When going through today’s news, I found an article on the International Energy Agency’s estimate of global fossil fuel subsidies: more than $550 billion in 2008. The increase from 2007 was $214 billion. According to the article, most of the subsidies were found in Iran, Russia, India, and China.

This is a stunning figure that reveals the deep flaws of energy policies in developing countries. According to standard economic theory, as well as common sense, the state should subsidize (tax) activities that produce public goods (bads). And yet we see developing countries waste hundreds of billions of dollars to increase pollution. Indeed, IEA’s chief economist, Fatih Birol, characterized phasing these subsidies out as the win-win-win solution: “Energy consumption will be reduced, CO2 emissions will be substantially reduced and it will increase energy efficiency.”

Why is phasing out energy subsidies so difficult, then? I am not terribly familiar with the literature, but common explanations include the influence of special interests (if you live in the United States, you should know how this works) and the public backlash from reduced subsidies when fuel prices go up.

In 2009, the G20 agreed to phase out fossil fuel subsidies by 2020. At this moment, it remains unclear whether this goal can be achieved. But if it is achieved, then the world has scored a major victory in the struggle to avert a climate crisis.

PS. The Global Subsidies Initiative seems to have a comprehensive section on fossil fuels. I have not read it yet, but it seems very good at first blush.

PPS. If you are aware of rigorous theoretical or empirical research on fossil fuel subsidies, please get in touch. The same goes if you are interested in exploring this topic in a more systematic fashion.

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