Fuel subsidies debacle undermines global warming roadmap

The abrupt New Year’s Eve reversal of Bolivia’s decision to raise petrol and diesel prices will send a shudder through every other government budget trapped in the suffocating embrace of fuel subsidies.

It also represents a setback for prospects of reducing global carbon dioxide emissions. Artificially low fuel prices encourage wasteful consumption and suppress economic incentives for new technologies.

A report prepared for the G20 summit in South Korea last November estimated that phasing out fuel subsidies in 37 countries – most of them developing economies – by 2020 would cut global carbon dioxide emissions by 5.8% in that year.

President Evo Morales of Bolivia put too much faith in the festive season of goodwill. On the day after Christmas he issued a decree ending fuel subsidies. Five days later it was withdrawn.

His measures to support those least able to cope with price increases of 70% failed to quell their outrage. Traditional loyalty to Morales amongst the poor was forgotten as they took to the streets.

Morales was not alone in selecting the holiday period as the moment to finesse unpopular measures on fuel prices. Nor was he alone in failure, although the circumstances elsewhere were kept under control through less headstrong political management.

India successfully deregulated petrol prices in June 2010 but diesel is far more sensitive as it is the fuel of the poor. December 22nd was the chosen date for India’s “Empowered Group of Ministers” to act on diesel subsidies.

Their meeting was postponed to December 30th. Now it has been cancelled indefinitely. Fearful of social unrest, the Indian government has backed down.

Similar new year backsliding is reported from Indonesia. The government there has a long term plan to phase out fuel subsidies by 2014. The start date was scheduled for 1st January 2011.

The country has a history of civil disturbance in response to price increases. By the middle of December the Indonesian parliament acquired collective cold feet and instructed the government to defer the proposals by “up to six months.”

Such episodes of governments seeking to wriggle off the hook of fuel subsidies are likely to intensify. As the price of oil edges towards $100 per barrel, the cost of subsidies is blowing national budgets apart.

Financial expediency is sharpened by the glaring contradictions between fuel subsidy policies and international efforts to reduce greenhouse gas emissions.

Moves to encourage energy efficiency by upping the price of carbon cannot coexist with fuel subsidies. Nor can governments justify an aggregate of $312 billion on fuel subsidies in 2009 when incentives for renewable energy technologies totalled less than $50 billion.

The fuel subsidy economies are therefore desperate to find an exit strategy which convincingly compensates the poorest households for price shocks. The title of the Seoul G20 report helpfully offers “A Roadmap for Phasing Out Fossil-Fuel Subsidies.” Events of last week reveal the pot-holes that lie in wait.

The roadmap is unlikely to influence the one country which has so far stuck successfully to its new year resolution to reduce fuel subsidies. Iran gave its citizens a few hours notice of a four-fold rise in fuel prices on December 20th.

The Iranian government also took the precaution of warning that protest or criticism would not be tolerated. With memories of violent suppression of post-election demonstrations still fresh in the public mind, few Iranians are taking chances.

Such tools of enforcement are less readily adopted elsewhere. Instead, the fate of Evo Morales seems likely to inspire more quiet shelving of good intentions, as in India and Indonesia.

The low carbon transition in developing countries faces a tough year ahead.


this article was first published by OneWorld UK