War and pandemic are leading to a surge in government support for fossil fuels, study says
Energize Weekly, September 7, 2022
The combination of the COVID pandemic and the war in Ukraine has spurred an almost doubling in government support for fossil fuel production among major economies, according to an analysis by the International Energy Agency and the Organization for Economic Co-operation and Development (OECD).
Overall government support in 51 countries – representing about 85 percent of the world’s total energy supply – rose to $697.2 billion in 2021 from $362.4 billion in 2020, as energy prices rose with the rebound of economies after the depths of the pandemic.
Consumption subsidies are expected to rise even further in 2022, the analysis said, as fuel and energy prices continue to rise – in large part due to the Russian invasion of Ukraine.
“Russia’s war of aggression against Ukraine has caused sharp increases in energy prices and undermined energy security,” Mathias Cormann, OECD secretary-general, said in a statement. “Significant increases in fossil fuel subsides encourage wasteful consumption, while not necessarily reaching low-income households.”
“We need to adopt measures which protect consumers from the extreme impacts of shifting market and geopolitical forces in a way that keeps us on track to carbon neutrality,” Cormann said. The OECD is a policy forum for 38 countries with some of the world’s largest economies.
An analysis by the environmental group Carbon Tracker concluded that almost all the major countries that signed the Paris climate agreement to limit the increase in global temperatures to 1.5 degrees Celsius are behind schedule on meeting their commitments. The increase in fossil fuel subsidies creates an additional challenge.
“A surge in investment in clean energy technologies and infrastructure is the only lasting solution to today’s global energy crisis and the best way to reduce the exposure of consumers to high fuel costs,” Fatih Birol, the International Energy Agency’s executive director, said in a statement.
In 2021, budgetary transfers, tax breaks and other supports for petroleum reached $302.7 billion. Government support was $166 billion for natural gas and $209.3 billion for electricity. Direct aid for coal was $19.2 billion.
Among OECD countries, support for fossil fuel producers reached an unprecedented $64 billion, an almost 50 percent increase year-on-year. “Those subsides have partly offset producer losses from domestic price controls as global energy prices surged in late 2021,” the analysis said.
Consumer supports in the OECD reached $115 billion up from $93 billion in 2020.
In the U.S., there have been initiatives to bolster fossil fuels on both the federal and state level.
“In the wake of the pandemic, numerous ‘fossil fuel unconditional’ support measures have been announced or launched in the U.S. … mainly as an aid to fossil fuel sector companies where revenues were impacted by the record fall in oil prices,” the analysis said.
These included a reduction in the royalty rate paid to the federal government by oil and gas companies operating federal leases to as low as 2.5 percent from the standard 12.5 percent
Alaska implemented a tax credit worth up to $8 per barrel in certain areas in order to encourage crude oil production on the North Slope. Pennsylvania adopted a $670 million tax credit bill for natural gas and petrochemical manufacturing.
While governments are trying to negotiate the supply and market difficulties created by war and pandemic, their support for fossil fuels may have long-term negative impacts, the analysis said.
“Fossil fuel subsidies are a roadblock to a more sustainable future, but the difficulty that governments face in removing them is underscored at times of high and volatile fuels prices,” Birol said.