Each year, the world spends $548-billion subsidizing fossil fuels, according to the International Energy Agency. That's $548-billion that could have been spent much better.
Fossil fuel subsidies are concentrated in the developing world. In Venezuela, you can typically get gas for less than 10 cents a gallon. This is not because gasoline is cheap, but because the government of Venezuela subsidizes gasoline consumption to the tune of more than $25-billion each year. It spends $1,250 per person to reduce the real cost of oil, gas and electricity by more than 92 per cent, costing it 10 per cent of its GDP. This drains the public budget, leaving less money to provide health and education services to the population. Over the past five years, Indonesia has spent more money on fossil subsidies than on infrastructure and welfare programs. That's crazy.
A disproportionate share of the subsidies goes to the middle class and the rich – after all, they are the ones who can afford a car in poor countries. And the subsidies make fossil fuels so inexpensive that consumption increases, thus exacerbating global warming.
Iran is at the top of the list of countries that subsidize fossil energy to the tune of more than $84-billion in annual subsidies, or 23 per cent of GDP. Saudi Arabia subsidizes fossil fuel with more than $60-billion, defraying more than three-quarters of the real cost of fossil fuels for its population. Russia, Venezuela, and India spend between $35-billion and $45-billion annually, while Egypt, Indonesia, the United Arab Emirates, China, and Algeria pay out more than $20-billion each. Compare that to the U.S.: The Energy Information Administration estimated in 2010 that fossil-fuel subsidies amounted to $4-billion a year, or two one-hundredths of a per cent of GDP. Renewable energy received more than triple that figure, roughly $14-billion.
But why do many developing countries hand out such massive subsidies, even when the economy is struggling? Primarily the goal is to buy political support and avoid popular protests.
There is no question that the money could be spent far better. Back in 2000, the international community agreed to a set of important development goals, the Millenium Development Goals, in order to improve conditions for the world's poorest by 2015. Many of these targets were highly successful in important areas, such as the reduction of poverty and hunger. Through the UN, the world's leaders are now working on the next set of development goals for 2016-2030.
In this context, my think thank, the Copenhagen Consensus, has asked 60 teams of the world's top economists and several Nobel laureates to analyze the economic, social, and environmental costs and benefits of the different suggested targets in areas from health and nutrition to environment and education. This can help the world choose the targets that will do the most good per dollar spent.
Our analysis by economists Isabel Galiana and Amy Sopinka shows that phasing out subsidies for fossil fuels would be a phenomenal target. It will slash waste, reduce inequality, and cut CO2 emissions. The economists estimate that every dollar spent (you still need to help the most vulnerable to energy access) will create benefits for society and the environment of more than $15. The billions of dollars that governments could save from phasing out fossil fuel subsidies could be spent on providing better health, education and nutrition, which could benefit hundreds of millions of people.
Now is the time to cut fossil fuel subsidies. Thanks to plummeting oil prices, it is easier to reduce the subsidies needed to guarantee regulated consumer prices, taking off public pressure against such reforms. Egypt, for example, paid 30 per cent less in subsidies than originally forecast due to cheap oil. It is encouraging that Egypt, India, Indonesia and Malaysia have recently announced to restructure their state budgets and to phase out energy subsidies.
Cutting fossil fuel subsidies will help the environment by emitting less CO2. It will help developing countries grow less unequal and will free up much needed resources for health, nutrition and education. Phasing out fossil fuel subsidies is an obvious target for the world's next development goals.