by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Roy Cordato has explained for us why calculations about energy costs should factor in both subsidies and penalties. Now the latest Bloomberg Businessweek explains how “budget-busting subsidies” for energy are hurting emerging economies worldwide.
In the developing world, it’s tempting for a country to keep the price of fossil fuels artificially low. The subsidy can take the form of a price cap, preventing oil companies from charging too much at the pump. Or it can come as a tax break to a domestic oil producer, which then usually passes on the savings. In both cases, the government has to make up the difference.
Subsidies usually start as an attempt to avoid inflation and shield citizens from the pain of price increases in global energy markets. But energy subsidies are expensive; they eat up national budgets. Benefits end up going mostly to the richest citizens and crowd out more productive government spending on education or infrastructure and reduce energy efficiency. Subsidies mess with the law of supply and demand, discouraging investment in both alternative energy and fossil fuel exploration.
“It’s a failed policy,” says Fatih Birol, chief economist for the International Energy Agency (IEA), “but we see that many countries continue to follow it.” Subsidies endure because, as Ukraine’s politicians know, getting rid of one means immediate pain for citizens, a drop in popular support, and sometimes even civil unrest.
The IMF pegged government support worldwide for petroleum products, electricity, natural gas, and coal at $1.9 trillion, or 2.5 percent of global GDP in 2011. This number includes the costs of damage done by subsidized fuel to public health, the environment, and infrastructure; subtract those costs, and countries still pay $480 billion a year for subsidies, or 0.7 percent of global GDP. The spending is concentrated mostly in the Middle East, Asia, Central Europe, and the countries of the former Soviet Union.