Why is it so difficult to reform fossil fuel subsidies?
In a post on Duncan Green's From Poverty to Power blog, IDS Climate Change Team Leader Matthew Lockwood explains why politics are making it difficult to reform controversial subsidies for oil, electricity and coal in developing countries.
In recent years, $500 billion a year or more has been spent globally on making high-carbon fuels cheap, with around 40% of that coming from developing countries, including some of the big emerging economies such as China, India, Indonesia and South Africa.
However, fossil fuel subsidies have a number of negative impacts:
- they are a type of negative carbon pricing (i.e. a carbon subsidy);
- the majority of the benefits are captured by the middle classes rather than the poor; and
- they take up fiscal resources that could be spent on public services or better targeted social protection.
Dr Lockwood explains that reform of subsidies has been on the G20 agenda since the Pittsburgh Summit in 2009, but has proved difficult to achieve in practice. Where attempts at subsidy reduction or removal have taken place, they have often been reversed within a few days (e.g. Ghana in 2008, Nigeria in 2012), postponed (Indonesia in 2012), or at best been highly partial (India since the 1990s). Fuel price rises often provoke violent street protests – the most recent example is Sudan.
Dr Lockwood argues that the political role played by subsidies is crucial to understanding how a reform package might be more successful. For example, concerns about corruption mean that any promises to compensate people for the loss of fuel subsidies with a targeted benefit face a big credibility problem. People see that there is no incentive for ruling regimes to eliminate corruption and distribute resources fairly, and there is no impartial third party which can enforce the promise.
He concludes: 'This really is an area where a better understanding of the political economy of reform could help bring about practical change that benefits poor people and the environment in a major way.'
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