Lydia Powell and Akhilesh Sati, Observer Research Foundation
As the 21st Conference of Parties (COP) draws nearer, industrialised nations are stepping up the pressure on poor countries to confess their carbon sins and embrace the gospel of de-carbonisation. Industrialised countries treat their dependence on fossil fuels in the past and continued dependence in the present as irrelevant but see no contradiction in treating the dependence on fossil fuels by poor countries as cardinal sin (Chart 1). Ignoring intrinsic values such as fairness, they limit their focus exclusively to the instrumental goal of forcing poor countries to do what they would not have done had they been at the same stage of development through reports that supposedly estimate the cost that the poor countries are imposing on the world. Their development funds (including that of Australia, a country with the highest per capita carbon emissions among industrialised countries which is also heavily dependent on coal and gas exports to other countries) self righteously declare that they no longer support any work on coal by poor countries. Their civil society movements go about spreading the gospel of de-carbonisation with the same zeal as they spread Christianity centuries ago. Their media and the institutions that they set up and continue to control such as the World Bank, the International Energy Agency (IEA) and the International Monetary Fund (IMF) bring out reports to condemn the use of fossil fuels and the use of subsidies for fossil fuels in poor countries using what they want us to see as objective academic language.
Chart 1: Per Person Dependence on Oil, Gas and Coal in Select Countries
Source: BP Statistical Review of World Energy 2015 & World Bank
One such report is the IEA’s forthcoming free report on Energy and Climate Change. The press release on the report observes that it sees four pillars as essential requirement to make COP 21 a success: (1) Setting conditions to achieve an early peak in global energy related emissions (2) Review of national actions every five years (3) translate the world’s climate goal into collective vision (4) establish a process for tracking achievements in the energy sector. It then goes on to say that a peak in energy emissions can be achieved in five years if governments implements ‘just five’ measures:
- Increase energy efficiency in the industry, buildings and transport segments
- Reduce use of least efficient coal fired power plants and ban their construction
- Increase investment in renewable energy technologies in the power sector from USD 270 billion to USD 400 billion
- Gradually phase out fossil fuel subsidies by 2030
- Reduce methane emission in oil & gas production
According to the IEA, these measures are all based on proven technologies and none of them will compromise on economic growth. The target of these messages is poor countries because rich countries have completed the process of using fossil fuels to industrialise and grow. Now they want to kick down the ladder that they used to climb on to their self-righteous perches. They have done this in the economic realm (as the South Korean economist Ha-Joon Chang as eloquently explained in his book) and now they want to do the same for energy.
One of the latest IMF reports on subsides seeks to estimate the magnitude of energy subsidies. The title of the report suggests that it is estimating ‘energy subsidies’ in general but its contents exclusively focus on subsidies for fossil fuels. The opening remarks of the report make that very clear as it observes that subsidies (1) damage the environment (2) cause premature deaths through local air pollution (3) cause congestion of vehicles that use fossil fuels (4) impose fiscal costs that consequently reduce investment in vital public services (5) discourage investment in energy efficiency and renewable (6) and that subsidies are invariably appropriated by rich households.
One of the key tools industrialised nations use to attack energy subsidies is to define it in such a way that poor countries come out looking bad. The way they do this is by limiting the definition of subsidies to economic and environmental outcomes while leaving out social outcomes. The IMF report defines pre tax consumer subsides as the ‘price paid by consumers (firms, households etc) that is below the cost of supplying energy’. It defines post tax subsidies as the ‘price paid by consumers that is below the supply cost of energy plus an appropriate ‘Pigouvian’ or ‘corrective’ tax that reflects the environmental damage with associated with energy consumption and an additional consumption tax that should be applied to all consumption goods for raising revenue.
As per the IMF definition irrespective of whether we use the pre-tax or the post tax definition of subsidies, the question of whether we subsidise or do not subsidise energy can be answered only when we know the cost of supply. According to the IMF consumer subsidies arise when the price paid by consumers is below benchmark prices which are taken as the supply cost. The IMF says that it used country specific data for OECD countries and closest prices adjusted for shipping and margins for other countries. On the basis of this definition, the IMF report concludes that pre-tax subsidies were 0.7 percent of global GDP in 2011 and 2013 and that these subsidies will decline by about a third to 0.4 percent of global GDP in 2015 on account of the decline in international energy prices. 63 percent of the reduction in pre-tax subsidies is attributed to the fall in the price of oil, 9 percent to the fall in the price of natural gas and 28 percent to the fall in the price of electricity.
As the IMF report is obviously hoping to influence outcomes at COP 21 in December 2015, it highlights the magnitude of post tax subsidies that is eight times as large as pre-tax subsidies in 2011 and 16 times as large in 2015. The report observes that despite the sharp drop in international energy prices, post tax subsidies have remained high at 5.8 percent of global GDP (USD 4.2 trillion) in 2011 and 6.5 percent (USD 4.9 trillion) in 2013 and 6.5 percent (USD 5.3 trillion) in 2015. It assigns blame for the growth in post tax subsidies almost entirely to ‘high growth in energy consumption, particularly coal, in countries with relatively high environmental damage from coal’. This is probably a new and improved way of shaming by not naming because we all know that the countries IMF report is targeting are China and India. The report observes that coal is the biggest source of post-tax subsidies amounting to 3 percent of global GDP in 2011 and rising to 3.9 percent in 2015. Petroleum and gas follow with a subsidy of 1.8 percent and 0.6 percent of GDP respectively. The only observation in the IMF report that implicates rich countries is when it says that the rich countries account for about a fourth of post tax subsidies while developing Asia about half. If one balances this observation for population (or present it in per person terms) rich countries may come out worse than poor countries.
Turning to the benefits of removing subsidies the IMF report provides a long list of favourable economic and environmental outcomes such as revenue gains, reduction in CO2 emissions, and reduction in premature deaths. If all countries are in the same stage of development there would be little reason to quarrel with the conclusions of the IMF report. Unfortunately all countries are not in the same stage of development. Developing Asia dominated by India and China has the largest number of people without access to modern energy sources. Subsidies, especially energy subsidies, were designed to increase access to modern energy sources. While it is an established fact that there are economic and material leakages of energy subsidies, it has contributed to increasing energy access in a big way. This is an outcome all the reports on energy subsidies choose to ignore. A study that compared energy access in neighbouring regions in India and Nepal that share the same ecological, economic and social characteristics has shown that the Indian part shows high penetration of modern cooking fuels such as LPG and modern lighting sources such as electricity compared to Nepal which showed zero penetration of these fuels. The difference in terms of energy access is attributed primarily to Indian policies that subsidise access to LPG and electricity. Does this positive social externality of subsidies not matter?
The IMF report shows that most of the subsidies are appropriated by not so poor and sometimes even rich households. This may be true as they consume more energy and consequently more subsidised energy. However this cannot be treated as an important argument for killing energy subsidies. There is evidence to show that a temporary withdrawal of subsidies for LPG in India pushed many households back in time as they were forced to use firewood and dried animal dung for cooking.
There are other definitions of subsides such as that of the World Trade Organisation (WTO) which defines subsidies as ‘financial contribution from the government which confers a benefit’. Under this definition, if subsidies confer a benefit to the poor it must be treated as violation of WTO norms. This makes meeting WTO norms more important for governments than keeping the social contract of providing basic necessities to people.
Chart 2: Share of Daily Wages Spent to by One Liter of Petrol in Select Countries
The definition of subsidies today is tailored to meet instrumental goals of industrialised nations. The definition assumes a uniform and equitable world where everyone is more or less in the same economic and social state. Under this definition, an average American is the same as an average Indian even though the American consumes twenty times more energy and so the American and Indian must be subjected to the same policies. This fallacy of equality pervades all global policy making endeavours but this cannot continue if we are serious about a socially and ecologically sustainable world.
Poor nations must call for a per person income floor below which global definitions such as those for subsidies cannot be applied. In the case of energy, when a person has to spend more than 20 percent of his income on energy he should be declared as energy poor and be freed from the constraints of global subsidy definitions. Bloomberg’s ‘pain at the pump’ index that tracks petrol prices in over 60 countries ranks Pakistan and India as the most energy poor because an average person must spend more than a day’s wages to buy a gallon of petrol (Chart 2). This is in spite of the fact that India and Pakistan ‘subsidise’ petrol prices. If they withdraw subsidies to keep the IMF happy they can do so only by making petrol inaccessible to the poor. As per the proposed floor, both India and Pakistan will not qualify as subsidisers of petrol.
The attacks by industrialised nations, motivated by the great and the good, assume that the guilt from the large carbon foot print of their lives can and should be off-set by preventing an Indian village from getting its first light bulb. These well known attack lines used by apostles of de-carbonisation must be countered by poor nations in the long term interest of their own people.
Views are those of the authors
Authors can be contacted at email@example.com, firstname.lastname@example.org
Courtesy: Energy News Monitor | Volume XII; Issue 1