Oil and Renewables: Slicing up the Subsidy Pie

Bloomberg New Energy Finance identified US$43–$46 billion last year allotted by governments for renewable energy. Meanwhile, oil, coal and gas received $557 billion in subsidies from the 37 countries that represent 95% of global subsidisation of fossil fuels in 2008, says the International Energy Agency (IEA). In its latest World Energy Outlook the IEA says that government support for both electricity from renewables and biofuels was $57 billion in 2009, of which $37 billion was allocated to the former.

With such a gap in government support, does the oil industry have any reason to worry?

It appears so. Several nations have begun analysing the disparity with an eye toward rolling back at least some of the subsidies. G20 leaders, in particular, have expressed consternation about the inequity, and are discussing a phase-out of the subsidies. Their concern is that fossil fuel subsidies distort markets, encourage fuel gluttony and undercut efforts to expand clean energy.

Consumers in the 37 countries analysed by IEA on average paid only 71% of the market price for oil. Middle Eastern nations, in particular, are known for large subsidies to fossil fuels. For example, in 2008, Iranian consumers paid 38 US cents per gallon for gasoline and Saudi Arabians about 61 US cents, says the US Energy Information Administration (EIA).

'Removing subsidies is usually very unpopular with consumers, and that makes it a challenge to exact such changes, particularly in countries with difficult sociopolitical circumstances', said EIA in its International Energy Outlook 2010.

While the US was not included among the 37 countries analyzed by IEA, it too has traditionally given more incentives to fossil fuels than renewable energy. The US allotted $72 billion to fossil fuels from 2002–2008, but only $29 billion to renewable energy over the same period, according to the Environmental Law Institute.

The wide discrepancy is expected to narrow in 2009-2010 as governments disperse stimulus funds. The US, alone, directed $16.8 billion of stimulus dollars into green energy, and an additional $4 billion into loan guarantees for renewable energy.

But still, stimulus money is not expected to eliminate the problem. To that end, IEA has undertaken further analysis of fossil fuel subsidies published in the World Energy Outlook 2010.

Fossil fuel subsidies are encouraging energy waste, the IEA believes (Source: BP)

The IEA argues that phasing out the fossil fuel subsidies could have a profound impact, reducing global energy demand 5.8% by 2020, the amount of energy used in Japan, Korea, Australia and New Zealand combined. It would cut global oil demand by 6.5 mb/d in 2020, which is about one third the amount used by the US. The phase-out also would reduce carbon dioxide emissions 6.9% by 2020, equivalent to the current emissions of France, Germany, Italy, Spain, and the UK combined.

'The analysis we have carried out in collaboration with other international organisations at the request of G20 leaders, and which is set out in this outlook, shows that removing fossil fuel consumption subsidies, which totaled $312 billion in 2009, could make a big contribution to meeting energy security and environmental goals, including mitigating carbon dioxide and other emissions,' said Tanaka.

He added: 'The commitment made by G20 leaders meeting in the US city of Pittsburgh in September 2009 to 'rationalise and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption' has the potential to, at least partly, balance the disappointment of Copenhagen. This commitment was made in recognition that subsidies can distort markets, can impede investment in clean energy sources and can thereby undermine efforts to deal with climate change.'

However, the effectiveness of the G-20 agreement remains to be seen, since it calls for elimination only of 'inefficient' subsidies. It is unknown how nations will define 'inefficient.' When they met in Toronto, just 11 of the G20 countries produced plans to phase out fossil fuel subsidies. They were Argentina, Canada, Germany, India, Indonesia, Italy, Korea, Mexico, Russia, Turkey and the United States. At the same time eight countries - Australia, France, Japan, Saudi Arabia, South Africa and the UK - said they have no inefficient fossil fuel subsidies.

Nonetheless, commenting on the World Energy Outlook, WWF director of Global Energy Policy, Stephan Singer, said the NGO is highly gratified with the IEA's growing emphasis on energy efficiency and renewable energy to enhance effective carbon abatement regimes. 'We are pleased that they highlight the need to overcome the approximate annual $700 billion in fossil fuel subsidies. This money, about 1% of global GDP, needs to go to support renewable and energy conservation and help the poor.'

Indeed, one issue under debate is the role some fossil fuel subsidies play in preventing energy poverty. While industrialised countries tend to subsidise production of fossil fuels, poor nations are apt to underwrite costs to guarantee heat and power to the citizenry.

'In this background, some countries may consider it necessary to continue subsidising the access of their poorest communities to energy,' said Harsha Singh, deputy director general of the World Trade Organization at the 14 October meeting in Geneva of the Global Subsidies Initiative (GSI), a project of the International Institute for Sustainable Development (IISD).

And even if the energy poverty issue is resolved don't expect the reversal of fossil fuel subsidies to be easy, warned conference speakers. Oil companies are well organised and their subsidies are not always highly visible, said GSI's Kerryn Lang, who pegged US oil and gas industry spending on political lobbying at $175 million in 2009. 

Oil vs Renewables

Indeed, oil's lobbying became apparent in the US this year as carbon dioxide cap-and-trade proposals languished before Congress. While cap-and-trade is not classed as a subsidy per se, it is viewed by supporters as a way to create a more level financial playing field between clean energy and fossil fuels.

The battle also made its way down to the states. In New York, protesters chanted 'cap-and-tax' outside the headquarters of the Regional Greenhouse Gas Initiative in September. Meanwhile, in California, similar bombs were being launched in an attempt to overthrow the state's Global Warming Solutions Act through a ballot initiative.

According to green energy advocates who study the money flow of anti-cap-and-trade initiatives one name keeps emerging as a prime funding source: Koch Industries. According to a March 2010 report from Greenpeace: 'Koch Industries: Secretly Funding the Climate Denial Machine' the company has outspent even oil major ExxonMobil in lobbying against climate change policies. The report pegs Koch efforts at $24.9 million from 2005 to 2008 and ExxonMobil's at a relatively modest $8.9 million.

'Koch Industries has become a financial kingpin of climate science denial and clean energy opposition,' says the Greenpeace study.

Such clout creates unease among renewable energy developers, who worry that it will be neither quick nor easy to do away with fossil fuel subsidies.

John Kourtoff, President and Chief Executive Officer of Toronto-based Trillium Power Wind, recently lamented that the tangle of fossil fuel subsidies is so complex, even the US Department of Energy and the Federal Energy Regulatory Commission admit to finding it difficult to unweave. 'So how is the average person gong to figure it out?' said the offshore wind developer. 'I'd be happy to beat anyone as long as everything is on the table'.

Sidebar: RE Growth Forecast in IEA'S 2010 Outlook

Fossil fuels' share of the overall energy mix falls in favour of renewable energy sources - and nuclear - over the outlook period as forecast in the International Energy Agency's new World Energy outlook reports (WEO-2010) to 2035, the latest in its series.

However, oil nonetheless remains the leading fuel in the energy mix by 2035, followed by coal, the IEA states. This is despite the IEA's conclusion that the oil price is set to rise. The central scenario in this year's Outlook – the New Policies Scenario – forecasts the average IEA crude oil price to rise from just over $60 in 2009 to $113 per barrel (in year-2009 dollars) in 2035. The New Policies Scenario takes account of the broad policy commitments and plans that have been announced by countries around the world.

In that central scenario, world primary energy demand increases by 36% between 2008 and 2035, or 1.2% per year on average. Releasing the document, Nobuo Tanaka, executive director of the International Energy Agency, commented: 'The energy world is facing unprecedented uncertainty. The strength of the economic recovery holds the key to how energy markets will evolve over the next few years. But WEO-2010 demonstrates that it is what governments do, and how that action affects technology, the price of energy services and end-user behaviour, that will shape the future of energy in the longer term. We need to use energy more efficiently and we need to wean ourselves off fossil fuels by adopting technologies that leave a much smaller carbon footprint.'

Tanaka added: 'It is hard to overstate the growing importance of China in global energy. How the country responds to the threats to global energy security and climate posed by rising fossil-fuel use will have far-reaching consequences for the rest of the world. China is at the forefront of efforts to increase the share of new low-carbon energy technologies, including alternative vehicles, which will help to drive down their costs through faster rates of technology learning and economies of scale, and boost their deployment worldwide.'

He continued: 'Renewable energy can play a central role in reducing carbon-dioxide emissions and diversifying energy supplies, but only if strong and sustained support is made available. In the New Policies Scenario, government intervention in support of renewables (electricity from renewables and biofuels) increases from $57 billion in 2009 to $205 billion (in 2009 dollars) by 2035. The share of modern renewable energy sources, including hydro, wind, solar, geothermal, modern biomass and marine energy, in global primary energy use triples between 2008 and 2035 and their combined share in total primary energy demand increases from 7% to 14%.

However, the energy trends envisioned in the New Policies Scenario imply that national commitments to reduce greenhouse-gas emissions, while expected to have some impact, are collectively inadequate to meet the Copenhagen Accord's overall goal of holding the global temperature increase to below 2°C.

'A lack of ambition in the Copenhagen Accord pledges has increased our estimated cost of reaching the 2°C goal by $1 trillion and undoubtedly made it less likely that the goal will actually be achieved. The technology exists today to enable such a change, but the required rate of technological transformation would be unprecedented,' said Tanaka.