The International Energy Agency wants to wean the world off fossil-fuel subsidies that it says artificially inflate global energy demand. The agency is urging Group of 20 nations to slash their estimated $312-billion (U.S.) in annual support.
G20 leaders, who will be meeting in South Korea this week, have committed in the past to phase out subsidies, but governments find it difficult to meet that pledge when it results in higher fuel prices or reduced economic activity.
The IEA contends that's a short-sighted approach. "Fossil-fuel subsidies result in an economically inefficient allocation of resources and market distortions, while often failing to meet their intended objectives," said the agency in its World Energy Report released Tuesday. Reducing those subsidies would have a "dramatic effect" on global demand.
The IEA focuses primarily on government efforts to shelter their populations from the full market price of energy through measures that subsidize consumption. However, countries also subsidize production of fossil fuels, with one recent study pegging Canada's support for crude oil production at $2.8-billion (Canadian), and environmental groups are urging the federal and provincial governments to end their support for the oil industry.
The Paris-based agency - which advises rich countries on energy policies - was less critical of production subsidies, which typically increase the supply of energy, thereby helping to keep prices lower than they otherwise would be.
It is estimated, however, that support for renewable energy is only about 60 per cent of the amount provided to fossil-fuel producers. And it urged governments to rebalance their support for cleaner energy sources, such as renewable and nuclear, in order to reduce greenhouse gas emissions that cause climate change.
In Canada, the federal government provides roughly $1.4-billion in tax breaks and support for R&D to the oil industry, while three provinces - Alberta, Saskatchewan, and Newfoundland and Labrador - account for roughly the same amount, said the International Institute for Sustainable Development in a report released last week.
While the Harper government is phasing out one key tax incentive for oil sands producers, the accelerated capital cost allowance, it has maintained other support programs.
"Canadian governments give kind words to those who reduce pollution gases and cold, hard cash to oil companies for increasing pollution and greenhouse gases," said Keith Stewart, Greenpeace climate and energy campaigner.
The G20 countries promised at their 2009 meeting in Pittsburgh to examine subsidies for fossil-fuel consumption and production and then move to eliminate those subsidies. But at the Toronto summit in June, the issue received little attention.
The Harper government pointed to its plan to phase out the accelerated capital cost allowance for oil sands production but offered nothing new, despite receiving recommendations from Department of Finance officials on a range of incentives that could be axed.
The IEA said consumption subsidies are particularly troublesome because they artificially increase demand for increasingly scarce and environmentally damaging energy sources. The agency estimated that global demand for fossil fuels would decline by 5 per cent - compared with a business-as-usual case - by 2020, representing the current consumption of Japan, South Korea and New Zealand combined.
Oil demand would be reduced by 4.7 million barrels per day, or about a quarter of current U.S. consumption.
However, the world's poorest citizens are also the biggest beneficiaries of such subsidies because they pay the highest percentage of their income for energy. "Subsidy reform programs need to be carefully designed as low-income households are likely to be disproportionately affected," the IEA said.