Energy Subsidies

An interesting new working paper by Hall et al. looks at the role of energy subsidies in the developing world as a problem – and potential solution – in dealing with climate change:

Many non-OECD countries currently subsidize energy, and particularly fossil fuels, thereby creating an opportunity for subsidy reform or elimination that would have a variety of domestic benefits while also reducing GHG emissions. Energy subsidies encourage the overconsumption
of fuels and increase CO2 emissions. Yet, many countries pursue these policies to accomplish specific domestic policy objectives such as social stability, access to cleaner cooking fuels, increased electrification, or industrial policy. In some cases these are worthy objectives, but the energy subsidies have significant domestic costs including budgetary pressures, decreased energy security, inefficient energy markets, black markets for fuels, and distributional consequences (UNEP 2008).4 It is worth asking whether developing countries could reform
energy subsidies and seek less costly avenues to accomplish related policy objectives while
simultaneously reducing CO2 emissions.

Hall and his colleagues figure elimination of gasoline subsidies in China are the equivalent of $11 a ton CO2 tax – more for diesel. This seems a promising approach. But energy subsidies are a tricky thing.

It could be argued that we are substantially subsidizing our own energy consumption, by not including in our energy costs all expenses associated with the energy’s production (in econojargon, not pricing the externalities). The cost of the military needed to protect oil supplies is one clear example. (See this Boyd and Chermak working paper. Data’s a bit old, but still relevant.) If you don’t associate the full cost with the commodity in question, you’ll tend to use a lot more than you should, with all sorts of nasty consequences. So while convincing those in the developing world to eliminate their energy subsidies is a win, the discussion needs to be broader.

(See Daniel Hall’s blog on this and other subjects at Common Tragedies.)

One Comment

  1. Pingback: jfleck at inkstain » Hall on Energy Subsidies

Comments are closed.