Energy subsidies are nothing new. The world’s total, direct energy sector subsidies – including those to fossil fuels, renewables and nuclear power – are estimated to have been at least US$634 billion in 2017, according to the International Energy Agency (IEA).
While renewables are often criticised for being heavily subsidised, in fact fossil fuels and nuclear power receive more financial support worldwide. These were dominated by subsidies to fossil fuels, which account for around 70 percent (US$447 billion) of the total.
Subsidies to renewable power generation technologies account for around 20 percent of total energy sector subsidies (US$128 billion), biofuels for about 6 percent (US$38 billion) and nuclear for at least 3 percent (US$21 billion).
Proponents of such energy subsidies argue for its security of supply, economic, and social benefits. Its detractors say that energy subsidies deter sustainable development, while impeding an efficient energy market.
Fossil fuel subsidies in particular are contentious, in that negative externalities are not adequately priced into consideration. For instance, policies that cap the price of gasoline for transportation are sometimes used to ensure the mobility of the poorest members of society. But when the subsidy is predominantly captured by car-owning middle-income households, the stated goal of the subsidy falls short.
This also has a negative interaction with health, environmental and macroeconomic policy goals. The International Renewable Energy Agency (IRENA) has estimated that health costs arising from outdoor pollution generated by fossil fuel use was around US$2.26 trillion, with climate change costs of around US$370 billion (assuming US$11 per tonne of CO2).
Hence, even without direct market subsidies, the externalities associated with fossil fuels represents an ‘implicit’ subsidy, which policymakers are reluctant to address.
Pricing Out Externalities
By increasing deployment of renewables through subsidies, it plays a role in reducing reliance on fossil fuels in the energy mix. It is an indirect way of pricing out the negative externalities associated with fossil fuels. Researchers from Berkeley National Laboratory found that using wind and solar energy in place of fossil fuels helped avoid between 3,000 and 12,700 premature deaths in the US between 2007 and 2015, saving US$35–220 billion. The researchers concluded that the monetary value from improved air quality and climate benefits were about equal to or more than the cost of government subsidies to wind and solar.
These estimates have huge margins of error, but at least it is a way of quantifying the impact of reliance on fossil fuels. Yet the continued imbalance remains staggering. In 2017, the costs of unpriced externalities and the direct subsidies for fossil fuels exceeded subsidies for renewable energy by a factor of 19.
The good news is that renewable sources of energy are becoming cost-competitive with fossil fuels and will no longer need subsidies. New-build renewable power generation technologies, increasingly without subsidies, will even displace existing coal, or nuclear power plants. This is because their total lifetime costs are lower than these older plants’ variable operating costs.
Subsidise or Compete?
As for green subsidies, IRENA argues for a rebalancing of energy sector subsidies away from fossil fuels towards environmentally friendly subsidies by 2050. On the other hand, research by the European Union has suggested that countries should focus on carbon pricing rather than subsidies for low-carbon electricity to achieve further reductions in power sector emissions, and as a more cost-effective measure. Both parties agree that fossil fuel subsidies are harmful and should be phased out as soon as possible.
For now, there is no definitive answer. But as technology improves and maintenance costs decrease, green energy plants will increasingly be in demand across the world, especially when old fossil fuel plants reach their end-of-life. Do we still need subsidies by then? IRENA’s research predicts that by 2050, total energy sector subsidies will fall from 0.8 percent of global GDP in 2017, to 0.2 percent.