Energy Subsidies: Lessons Learned in Assessing their Impact - UNEP

Energy Subsidies: Lessons Learned in Assessing their Impact and Designing Policy Reforms
corn-based ethanol blended into gasoline. The 2000 report estimates that total subsidies
calculated on an equivalent basis declined by 16% in real terms compared with 1992.
A 2000 study by Koplow and Martin, commissioned by Greenpeace, estimates the cost of
federal subsidies to the US oil industry in 1995 at between $5.2 and $11.9 billion, excluding
the costs of defending Persian Gulf oil supplies. The largest single elements are stockpiling
of oil in the Strategic Petroleum Reserve to protect against supply disruptions and tax breaks
for domestic oil exploration and production.
A 1995 study by Böhringer at the University of Stuttgart examines the effects on CO2
emissions of reducing subsidies to German coal production, using a general equilibrium
model. His study evaluates income and other economic effects of various possible
modifications of the then current coal support system, subject to different national emission
constraints (or carbon taxes). The monetary value of coal subsidies is estimated at $6.7
billion in 1990, equivalent to DM94,000 to DM145,000 per job per year. The study finds that
subsidies to coal production become increasingly expensive as carbon constraints become
tighter. Removing these subsidies without any additional controls on emissions would
increase national income by almost 1%. The effects on emissions are not reported.
3.3 Conclusions
All OECD countries subsidise to some extent, in various ways and for differing reasons the
production, supply and use of energy. However, few countries systematically attempt to
quantify the value of those subsidies and their overall economic and environmental impact.
This is largely because of the complexity of the task, including difficulties in compiling data
and applying appropriate methodologies.
Various studies and analyses have nonetheless sought to shed some light on the issue. The
main findings of this work are as follows:
• Significant energy subsidies, mostly to producers, remain in place in OECD countries.
They are nonetheless much smaller generally than in non-OECD countries.
• Most OECD countries have reduced direct subsidies to energy in recent years. Coal
subsidies, in particular, have been reduced considerably. Regulations supporting the
supply or use of particular energy sources, discriminatory taxation and R&D may also
have been reduced overall, though the empirical evidence to support this hypothesis is
incomplete.
• Most of the subsidies that remain are intended to promote the production and use of
indigenous fossil fuel resources (for regional economic, employment and energy
security reasons) and renewable energy sources and energy-efficient technologies (for
environmental and industrial policy reasons), and to lower the cost of energy for poor
people (for social reasons).
• Many subsidies that encourage the production and consumption of fossil fuels by
lowering the price are offset by taxes, such that net subsidies are small or negative. This
is especially true for oil products. Nonetheless, market distortions are caused by
differential taxation of energy sources.
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