UNEP Report: Cutting Fossil Fuel Subsidies Can Cut GHGs

Scrapping fossil fuel subsidies could play an important role in cutting greenhouse gases while giving a small but not insignificant boost to the global economy, says a new report by the UN Environment Programme (UNEP).

The report challenges the widely held view that such subsidies assist the poor, arguing that many of these price support systems benefit the wealthier sections of society rather than those on low incomes. They are also diverting national funds from more creative forms of pro-poor polices and initiatives that are likely to have a far greater impact on the lives and livelihoods of the worse-off sectors of society.

Globally around $300 billion or 0.7 per cent of global gross domestic product is being spent on energy subsidies annually. The lion's share is being used to artificially lower or reduce the real price of fuels like oil, coal, and gas or electricity generated from such fossil fuels.

Cancelling these subsidies might reduce greenhouse gas emissions by as much as six percent a year while contributing 0.1 percent to global GDP.

The report acknowledges that some subsidies or mechanisms, whether in the form of tax breaks, financial incentives, or other market instruments can generate social, economic, and environmental benefits.

But the report argues that many seemingly well-intentioned subsidies rarely make economic sense and rarely address poverty. The report therefore challenges the widely-held myth that scrapping fossil fuel supports would hit the poor. The report cites the example of Liquid Petroleum Gas subsidies in India where $1.7 billion was spent in the first half of the current financial year on trying to get the fuel into poor households. "LPG subsidies are mainly benefiting higher-income households…despite the ineffectiveness of the subsidy the programme is being extended until 2010,"says the study. Indeed, the report concludes that in many developing countries, the real beneficiaries of such subsidies are neither the poor nor the environment but well-off households equipment manufacturers, and the producers of the fuels.

Achim Steiner, UN under-secretary general and UNEP executive director, said: "In the final analysis, many fossil fuel subsidies are introduced for political reasons but are simply propping up and perpetuating inefficiencies in the global economy -- they are thus part of the market failure that is climate change."

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