The Environmental Benefit of Fuel Subsidy Elimination

The Environmental Benefit of Fuel Subsidy Elimination

Fossil fuel subsidy reform (FFSR) is the missing piece of the climate change puzzle. The elimination of fossil fuels subsidies is believed by environmental experts to highly contribute to the goal of the Paris agreement, which builds upon the United Nations Framework Convention. The agreement aims to combat climate change by preventing the average global temperature from rising above 2 degrees Celsius from that of pre-industrial levels and limit the temperature increase even further to 1.5 degrees Celsius. It is estimated that FFSR could lead to carbon emission reductions equivalent to a quarter of the combined effort currently proposed by countries as part of the Paris Agreement.

On the local front, Ehsan El Hady, Chairman at Green Plus Environmental Solutions, a firm in the field of environmental management and quality, notes that Egypt signed the Paris Climate Agreement in April 2016. To El Hady, the country’s motivation to do so goes beyond its contribution to greenhouse gas emissions. “Egypt is a developing country, looking for funds from other countries to implement the national, international laws as well as all regional and international agreements regarding the environment.” Nevertheless, he still stresses that the country’s “emissions are relatively high considering the GDP and population numbers, which have adverse impacts on the efficient use of natural resources, environmental protection, and human health,” El Hady added.

Economic Cost of Removing Subsidies

Environmental welfare goals are a matter of balance when mixed with the economic needs of developing countries. Therefore, energy subsidies are—theoretically—believed to be justified; however, the environmental benefits of reducing or removing fuel subsidies can be seen from two aspects.

At the G20 Leaders Summit in September 2009, summit leaders proclaimed that they would commit to rationalize and phase out the inefficient fossil fuel subsidies that encourage wasteful consumption, that commitment was conveyed after joint research by Organization for Economic Co-operation and Development (OECD), International Energy Agency (IEA) and World Bank on fossil-fuel and other energy subsidies: which had reached conclusions that the phasing out fossil-fuel subsidies in some non-OECD countries would reduce world Greenhouse Gas (GHG) emissions by 10% in 2050.

Secondly, as a result of fuel tends to have a distinct advantage over renewable energy sources. Phasing out fuel subsidy would level the playing field of renewable energy. According to report, reducing or removing fuel price subsidy would then allow for rapid transition from fossil fuel to renewable energy, that funds arising from fuel subsidy could be redirected to clean energy subsidy and other environmental programs designed to mitigate environmental degradation.

“Subsidy reduction will potentially affect social issues that will be reflecting on environmental issues as well, for example, some citizens will be forced to change their lifestyle to cut some costs especially in the power sector that will affect directly the environment through power consumption that will reflect also on the oil and gas field,” explained Mohamed Labib; Senior Environmental Consultant.

While positive environmental impact is a byproduct to the state’s efforts to eliminate subsidies, Labib thinks “the current subsidy-reform scheme addresses only budget [concerns] and does not take into consideration the social issues accompanying this decision, either on the long run or the short run.”

Furthermore, Labib believes the impact of subsidies reduction will go beyond economic factors in Egypt. “These subsidies will rush citizens to reduce their costs,” he explained, adding that this directly translates to a “negative social impacts for most families of the low- and mid- range economic classes.”

According to a paper published by the National Bureau of Economic Research in 2016 titles “The Environmental Cost of Global Fuel Subsidies,” fuel subsidies are inefficient as they lead to excess consumption, enabling purchases for which the private benefits are lower than private cost. Removing fuel subsidies helps balance government budgets, but it also yields enduring benefits in the form of reduced carbon dioxide emissions and other externalities.

According to a research paper in 2012 titled “Impact of Fuel Subsidy Removal on the Indonesian Economy.” Fuel subsidy removal will certainly improve the government budget. The government will have more room for various fiscal policies from subsidy removal. It should reallocate this extra budget to each sector accordingly. Economic efficiency requires that households and firms pay energy prices that reflect their full cost to society, including both private and external costs.

Economic and Environmental Cost of keeping Fossil Fuels Subsidy

According to an article entitled “Reforming Environmentally Harmful Subsidies: How to Counteract Distributional Impacts,” removal of subsidies would imply structural adjustment and improved efficiency in productivity and consumption. For example, it would lower subsidies to coal, gasoline and biofuels increase energy prices in general, reduce consumption and promote more efficient utilization of energy and substitution to non-subsidized energy sources. Since the subsidies are foremost targeted at fossil fuels, the emissions of greenhouse gases would be reduced. This represents a win-win situation, as it represents a cost efficient option of reducing GHG emissions. The different benefit estimates, dependent upon which countries are included, time period and subsidies.

Given the extensive support to energy consumption and production, removing the inefficient subsidies would dramatically affect the energy markets. Subsidies on certain energy production or consumption undermine the competitiveness of alternative energy sources and efficient energy technologies. Exemptions from environmental taxes can lock in polluting technologies and hinder low cost pollution reductions. This may hinder the development and deployment of environmentally friendly technologies and have negative environmental effects in the longer term. The longer a subsidy is granted, the more it will impact the lock-in effect and therefore on the environment.

States should encourage the alternative fuel vehicles in countries that heavily subsidize gasoline and diesel.

“In my opinion, the government should begin to adopt the energy consumption and energy efficiency procedures in the governmental assets (especially in the transportation field) to reduce the gaseous emissions that will lead to pollution reduction,” noted Labib.



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