Contributed by: André de Moor, Institute for Research on Public Expenditure (IRPE)

One of the key causes of slow reform is that public policy continues to encourage wasteful behavior and support unsustainable practices. A report by the Institute for Research on Public Expenditure entitled Subsidizing Unsustainable Development: Undermining the Earth with Public Funds reveals that economically perverse and ecologically blind subsidies are widespread and pervasive in virtually every country, developing and industrialized. Worldwide, governments spend USD 700 to USD 900 billion each year on subsidies to water, agriculture, energy and road transport. The report concludes that far too many of these subsidies are economically inefficient, trade dis-torting, ecologically destructive and socially inequitable, sometimes all at the same time.

Among the most perverse are subsidies for energy. It is currently estimated that global energy subsidies run up to USD 200 billion each year.

OECD countries spend USD 82 billion on subsidiz-ing energy production, about USD 90 per person, mostly through tax breaks, cheap provision of public infrastruc-ture and services, subsidized capital and price support. Countries of the Former Soviet Union and in Eastern Europe spend over USD 80 billion subsidizing the energy bills of consumers, that is USD 200 per person. Still, this is less than half the size of energy support during the Soviet era; indeed, in their transition to a market economy, governments in these countries have increased energy prices substantially, currently up to 70 percent of world market level. The impact of the price reforms, however, has been partly offset by a new major problem, that is the non-payment of energy bills. In several countries, it is now quite common that privileged users are exempt from penalties on delinquent payments and governments even conduct bail-out operations. These policies effectively set energy prices at zero rates and encourage excessive consumption of energy resources. Rough estimates suggest that non-payments in energy sectors may run at between USD 10 to USD 30 billion. Finally, subsidies for energy consumers in developing and oil exporting countries amount to about USD 40 billion a year.

The common feature in global energy policy is that most of the USD 200 billion of subsidies flow to the most damaging and polluting energy sources. Some 88 percent of all subsidies end up subsidizing coal, oil and gas, either direct or indirect through fossil fuel based power generation. Nuclear energy with all its risks for human health and the environment receives 8 percent, mainly in OECD countries, and gets more support than "clean" renewable energy. The inevitable but shocking conclusion, therefore, is that governments are actually subsidizing pollution. Analytical and empirical evide-n-ce convincingly demonstrates that removing all energy subsidies would reduc-e global CO2 emissions by 10 percent while at the same time stimulating econo-m-ic efficiency and growth. Therefore, an internationally coordinated ac-tion to remove energy subsidies would be an ideal effort to comply with the targets for CO2 emissions as agreed in Kyoto. Oddly enough, the possibility of global subsidy reform has only attracted little attention.

Perhaps the most striking example of how wasteful and damaging subsidy policies can be is public support to the coal industry in Germany. The German government subsidizes coal production directly through purchase obligations but also indirectly through deficit payments to minersŐ pension funds, subsidies for early retirement schemes or adaptation aid to control water contamination. Total coal subsidies now run up to USD 16 billion a year, that is about USD 100,000 for each miner. This staggering outcome implies that it would be cheaper to close the mines, fire the miners and give them a handsome salary not to work and hence bring about enormous savings to the budget and the environment. Indeed, Germany could then easily comply with its Kyoto reduction target and reduce its CO2 emissions by 8 percent.

André de Moor
Institute for Research on Public Expenditure; Oranje-straat 8, 2514 JB the Hague, the Netherlands. Email: ademoor@ivovo.nl