Falling fossil fuel subsidies may be a sign that governments have got the message on global warming

PUBLISHED : Friday, 29 July, 2016, 12:50pm
UPDATED : Friday, 29 July, 2016, 10:38pm

At last a sliver of good news on global warming: worldwide subsidies for fossil fuels that contribute so strongly to wasteful energy use are slipping steadily downwards – maybe not yet far enough, but movement is in the right direction, according to the International Energy Agency.

From fossil fuel subsidies totalling US$557 billion in 2008, the subsidies in 2014 fell to US$490 billion, and are thought to have fallen further since then as oil prices have steadied at lower levels in the past year.

And for a change, China is not among the most grievous sinners. The IEA says China’s fossil fuel subsidies – mainly focused on oil and coal – have almost halved since 2008, from US$42 billion to around US$22 billion. This is far behind Saudi Arabia and Iran, which provide fossil fuel subsidies of US$69 billion or more, and even behind India and Russia, which in 2014 provided subsidies of more than US$40 billion.

At the same time China has joined the good guys by shifting subsidies to the promotion of renewable energies. In 2014, more than half of its US$7 billion of renewable energy subsidies were devoted to encouraging wind power, where it has today become a world leader in wind turbine manufacture and technology. Leading the field in subsidy for renewables is Germany (US$22 billion), ahead of the US and Italy, both around US$20 billion. Worldwide, subsidies for renewable energy have risen to US$112 billion – gratifying, but rather perversely this is still less than a quarter of the subsidies provided for fossil fuels.

If we stay with the IEA numbers, then Hong Kong (and Singapore) can smile complacently around the room as global good guys – no subsidies at all for fossil fuels. But then suddenly we notice a wholly different set of data now being produced by the International Monetary Fund and other agencies like the Global Subsidies Initiative, which paint a rather less glowing picture. According the IMF measures, Hong Kong’s consumption-distorting energy subsidies cost us around US$9.64 billion – or about $75 billion in Hong Kong dollar terms. Singapore is also not such a good guy, with energy supports amounting to US$7.85 billion.

So too at a global level does the IMF paint a rather bleaker picture. It says energy subsidies worldwide amounted to US$5.4 trillion last year – 11 times more than estimated by the IEA. How on earth can they arrive at such a totally different number? It is rather simple really: they include estimates of the costs arising from harm from air pollution and global warming, including damage to health from pollution exposure, and the cost of damage done by carbon emissions.

By the IMF’s measure, it is once again China that becomes the world’s cardinal sinner and biggest subsidiser, with subsidies in 2015 estimated at US$2.27 trillion – more than three times more sinful than its nearest prodigal, the United States (US$669 billion). For the IMF, US$1.73 trillion of China’s subsidies are attributed to local air pollution, and US$433 billion to global warming impacts.

As these subsidies have been eliminated or shifted to renewables, real and measurable benefits have arisen

And it is of course here where Hong Kong also becomes a prodigal – albeit on a much more modest scale. Of our HK$75 billion in energy “subsidies”, 69 per cent is blamed on local air pollution, and 20 per cent on global warming. A not-insignificant 5 per cent is blamed on traffic congestion. The IMF implies that appropriate energy pricing policies would in real terms recover for the government a significant proportion of that HK$75 billion “subsidy”.

While I am willing to laud all possible pressures to attract focus and priority to the global warming challenge and to the wasteful use of natural resources, I feel horribly uncomfortable at these data games, and I am far from certain that any real dollars could be recovered by the government. According to the IMF: “The bulk of the energy subsidies in most countries are due to undercharging for domestic environmental damage, including local air pollution, especially in countries with high coal use and high population exposure to emission.”

But these numbers muddle me, rather than clarify the discussion. They make the objectives less clear: should we simply be getting more governments to shift real cash support to positive policy initiatives to support development of clean and renewable energies? Or should we be prioritising technologies that reduce air pollution like carbon capture for coal-fired plants? Of course we should be doing all of these things, but my suspicion is that these new IMF numbers have been designed to “shock and awe” – after all, US$5.3 trillion is a much more shocking number than the IEA’s more imaginable US$490 billion.

Using IEA data, it is possible to see real positive progress being made in countries like China and Indonesia. At the worst point back in 2012, Indonesia was spending US$36 billion a year on fuel subsidies, mainly for petrol and for electricity. These subsidies were gobbling up 20 per cent of the government’s budget, and ruthlessly squeezing poverty alleviation programmes, improvements in health care, and efforts to build a better infrastructure. President Joko Widodo has taken advantage of the slump in global fuel prices to slash these subsidies. Last year they were US$8 billion, and this year they are expected to be even lower. Billions have been released for use on urgent social programmes.

As these subsidies have been eliminated or shifted to renewables, real and measurable benefits have arisen. In China, energy consumption has been cut 9.4 per cent from projected levels, and CO2 emissions by 13.4 per cent. Indonesia has seen a 7 per cent cut in projected consumption, and an 11 per cent reduction in CO2 emissions.

Whichever set of data we use, my sense is that governments worldwide – and in particular the government in Beijing – have at last got the message that urgent action is needed, and are putting policies in place that are beginning to make a difference. Our fierce summer heatwave may tell us that the global warming threat is as pressing as ever, but perhaps we are beginning to edge back from the brink.

David Dodwell is executive director of the Hong Kong-Apec Trade Policy Group