Is it an economic decision to stop subsidies on fossil fuels in developing countries?

It is hard to make judgment on a report, which is published by the International Monetary Fund (IMF). It is more difficult to make a ‘politically correct’ statement on the same report, if that is linked to the global politics and affects the national economies of developing countries like India.

I am facing a situation of this kind, while reading the recently published report of IMF with the title, ENERGY SUBSIDY REFORM: LESSONS AND IMPLICATIONS[1], where IMF is arguing to get rid of $1.9 trillion in energy subsidies. The justification for stopping subsidy mechanism in the energy sector (mainly in the fossil fuel) is that –if we want to tackle the negative externalities of global warming/climate change, make sure that fossil fuels are priced properly and not subsidized. That’s the core idea behind the IMF report, which argues that the world “misprices” fossil fuels to the tune of some $1.9 trillion per year. Eliminating these subsidies, the IMF argues, and replacing them with appropriate carbon taxes could cut global greenhouse-gas emissions by 13 percent, curtail air pollution, and shore up the finances of many poorer countries now in debt trouble.

This is far simpler than done! Actually, IMF’s economic vision on energy subsidies has its origin in the creation of the subsidy mechanism during the peak period of the world’s industrial era. During this period, it was believed that subsidy was inevitable for development and enhanced gross domestic products. And, now, in the new frame of thinking for low emission development pathway, subsidy is argued to be counterproductive for development.

However, by considering the enormous needs for energy sources and the increased aspirations of new economic powers like China and India, a complete halt of energy subsidy policies sounds like a untested and one sided political decisions. This also appears like an ‘occultist movement’ for having ‘controls’ on the emerging economics in the pretext of low emission development agenda. It is believed particularly to be biased ‘understanding on energy subsidies’, as most of the developing countries (like India, Indonesia) are now promoting renewable energy solutions for generating powers to meet the nation’s need for economic progress and development. Of course, while executing this dream, developing nations are also depending on the fossil fuels with minimum subsidy and increased subsidy in the renewable. The best example of this regulated subsidy policy is prevalent in Indonesia, where, subsidy in LPGs has been changed to promote renewable.

ImageIn India, the present per capita energy consumption (500 kWh) is rather small, only ¼th of World average and about 1/13th of developed nations. India aspires to reach at least the global average by 2050, which would require it to produce about 1300 GW of electricity, ten times more than the present value of about 130 GW. Of the present electricity generation, about 80% of the resources are fossil fuels, gydro about 15%, renewable about 2% and nuclear about 3%.  The good news about India is that there is now remarkable subsidy provision for renewable (e.g., solar) and businesses and people have been responding positively to this paradigm shift.

Hence, subsidy for fossil fuels is predominantly a phenomenon of developed nations and has been producing negative environmental externalities for centuries. Climate change is a global problem and needs to be tackled urgently. This development punch-line on climate change has been in the discussion tables for last 3-4 decades. However, nothing remarkable has been achieved even in the COP.18. Hence, report like the IMF’s latest makes little sense in absence of a trust worthy political commitments of developed nations. Indeed, we’ll wait and watch what would be delivered in COP.19, Poland on this front.  

 

Note: Also read my another post on subsidy: https://keshavcdas.wordpress.com/2012/05/04/why-do-we-need-subsidy-for-promotion-of-cleantech/

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2 thoughts on “Is it an economic decision to stop subsidies on fossil fuels in developing countries?

  1. Hello Keshav,

    Thanks for writing this useful blog. Do you think it would be a impetus for renewable energy development when the price correction by abolishing subsidy for fossil fuel be implemented ? Though it would be simplistic to say that the money thus saved would be diverted towards promotion of renewable energy, at least it would create a level playing field for all energy sources. Since all renewable energy sources are fighting it out among each other to be competitive, subsidy on fossil fuel is skewing the energy scene.

    I think Nigeria made an attempt to remove subsidy only to find the Nigerians agitating. Subsidy withdrawal is a political decision and energy economics might not play a measure role.

    Regards,

    Santosh

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  2. Hi there – just in case of interest:

    There has been a lot of research into the regressive nature of subsidies in India (even in respect of kerosene) and analysis which show they are an inefficient way to provide welfare to low-income households (the largest proportion of subsidies goes to the wealthiest, increasing inequality – there are also huge transfer losses:

    http://www.sciencedirect.com/science/article/pii/S0973082611001128

    Also the high level of subsidies are putting extreme pressure on the Indian economy, which may reduce overall welfare as there will not only be fiscal pressures but less finance to spend on health, education, infrastructure et al.

    http://www.thehindu.com/business/Economy/private-vehicles-guzzle-much-of-diesel-subsidy/article5627178.ece

    I think there have also been several reviews by the Indian govt suggesting reform across a number of years too – and also concerns by the energy sector that low-prices may undermine its stability.

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