GDP unit is approximately five times higher than in other IEA member states.

Low energy prices also mean that energy suppliers have little incentive to invest into new production facilities or expand the production due to low payback on it. As the result, some residential areas suffer from lack of electric energy supply. Besides, there are big energy losses due to unreliability and inefficiency of power lines.

Another logical consequence of fossil fuel subsidies is the increase in the level of GHG emissions and air pollution. Cutting the subsidies will allow countries like Russia to contribute to reducing GHG emissions without having to implement carbon taxes or participating in carbon trade, some experts say.

Besides, in case of cutting the fossil fuel subsidies Russia may receive an additional income of around 0.3% GDP by 2050 compared to the baseline scenario in which no subsidy cut takes place. Furthermore, the funds that are released this way may be directed towards increasing energy efficiency of energy production, as well as energy consumption, which would have a positive effect on the entire energy sector.

According to Skolkovo experts, refusing to continue cross subsidization may lead to an industrial growth of 3.6%. This would promote an increase in budget revenues from industrial energy producers by 451.5 million rubles, around 0.8% of the country’s GDP.

It is worth remembering that back in 2009, at the G20 summit in Pittsburg, Russia was one of the countries that supported the initiative to reduce fossil fuel subsidies. Russia’s Prime Minister Dmitry Medvedev has made several strong statements concerning this issue: in December 2014, he announced, “It was the time that Russia get off the oil needle”; in January 2015, he said that ‘the old fossil energy model has outlived itself. Neither is it able to provide us a sustainable growth, nor stimuli to invest in real production.’

‘The net cost of raw hydrocarbons extraction in our country is increasing. More and more deposits of fossil fuel are located in remote areas that are hard to access, and the deposits are hard to extract. The IMF survey confirms the idea that we can no longer consider fossils a “cheap” fuel. In reality, our extracting companies constantly ask the Government for more subsidies, but those subsidies do not work for the future and have a detrimental impact on our environment and the climate,’ says Head of Russian Social Ecological Union’s Climate Secretariat.

‘If those subsidies were directed towards the development of renewable energy sources and increasing energy efficiency, instead of fossil fuels, that would be an investment into our common future, into the modernization of our economy, into nature protection and towards improving the welfare of our citizens.’