Fossil fuel subsidies need global reform, say Baker Institute experts

Rice Quad

HOUSTON – (Oct. 22, 2020) – Fossil fuels still receive most of the international government support provided to the energy sector despite their “well-known environmental and public health damage,” according to new research from Rice University’s Baker Institute for Public Policy.

“There is evidence that fossil fuel subsidies are socially inequitable, that they encourage smuggling and waste, and distort economies in ways that undermine economic efficiency while harming the environment and the climate,” wrote Jim Krane, the Wallace S. Wilson Fellow for Energy Studies at the Baker Institute, Francisco Monaldi, fellow in Latin American energy policy at the Baker Institute, and Walid Matar of the King Abdullah Petroleum Studies and Research Center.

Their paper tracks fossil fuel usage and government subsidies since the the 2009 G20 summit, during which representatives from 20 countries discussed global financial and socioeconomic issues and agreed to “phase out and rationalize over the medium term inefficient fossil fuel subsidies.” A decade later, fossil fuels continue to constitute 80% of global energy consumed — as they have since about 1910, when coal consumption surpassed that of biofuels, the researchers wrote.

As of 2018, “advanced countries were still spending some $800 billion per year to support purchases of fossil fuel products and services, versus $140 billion for all subsidies worldwide on renewable power generation,” they wrote. “Retracting fossil fuel subsidies would bring a huge reduction in CO2 emissions alongside public health benefits from reduced local pollution and traffic.”

The authors wrote that fossil fuel subsidy reform is “so unambiguously beneficial that it is often described as one of the few areas within the field of economics around which there is widespread agreement among scholars.”

Fossil fuel subsidies are regressive, disproportionately benefiting the “better off,” according to the paper — an estimated 61% of gasoline subsidies accrue to the top 20% of income earners, while the bottom 20% receives just 3%. But the subsidies do represent a large portion of income for those in the bottom 20%, so simply removing them without compensation "would be socially undesirable and politically dangerous,” the authors wrote.

Subsidy reform will require a comprehensive communications campaign to publicize its economic and environmental benefits, according to the authors. Talk of higher gas prices tends to incite protest, so further stimuli may be necessary, they argue, including alternate benefits or even cash “basic income” stipends.

Saudi Arabia, for instance, has “successfully reduced its long-standing discounts on fossil fuels, which, compounding over four decades, made it the world No. 5 consumer of oil,” Krane said. “The kingdom’s two rounds of price increases appear to have reduced oil consumption, an important victory for Riyadh, since oil exports are its main source of government revenue.”

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Related materials:

Paper: https://www.bakerinstitute.org/media/files/research-document/4a872e65/ces-pub-fuelsubsidy-100620.pdf.

Krane bio: https://www.bakerinstitute.org/experts/jim-krane/.

Monaldi bio: https://www.bakerinstitute.org/experts/francisco-j-monaldi/.

Follow the Baker Institute’s Center for Energy Studies via Twitter @CES_Baker_Inst.

Follow Rice News and Media Relations via Twitter @RiceUNews.

Founded in 1993, Rice University’s Baker Institute ranks as the No. 2 university-affiliated think tank in the world and the No. 1 energy think tank in the world. As a premier nonpartisan think tank, the institute conducts research on domestic and foreign policy issues with the goal of bridging the gap between the theory and practice of public policy. The institute’s strong track record of achievement reflects the work of its endowed fellows, Rice University faculty scholars and staff, coupled with its outreach to the Rice student body through fellow-taught classes — including a public policy course — and student leadership and internship programs. Learn more about the institute at www.bakerinstitute.org or on the institute’s blog, http://blog.bakerinstitute.org.