Energy subsidies put at $550bn a year

By Javier Blas

Financial Times, Published: June 7 2010 03:00 | Last updated: June 7 2010 03:00

The world economy spends more than $550bn (€460bn, £380bn) in energy subsidies a year, about 75 per cent more than previously thought, according to the first exhaustive study of the financial assistance devoted to oil, natural gas and coal consumption.

The study by the International Energy Agency, the western countries' oil watchdog, says phasing out subsidies over the medium term, as agreed last year by the Group of 20 leading industrial economies, would trigger vast savings in energy consumption and carbon dioxide emissions.

Past efforts have foundered, as many countries have vested interests in providing lower-cost fuel to citizens and industries, and in propping up sectors such as mining. The IEA estimates that in 2008, the latest year for which data are available, 37 large developing countries spent about $557bn in energy subsidies, according to a draft seen by the Financial Times. Previous estimates put it at about $300bn. Iran, Russia, Saudi Arabia, India and China top the ranking, according to the report.

Fatih Birol, chief economist at the IEA in Paris, said removing subsidies was a policy that could change the energy game "quickly and substantially".

"I see fossil fuel subsidies as the appendicitis of the global energy system which needs to be removed for a healthy, sustainable development future," he said.

The new report will be discussed at the G20 summit in Toronto this month.

The IEA estimates that energy consumption could be reduced by 850m tonnes equivalent of oil - or the combined current consumption of Japan, South Korea, Australia and New Zealand - if the subsidies are phased out between now and 2020. The consumption cut would save the equivalent of the current carbon dioxide emissions of Germany, France, the UK, Italy and Spain. Critics of energy subsidies say they encourage wasteful consumption, reduce global energy security, impede investment in clean energy and undermine efforts to deal with climate change.

They also claim that subsidies are a burden on national budgets, with financial support to oil, natural gas and coal sometimes larger than education or health spending.

But supporters, including some G20 members which reluctantly signed the statement last year, such as India, say subsidies help the poor and control inflation.