Commentary: Hard-earned reforms to fossil fuel subsidies are coming under threat



29 October 2018

Phasing out fossil fuel consumption subsidies is a pillar of sound energy policy (Photograph: Shutterstock)

The World Energy Outlook has been tracking fossil fuel consumption subsidies for many years; our latest data shows that they are rising again. All the data are available on our WEO energy subsidies page. The data referenced in this commentary are from World Energy Outlook 2018, which will be released on 13 November.

Worldwide fossil fuel consumption subsidies almost halved between 2012 and 2016, from a high point in 2012 of more than half a trillion dollars. But the estimate crept higher again in 2017, according to new data from World Energy Outlook 2018, and the run-up in the oil price in 2018 is putting pricing reforms under pressure in some countries.

The new data for 2017 show a 12% increase in the estimated value of these subsidies, to more than $300 billion. Most of the increase relates to oil products, reflecting the higher price for oil (which, if an artificially low end-user price remains the same, increases the estimated value of the subsidy). In 2016, for the first time, the value of subsidies to fossil-fuelled electricity were higher than for oil. The 2017 data sees oil return as the most heavily subsidised energy carrier.

	Oil	Gas	Coal	Electricity	IEA average crude oil import price (right axis)
2010	184	100	3	138	88
2011	242	94	4	143	118
2012	275	119	3	144	118
2013	275	107	2	130	112
2014	244	93	1	121	102
2015	140	73	1	102	52
2016	105	48	2	117	42
2017	137	57	2	106	52
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Fossil fuel consumption subsidies are in place across a range of countries. These subsidies lower the price of fossil fuels, or of fossil-fuel based electricity, to end-consumers, often as a way of pursuing social policies including energy access.

There can be good reasons for governments to make energy more affordable, particularly for the poorest and most vulnerable groups. But many subsidies are poorly targeted, disproportionally benefiting wealthier segments of the population that use much more of the subsidised fuel.

Such untargeted subsidy policies encourage wasteful consumption, pushing up emissions and straining government budgets. Phasing out fossil fuel consumption subsidies is a pillar of sound energy policy.

The period of high oil prices from 2010-2014 provided strong motivation for many oil-importing countries to pursue subsidy reform. The fall in price that began in 2014 presented the opportunity. A host of countries, from India to Indonesia and from Mexico to Malaysia, have implemented pricing reforms in recent years.

Pricing reforms have also gained ground among fossil fuel exporters. In many cases, subsidies represent an opportunity cost, i.e. foregone revenue, rather than an explicit financial burden, but the straitened circumstances of many oil and gas exporters in recent years gave impetus to changes in energy pricing. Kuwait, Oman, Qatar, Saudi Arabia and the UAE have all increased domestic prices for gasoline, natural gas and electricity in recent years.

	Brent	Argentina	Brazil	Indonesia	India	Turkey
01/Jan/18	100	100	100	100	100	100
02/Jan/18	100	99	99	100	100	100
03/Jan/18	103	102	100	102	102	102
04/Jan/18	104	104	101	103	103	103
05/Jan/18	103	104	100	102	102	101
06/Jan/18	103	104	100	102	102	101
07/Jan/18	103	104	100	102	102	101
08/Jan/18	103	105	101	102	103	102
09/Jan/18	104	106	102	103	104	104
10/Jan/18	105	105	103	104	105	106
11/Jan/18	106	107	103	105	106	106
12/Jan/18	105	106	102	104	105	104
13/Jan/18	105	106	102	104	105	104
14/Jan/18	105	106	102	104	105	104
15/Jan/18	106	107	103	104	106	106
16/Jan/18	105	106	102	103	105	105
17/Jan/18	104	105	101	102	104	105
18/Jan/18	104	106	101	103	105	104
19/Jan/18	103	105	100	101	103	104
20/Jan/18	103	105	100	101	103	104
21/Jan/18	103	105	100	101	103	104
22/Jan/18	105	108	101	103	105	104
23/Jan/18	105	110	103	104	106	105
24/Jan/18	105	111	100	103	105	104
25/Jan/18	106	112	101	104	106	105
26/Jan/18	105	111	100	103	105	104
27/Jan/18	105	111	100	103	105	104
28/Jan/18	105	111	100	103	105	104
29/Jan/18	103	108	98	102	103	103
30/Jan/18	102	108	98	101	102	102
31/Jan/18	102	108	98	101	102	102
01/Feb/18	103	107	99	102	104	102
02/Feb/18	102	107	99	101	103	101
03/Feb/18	102	107	99	101	103	101
04/Feb/18	102	107	99	101	103	101
05/Feb/18	102	107	101	102	103	102
06/Feb/18	100	105	98	100	101	100
07/Feb/18	98	104	97	98	99	99
08/Feb/18	97	104	96	97	97	97
09/Feb/18	95	102	94	95	96	96
10/Feb/18	95	102	94	95	96	96
11/Feb/18	95	102	94	95	96	96
12/Feb/18	94	101	93	95	95	94
13/Feb/18	93	100	92	93	94	93
14/Feb/18	94	101	91	95	95	94
15/Feb/18	95	100	92	95	95	94
16/Feb/18	96	102	94	96	97	95
17/Feb/18	96	102	94	96	97	95
18/Feb/18	96	102	94	96	97	95
19/Feb/18	97	104	95	97	98	97
20/Feb/18	96	103	95	97	98	97
21/Feb/18	98	104	96	98	99	98
22/Feb/18	99	106	97	100	101	99
23/Feb/18	100	108	98	101	102	100
24/Feb/18	100	108	98	101	102	100
25/Feb/18	100	108	98	101	102	100
26/Feb/18	102	111	99	103	104	102
27/Feb/18	101	110	99	102	103	102
28/Feb/18	99	107	97	100	101	99
01/Mar/18	97	105	95	98	99	97
02/Mar/18	97	105	95	98	99	97
03/Mar/18	97	105	95	98	99	97
04/Mar/18	97	105	95	98	99	97
05/Mar/18	99	108	97	101	101	100
06/Mar/18	99	108	96	100	101	99
07/Mar/18	98	107	96	99	100	98
08/Mar/18	97	106	95	98	99	98
09/Mar/18	98	107	97	100	101	99
10/Mar/18	98	107	97	100	101	99
11/Mar/18	98	107	97	100	101	99
12/Mar/18	97	105	96	98	99	98
13/Mar/18	97	105	95	98	98	99
14/Mar/18	96	104	94	97	97	98
15/Mar/18	96	104	95	97	98	98
16/Mar/18	97	105	96	98	99	100
17/Mar/18	97	105	96	98	99	100
18/Mar/18	97	105	96	98	99	100
19/Mar/18	98	106	97	99	100	102
20/Mar/18	100	108	100	101	102	104
21/Mar/18	103	112	102	104	105	106
22/Mar/18	103	112	103	104	105	107
23/Mar/18	104	113	104	105	106	109
24/Mar/18	104	113	104	105	106	109
25/Mar/18	104	113	104	105	106	109
26/Mar/18	103	112	103	105	105	108
27/Mar/18	103	112	104	105	105	109
28/Mar/18	103	111	103	104	105	109
29/Mar/18	101	110	101	103	104	105
30/Mar/18	101	110	101	103	104	106
31/Mar/18	101	110	101	103	104	106
01/Apr/18	101	110	101	103	104	106
02/Apr/18	101	110	101	103	104	106
03/Apr/18	101	109	101	102	103	106
04/Apr/18	100	108	100	101	102	105
05/Apr/18	101	109	102	102	103	108
06/Apr/18	100	108	102	101	102	107
07/Apr/18	100	108	102	101	102	107
08/Apr/18	100	108	102	101	102	107
09/Apr/18	103	112	106	104	105	111
10/Apr/18	106	114	109	107	108	115
11/Apr/18	109	119	111	111	112	119
12/Apr/18	108	117	111	109	110	117
13/Apr/18	109	119	113	111	112	118
14/Apr/18	109	119	113	111	112	118
15/Apr/18	109	119	113	111	112	118
16/Apr/18	108	118	112	110	111	117
17/Apr/18	108	117	111	110	112	117
18/Apr/18	110	119	113	112	114	117
19/Apr/18	113	122	115	115	117	120
20/Apr/18	111	120	114	114	115	120
21/Apr/18	111	120	114	114	115	120
22/Apr/18	111	120	114	114	115	120
23/Apr/18	112	122	117	115	117	121
24/Apr/18	113	123	119	116	118	122
25/Apr/18	112	121	117	115	117	120
26/Apr/18	113	125	118	115	118	121
27/Apr/18	113	124	117	115	118	120
28/Apr/18	113	124	117	115	118	120
29/Apr/18	113	124	117	115	118	120
30/Apr/18	114	125	120	116	119	122
01/May/18	112	124	119	115	117	121
02/May/18	110	125	118	113	115	122
03/May/18	111	133	118	114	116	123
04/May/18	112	132	120	116	118	126
05/May/18	112	132	120	116	118	126
06/May/18	112	132	120	116	118	126
07/May/18	112	133	121	116	119	127
08/May/18	112	135	120	116	118	128
09/May/18	116	142	126	121	123	132
10/May/18	116	142	125	121	123	130
11/May/18	117	144	127	120	123	133
12/May/18	117	144	127	120	123	133
13/May/18	117	144	127	120	123	133
14/May/18	118	158	129	121	125	136
15/May/18	119	153	131	123	127	139
16/May/18	118	154	131	122	126	137
17/May/18	121	158	135	125	129	142
18/May/18	118	155	133	123	126	140
19/May/18	118	155	133	123	126	140
20/May/18	118	155	133	123	126	140
21/May/18	118	155	131	124	127	143
22/May/18	121	158	133	126	129	149
23/May/18	119	156	130	124	128	144
24/May/18	119	157	131	124	128	148
25/May/18	115	152	127	120	122	143
26/May/18	115	152	127	120	122	143
27/May/18	115	152	127	120	122	143
28/May/18	115	153	130	119	122	139
29/May/18	112	150	126	116	119	135
30/May/18	114	153	128	118	121	135
31/May/18	116	155	130	119	123	138
01/Jun/18	112	151	128	115	118	138
02/Jun/18	112	151	128	115	118	138
03/Jun/18	112	151	128	115	118	138
04/Jun/18	111	149	125	113	117	134
05/Jun/18	110	147	126	113	116	134
06/Jun/18	111	148	128	113	116	133
07/Jun/18	113	152	134	116	120	134
08/Jun/18	113	153	126	116	119	133
09/Jun/18	113	153	126	116	119	133
10/Jun/18	113	153	126	116	119	133
11/Jun/18	113	157	126	116	119	134
12/Jun/18	112	156	126	115	119	137
13/Jun/18	112	157	126	115	119	138
14/Jun/18	112	167	129	115	119	140
15/Jun/18	108	163	122	111	115	135
16/Jun/18	108	163	122	111	115	135
17/Jun/18	108	163	122	111	115	135
18/Jun/18	110	164	125	113	118	137
19/Jun/18	111	165	125	114	119	138
20/Jun/18	111	166	127	114	119	139
21/Jun/18	109	161	124	113	116	136
22/Jun/18	111	160	126	115	118	137
23/Jun/18	111	160	126	115	118	137
24/Jun/18	111	160	126	115	118	137
25/Jun/18	110	160	125	114	117	136
26/Jun/18	111	161	127	116	119	135
27/Jun/18	115	169	134	120	124	140
28/Jun/18	114	172	133	121	123	138
29/Jun/18	117	182	137	124	126	142
30/Jun/18	117	182	137	124	126	142
01/Jul/18	117	182	137	124	126	142
02/Jul/18	115	175	136	122	124	140
03/Jul/18	114	171	134	121	123	140
04/Jul/18	116	175	137	123	125	143
05/Jul/18	116	175	138	123	125	141
06/Jul/18	114	171	133	121	123	138
07/Jul/18	114	171	133	121	123	138
08/Jul/18	114	171	133	121	123	138
09/Jul/18	116	174	135	122	125	145
10/Jul/18	117	172	135	124	126	145
11/Jul/18	113	167	133	120	122	146
12/Jul/18	109	159	127	115	117	139
13/Jul/18	112	164	130	119	120	144
14/Jul/18	112	164	130	119	120	144
15/Jul/18	112	164	130	119	120	144
16/Jul/18	107	156	124	113	115	136
17/Jul/18	107	158	124	113	115	135
18/Jul/18	106	158	123	113	114	134
19/Jul/18	109	162	126	116	118	138
20/Jul/18	109	162	124	116	118	138
21/Jul/18	109	162	124	116	118	138
22/Jul/18	109	162	124	116	118	138
23/Jul/18	111	164	127	118	120	139
24/Jul/18	111	164	126	119	120	143
25/Jul/18	111	164	124	119	120	140
26/Jul/18	112	166	127	120	121	144
27/Jul/18	113	166	126	120	122	145
28/Jul/18	113	166	126	120	122	145
29/Jul/18	113	166	126	120	122	145
30/Jul/18	113	166	127	120	122	146
31/Jul/18	112	165	127	119	121	145
01/Aug/18	109	161	124	116	117	144
02/Aug/18	110	162	125	118	119	147
03/Aug/18	110	162	123	118	119	148
04/Aug/18	110	162	123	118	119	148
05/Aug/18	110	162	123	118	119	148
06/Aug/18	110	161	124	117	119	155
07/Aug/18	108	158	122	115	116	149
08/Aug/18	105	156	120	112	114	147
09/Aug/18	105	159	121	112	113	154
10/Aug/18	106	166	123	113	114	180
11/Aug/18	105	165	122	112	114	179
12/Aug/18	105	166	123	112	114	179
13/Aug/18	102	164	119	109	112	184
14/Aug/18	103	164	120	111	113	173
15/Aug/18	104	167	123	112	115	165
16/Aug/18	105	167	124	113	115	161
17/Aug/18	106	170	125	114	117	168
18/Aug/18	107	171	126	115	118	170
19/Aug/18	108	173	127	116	119	171
20/Aug/18	109	174	130	117	119	174
21/Aug/18	109	176	134	118	120	175
22/Aug/18	110	179	135	119	121	176
23/Aug/18	111	182	138	120	122	179
24/Aug/18	112	186	139	121	123	178
25/Aug/18	113	187	140	122	124	179
26/Aug/18	114	189	141	123	125	181
27/Aug/18	115	191	141	124	127	186
28/Aug/18	116	196	144	125	127	191
29/Aug/18	117	213	145	126	129	199
30/Aug/18	118	240	147	127	131	206
31/Aug/18	118	234	145	129	132	204
01/Sep/18	119	236	146	130	133	205
02/Sep/18	121	239	148	131	135	208
03/Sep/18	122	248	154	134	137	214
04/Sep/18	124	259	156	136	139	218
05/Sep/18	125	259	157	138	141	218
06/Sep/18	127	255	155	139	143	220
07/Sep/18	128	255	157	140	145	216
08/Sep/18	130	258	159	142	146	219
09/Sep/18	131	261	161	143	148	222
10/Sep/18	133	267	164	145	151	226
11/Sep/18	134	274	168	147	153	228
12/Sep/18	136	279	171	148	154	227
13/Sep/18	137	289	175	150	155	220
14/Sep/18	139	297	175	152	157	226
15/Sep/18	140	300	177	153	158	229
16/Sep/18	142	303	179	155	160	231
17/Sep/18	143	305	179	157	163	239
18/Sep/18	145	310	182	159	165	244
19/Sep/18	146	309	183	161	166	242
20/Sep/18	148	304	182	162	167	242
21/Sep/18	149	299	183	163	170	248
22/Sep/18	151	302	185	165	171	251
23/Sep/18	152	305	186	167	173	253
24/Sep/18	154	309	190	169	176	250
25/Sep/18	155	320	191	171	177	253
26/Sep/18	157	322	191	172	179	253
27/Sep/18	158	335	192	174	181	251
28/Sep/18	160	355	196	176	182	256
29/Sep/18	161	359	197	177	184	258
30/Sep/18	163	362	199	179	186	261
01/Oct/18	165	349	200	181	188	258
02/Oct/18	166	340	198	184	190	262
03/Oct/18	168	340	197	186	193	268
04/Oct/18	169	351	198	189	195	275
05/Oct/18	171	347	198	191	198	276
06/Oct/18	172	350	199	192	199	279
07/Oct/18	174	353	201	194	201	281
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The rise in international fuel prices in 2018 could set back efforts to phase out fossil fuel subsidies. Consumers in many oil-importing countries are facing a hike in retail prices, particularly in developing economies with depreciating local currencies against US dollar. A 75% rise in the dollar-denominated Brent crude price since January 2018 translates into a more than a 100% rise expressed in Indian rupees, and a 250% increase in Argentinian pesos.

Facing these pressures, some countries have started pushing back their reform schedules by postponing price increases or otherwise protecting consumers from their efforts – while in most cases keeping the overall policy goal of market-based pricing in place. For example, despite higher international prices, Indonesia and Malaysia have maintained domestic prices at the previous levels, while India has cut the excise duty on gasoline and diesel, and Brazil has increased its subsidy on diesel.

These price controls can shield consumers from short-term changes in international market price, but at a fiscal and environmental cost. Moreover, they diminish the potential for higher prices to curb demand and bring the market into balance.

The IEA continues to be a strong supporter of international efforts to phase out inefficient fossil fuel consumption subsidies, and the WEO has consistently been highlighting this issue with data and analysis. In the newly released Outlook for Producer Economies, we highlight the low tariffs for end-use electricity consumption across many parts of the Middle East, which is underpinning very rapid growth in residential electricity use – largely for appliances and cooling.

	Subsidies	Per capita residential electricity demand (right axis)
2017	26.8	1611.8
2025	42.5	1678.7
2030	48.1	1904
2035	55	2180.1
2040	64.4	2429.1
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Some progress has been made in raising residential electricity prices in several countries, including in Saudi Arabia, but prices are still relatively low across the region – failing in many cases to cover the cost of supply. If subsidies to electricity were to remain at their current levels, rising electricity demand in the residential sector would increase the subsidy bill to around $65 billion by 2040 in the Middle East, a huge fiscal burden.

Further efforts at pricing reform are a major part of the solution. Raising fuel and electricity prices reduces the payback period for products with higher efficiency, and helps raise public awareness of the links between efficiency and the cost of the energy they consume.

However, a push is typically also required on the supply side to ensure that more efficient products are available on the market. A number of countries are introducing efficiency policies: the UAE have introduced an efficiency labelling programme for refrigerators and air conditioners, while Saudi Arabia has introduced minimum efficiency performance standards (MEPS). But much more could be done.

Phasing out fossil fuel subsidies would also facilitate the cost-effective deployment of the region’s huge renewables potential, whose development has been limited by the availability of subsidised oil and gas for power generation. The Middle East is endowed with some of the best solar irradiation rates in the world, reaching around 2 400 kilowatt-hours per square metre per year, but the share of solar generation in the power mix remains very low. The share of all renewables is only 6% of the region’s generating capacity and 2% of electricity production.

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