x Abu Dhabi, UAEWednesday 17 January 2018

Agreeing to phase out subsidies is one giant step for mankind

The Group of 20 leading and developing economies has made it official: energy subsidies are no longer a private matter for sovereign states.

The Group of 20 (G20) leading and developing economies has made it official: energy subsidies are no longer a private matter for sovereign states, but constitute a global environmental issue demanding international action. Environmental groups may decry the G20's lack of a firm timetable and specific action plan, but the die has been cast. Against expectations, the group of countries responsible for 80 per cent of world energy consumption has publicly agreed to phase out subsidies on fossil fuels such as oil, gas and coal over the "medium term".

Acknowledging the need for concerted action to end subsidies is a huge step forward in the fight to curb global carbon emissions without knocking the remaining stuffing out of the world's economy. Charging all consumers prices that realistically reflect the costs of producing and transporting fuel is the surest way to prevent fuel from being wasted. In terms of energy conservation and emission cuts, it would yield instant results.

"We agreed to phase out subsidies for fossil fuels so that we can transition to a 21st century energy economy - an historic effort that would ultimately phase out nearly US$300 billion (Dh1.1 trillion) in global subsidies," the US president, Barack Obama, said in his closing address to the G20 summit he hosted last week in Pittsburgh. "This reform will increase our energy security. It will help transform our economy, so that we're creating the clean energy jobs of the future. And it will help us combat the threat posed by climate change," Mr Obama said. "All nations have a responsibility to meet this challenge, and together, we have taken a substantial step forward in meeting that responsibility."

But if the benefits of eliminating fuel subsidies are so obvious, why has it not already been done? According to the US energy consulting firm John S Herold, two thirds of the growth in global oil demand in 2007, when crude was well on its way to a record $147 per barrel, was coming from countries whose governments controlled and subsidised domestic prices for fuels such as petrol and diesel. Since the international crude price did not affect the local price of petrol, consumers in those countries mostly did not care or were blissfully unaware that oil prices were headed to levels that could tip their national budgets into deficit while contributing to global economic collapse.

As the oil price spike materialised over the ensuing year, several impoverished governments announced that fuel subsidies would have to be chopped. With the notable exceptions of Indonesia and China, few made the proposed reforms stick. Part of the reason was that the citizens of countries offering subsidies had come to regard cheap petrol, gas and electricity as a right. Governments reducing fuel subsidies therefore ran a grave risk of stoking both inflation and social unrest.

Another problem was that governments had used subsidised energy to attract heavy industry. Analysts attributed China's feat of corralling 34 per cent of the world's steel manufacturing capacity to massive coal subsidies. In the name of diversifying their economies, Middle-Eastern countries, including Egypt, Saudi Arabia and the UAE, used cheap gas and electricity to attract investment in petrochemicals, aluminium smelting and other energy-intensive industries.

But if the subsidies were lifted, those ventures might turn unprofitable, leaving the host countries' governments to cope with closed plants, angry former employees and legal fights with disgruntled investors. However, there was also mounting evidence that fuel subsidies were becoming unsustainable in some countries. In Iran, the world's fourth-biggest crude oil producer, subsidies left the government so short of funds as oil prices rose that it failed to invest in sufficient refining capacity to satisfy domestic fuel demand. In 2007, rioters set fire to petrol stations as Tehran introduced petrol rationing.

Compounding the shortage, illicit petrol trafficking into neighbouring Turkey flourished, due to a 20-fold difference between official Turkish and Iranian petrol prices. In India last year, capped fuel prices left state-owned refiners dependent on government "oil bonds" to offset substantial financial losses. Meanwhile, private-sector refiners focused on exports. In the Gulf region, every state except Qatar has recently grappled with gas and electricity shortages linked to fuel subsidies. Although countries such as Saudi Arabia and the UAE have sought foreign partners for gas development, the low projected returns from projects aimed at supplying their domestic markets have deterred investment.

In Russia, fuel subsidies have left state-controlled energy companies short of funds for refurbishing ageing pipelines, resulting in frequent leaks and explosions. Gazprom, the Russian gas monopoly, which last year sold gas in Europe at 4.7 times the price it charged its Russian customers, has admitted to underinvesting in its pipeline system. Russia leads the world in the environmentally harmful practice of gas flaring, burning off fuel that might be used productively if the financial returns from gathering and processing it were more attractive.

In cutting fuel subsidies, Indonesia softened the blow to its citizens by distributing cash to poorer households. China's government publicly linked recent increases in petrol prices to national drives to clean up pollution and stimulate low-carbon energy development. Other states may need help to liberalise fuel prices, which makes international agreements important. Following the G20 decision, both India and Saudi Arabia declared they were in favour of ending "inefficient" subsidies.

Iran's government may soon get all the outside help it needs. Proposed international sanctions targeting oil products could soon allow Tehran to blame higher petrol prices on the West. tcarlisle@thenational.ae