Common Tragedies

Thoughts on Environmental Economics

Energy subsidies

Posted by Daniel Hall on July 28, 2008

There is a good article in today’s New York Times that discusses fuel subsidies, particularly in Asia:

From Mexico to India to China, governments fearful of inflation and street protests are heavily subsidizing energy prices, particularly for diesel fuel. But the subsidies — estimated at $40 billion this year in China alone — are also removing much of the incentive to conserve fuel. …

China raised gasoline and diesel prices on June 21, though still keeping them below world levels. World oil prices plunged more than $4 a barrel within minutes on the expectation that Chinese demand would slow.

In Indonesia, the government spends six times as much on energy subsidies as it does on agricultural investments, even as rice prices have skyrocketed this year.

Many countries, like India, have raised oil prices considerably in recent months, only to watch world prices climb even further, pushing up the cost of subsidies once again. China’s estimated $40 billion in subsidies this year is up from $22 billion last year, mainly for this reason, although consumption has also risen, with Chinese buying 18 percent more cars in the first half of this year than in the period a year earlier.

A few comments:

1. It is reasonable to wonder how long many of these countries can afford these policies if oil prices stay around current levels.  (“Before adjusting the prices, Malaysia was spending 7.5 percent of its entire economic output on fuel subsidies, a greater share than any other nation. Indonesia follows with 4 percent.”)

2. The $40 billion figure for China is eye-popping, but it is not entirely clear what fuels it is for and how it was calculated.  The IEA has estimated that in 2005 China subsidized oil products to the tune of around $7 billion, out of $25 billion in total energy subsidies.  My understanding is that the 2008 World Energy Outlook is going to take another look at developing country energy subsidies.  I wait with curiosity.

3. As Free Exchange notes, a lot of the increase in oil consumption in China is being driven by increases in wealth and consumption more broadly.  Market prices won’t stop demand in China from growing but they might help prevent China from developing into an oil-addicted behemoth (see America, 1950s).

4. The EIA estimates that the U.S. currently subsidizes energy at around $16.6 billion, with about half of this going to renewables (particularly biofuels), nuclear power, conservation, and energy R&D.  About $2 billion goes to oil and natural gas, almost all in the form of tax expenditures.  On a per-unit basis energy is neither much subsidized nor taxed in the U.S.

2 Responses to “Energy subsidies”

  1. guido said

    i do not know where you get your subsidies from…but total energy subsidies are $74B with $9B to nucleur, $8b to coal, $6b to ethanol, and finally $6 b to other renewables.

    To oil and gas is approximately $39 billion when the war is factored in (50%), which includes keeping sea lanes open, accelerated depreciation (17%), royalties (8%), tax breaks (11%),oil stockpiling (5%), other (9%).

    i wish i could find the source for this…and i will post if i can.

  2. Daniel Hall said

    Guido, when you say “total” energy subsidies do you mean U.S.? For the U.S. I am using estimates from a recent EIA report (linked in the post). Of course there are other estimates out there that use different metrics for what constitutes a subsidy. Regarding the numbers you quote, readers will have to make up their own minds about whether the war in Iraq is an energy subsidy policy. But I am relatively certain that the figures quoted in the NYTimes article refer to essentially direct subsidies to fuel prices (probably mostly consumption subsidies) and do not include things like all the aid and development money that China gives Africa with very many (energy) strings attached. Thus to my mind the EIA estimates are reasonably good for making comparisons with the figures quoted in the article.

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