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A labourer searches for usable coal at a cinder dump site on the outskirts of Changzhi, Shanxi province October 27, 2009. (REUTERS/REUTERS)
A labourer searches for usable coal at a cinder dump site on the outskirts of Changzhi, Shanxi province October 27, 2009. (REUTERS/REUTERS)

Globe editorial

Fossil fuel subsidies are a sticky problem Add to ...

The world's addiction to oil and other fossil fuels is enabled by the subsidies many governments provide to make them so cheap. While the G20 can bring light to the problem, it is likely the wrong place to solve it.

During their September summit in Pittsburgh, the G20 pledged to "rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption." Four international organizations - the International Energy Agency, the OECD, the WTO, and, remarkably, OPEC - are collaborating on a study of these subsidies to be presented at the G20.

Some details have already started to leak out, and the scale of subsidization worldwide is massive. The IEA came out with its own announcement that public spending on consumption subsidies - payments made to make coal, oil and gas more affordable to consumers - was $556-billion (U.S.) in 2008, a $215-billion increase from 2007.

The international economic and environmental ramifications are huge. Crude oil prices are largely set by world market conditions; subsidies help make world prices lower than they should be. The IEA estimates that phasing out the subsidies in the next 10 years could cut global energy demand by 6 per cent, and reduce carbon emissions equal to 30 per cent of the reduction needed to keep global temperatures from rising by 2 degrees.

But this is not a problem that can be solved with better economic co-ordination alone; rather, it means playing politics.

For of the top 15 subsidizers, none is in the G8; eight are not in the G20 either. Iran, where gas costs only 10 cents a litre, spends around $101-billion in subsidies, one third of its budget and 18 per cent of the world's share of subsidy payment. The next countries after Iran are Russia, Saudi Arabia, India, China, Egypt and Venezuela. Most or all of the worst offenders depend on cheap domestic oil, gas, or coal. The subsidies can be used by autocrats to help keep a restive population pliant, as tools to help industrialize and promote economic development, or both.

And if the G20 is serious in its commitment, it may be pressured to look within. Developing countries will argue that other forms of government support - for carbon-capture and sequestration research, for instance, a promising technology that disproportionately benefits oil producers - are also subsidies. Meanwhile, Canada is reportedly studying a unilateral move to end preferential tax treatment for fossil fuel industries.

A phase-out of fossil fuel subsidies would bring great benefits. But Canada and other G20 members need to assemble a larger consensus around the issue before acting, and that consensus does not yet exist.

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