Digging up old fossils

Of all the riveting topics that will be brought up at this week's tax summit in Canberra, one that is likely to feature little, if at all, are subsidies for fossil fuels. And that’s a pity.

The International Energy Agency and the OECD last night delivered another broadside against the extent of fossil fuel subsidies around the globe, estimating that they amounted to $409 billion in 2010 – a rise of $110 billion over 2009 – and will likely exceed $600 billion by 2010.

Moreover, the agencies argue, they do nothing to alleviate fuel poverty, because they are poorly directed. While many of them reduce the price of oil and fuel below their cost, they favour only the rich and middle class that can afford them in the first place. Only eight per cent of the subsidies reach the poorest population.

“Making energy cheap means we use fuel in a wasteful manner, says Fatih Birol, the chief economist at the IEA. Without these subsidies, he says, global energy use would decline 4 per cent by 2020 – a significant reduction in the current context – around 1.7 gigatonnes of greenhouse emissions would be avoided, and more money could be directed towards renewable energy and energy efficiency schemes.

The IEA has been raging against fossil fuels for several years, arguing that artificially lowering prices below their costs distorts the market for energy products, and impedes the task of reducing emissions and ensuring energy security, which it sees as its remit. It also has other unwanted impacts, such as encouraging energy smuggling.

The OECD notes that removing fossil fuel subsidies – which outrank renewable energy subsidies by a factor of around eight to one – are one of the few structural reforms and policy levers available to address one of the worst economic crises of our lifetime and to stimulate growth and employment. The World Bank has recently argued that ending fossil fuel subsidies in developed countries could allow funds to be directed towards climate change financing in emerging economies, one of the key sticking points at international climate negotiations.

Most of the subsidies accounted for in the IEA/OECD survey come from nations such as Iran, Saudi Arabia and Russia, and half of the subsidies are directed towards petroleum products. China, India and Russia have been credited with taking measures to reduce their subsidies.

However, for the first time, the IEA and the OECD countries have combined to produce an inventory of fossil fuel subsidies in these nations, most of them among the G20, who in 2009 promised to eliminate these subsidies by 2020.

This is potentially embarrassing for Australia, which has used definition arguments and accounting gymnastics to try and argue that it doesn’t have any. The OECD is not having a bar of it. Its inventory estimates that 24 OECD nations together hand out around $45-$75 billion a year in fossil fuel subsidies, and Australia has more than its fair share, with annual subsidies – even within the narrow construct of the OECD definition – of more than $7 billion.

According to the OECD, the big ticket items are fuel tax credits, which have amounted to around $5 billion a year in each of the last three years. There was a further $1 billion in fuel tax credits for aviation, and another $563 million in exemptions for “alternative fuels.”

While Australia has moved to end some of its most notorious subsidies, such as the fringe benefits tax, which encouraged people to drive their cars more than was needed, the OECD says its assessment also does not include subsidies to the making of motor vehicles designed to run on petroleum fuels, or to electricity producers.

That means that some of the subsidies that exist in NSW, for instance, where the cost of coal-fired electricity is subsidised by contracts that are dramatically below market prices, are not included. Nor does it take into account the carbon pricing mechanism currently before parliament.

Australia would argue that its carbon pricing regime finally addresses part of what many would describe as the biggest subsidy in the world today – the lack of accountability on the external costs of fossil fuel production, as outlined in this article on Monday.

However, it seems likely that the OECD would take a dim view of some of the compensation measures included in the Clean Energy Future package, as others already have. In particular, the $5.5 billion in compensation that will be handed out to coal-fired generators, apparently to ensure that they don’t close suddenly, and the further billion or two billion dollars that will be spent on the brown coal buyout scheme to ensure that some of the worst polluting generators do in fact close.

The IEA/OECD, and most independent think tanks would argue that these handouts are not needed, and the money would be better directed at support for R&D and the commercial rollout of clean technologies.

The tax forum could have been a good place to discuss them, because energy costs will become an ever growing input on businesses of all kinds. But the politics of the moment mean that the Clean Energy Future package is out of bounds.

That’s a shame, because the package is a useful start, but doesn’t deliver the whole picture. The IEA would like the world to take a long-term, strategic view of how it arrives at the stated long-term goals of reducing emissions by 80 per cent, 90 per cent, or even 100 per cent by 2050.

Sadly, this is far beyond the performance measures of our politicians and our business leaders, so it’s not the sort of vision that many are prepared to embrace. It certainly won’t be in Canberra this week.

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