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For decades there has existed a community of researchers – spanning government ministries, international organisations, academia and civil society – working to increase the world’s understanding and awareness of harmful subsidies. Since September 2009, when the G-20 committed to phase out and rationalize inefficient fossil-fuel subsidies that lead to wasteful consumption and distorted long-term energy investments, much attention has turned to the subjectMarking just over a year after this agreement was reached, and in the run-up to the G-20’s Seoul Summit on 11−12 November, Subsidy Watch contacted Professor Cees van Beers and André de Moor, part of the fossil-fuel subsidy research community since the 1990s, and asked for a retrospective: how far have we come and how far have we yet to go?

In the early 1990s we started researching public subsidies as part of an Earth Council project, initiated by Emile van Lennep, former Secretary General of the Organisation for Economic Co-operation and Development (OECD). This was an eye-opener as government subsidies were generally thought to be benevolent but many turned out to be fiscal, environmental and social failures. Some years later, our work culminated in a book entitled Public Subsidies and Policy Failures, published in 2001. In the preface we wrote, “Our decision to write a book on public subsidies has been triggered by the continuing examples around us of subsidies with perverse implications. Although the political and social significance of the issue has become abundantly clear, it is still insufficiently recognized…”

We estimated global energy subsidies at US$ 240 billion, reflecting a severe addiction on the part of governments. Furthermore, we emphasized two key points. First, most energy subsidies were not directly visible in government budgets but given off-budget and hidden in policies and regulations. For example, tax breaks for depletion of oil and gas fields, low tax rates on diesel, minimum requirements to use domestic fossil fuels, price regulations that keep prices below market level and so on. The hidden nature of these policies is a huge impediment to subsidy reform, so we recommended increased transparency regarding the size and impact of energy subsidies.
 
Second, it appeared that in developed countries energy subsidies tended to benefit producers, while in developing nations the main beneficiaries were energy consumers. Common for both types, though, was that fossil fuels received by far the largest share of the support: around 80% of total spending, equal to some US$ 150 billion annually. The overall conclusion was that the large majority of producer and consumer energy subsidies did not serve their purposes and at the same time undermined economic efficiency and environmental quality. Reforming energy subsidies offered an enormous challenge for political leaders to mobilize these public funds for more sustainable purposes.
 
Now, more than a decade later, what has become of our findings? The results are mixed: some good news, real disappointment and a spark of hope and optimism. On the positive side, more transparency has been achieved as regards the hidden character of energy subsidies. At both national and international levels, disclosure of energy subsidies has improved. The disappointing news is that the addiction to energy subsidies is worse than we thought in 2001. Recent ballpark estimates by the Global Subsidies Initiative (GSI) indicate that global energy subsidies may be more than double the amount we previously estimated, at some US$ 500 billion per year. Consumer subsidies have increased, which could be a reflection of the improved information about subsidy mechanisms, as well as policies to keep energy prices low for consumers. When oil prices were at their highest, in 2008, the IEA estimated that fossil fuel consumer subsidies alone were worth US$ 557 billion. Producer subsidies have also increased. Even after correcting for inflation, our estimate for the 1990s of nearly US$ 60 billion annually seems out-dated and now appears closer to US$ 100 billion in current prices. The true amount may be even higher, as hidden subsidies in the United States and Europe continue to be unearthed.
 
Another disappointment is the poor progress that has been made in revealing the implications of energy subsidies. This is important because it raises further awareness of the problem at the policy level. We co-authored a tractable and practical modelling attempt at this in 2006 for eight important subsidies in the Netherlands. The study revealed that subsidies are undermining environmental policies because they increase CO2 emissions. On a global level, the OECD’s Jean-Marc Burniaux and Jean Chateau calculated in 2009 that removing all consumer energy subsidies would reduce greenhouse gas emissions by 10% in 2050. More such work is required.
 
Our overall view concerning the political challenge is mixed. In 2001 we proposed a Grand Bargain on reforming energy subsidies to be closed within the UN framework of the climate-change negotiations. Considering the poor situation the UNFCCC now finds itself in, this is not a viable way forward anymore. The spark of hope is the positive step taken forward at the G-20 summit at Pittsburgh in 2009. Political leaders of the 20 largest economies committed to phasing out fossil-fuel subsidies and put the responsibility on their Energy and Finance Ministers to monitor implementation and report on progress towards meeting this goal. Surely, such commitment calls for optimism, as several of the 20 leading countries are also among the biggest energy subsidizers. However, the G-20 countries now really need to push forward and deliver on their commitment soon. This requires close and critical monitoring.
 
And there we touch upon a key conclusion in our book. We paid a great deal of attention to the question of how subsidies could persist if their fiscal, social and environmental implications were so harmful, and identified key barriers and mechanisms that inhibit subsidy reform. Most prominent, as has long been observed in many other sectors, is that public subsidies reflect vested interests that are a lock-in mechanism against any reform. These interests represent real economic benefits and create addiction of both subsidy providers and recipients. These interests need to be addressed in subsidy reform, both at the national and international level. Today, the policy strategies we formulated in 2001 are still relevant. A process of desubsidization requires transparency, control of subsidies and a solid transition policy, to be realized through economic, institutional and political reform. Transparency should also reveal the winners and losers of reform and lead to sustainable but temporary policies to compensate the losers. This is in our view the key to successful subsidy reform.
 
So, after years and years of subsidy research and debate, we are cautiously optimistic about the removal of harmful energy subsidies. Optimistic, because finally G-20 countries are officially facing the challenge to phase out fossil-fuel subsidies; cautious, as we realize the persistence of subsidy addiction. More transparency and bringing vested interests to a solution are the keys to turning our reservations into sheer optimism. We, like many others, will be closely watching the G-20 Summits at Seoul in 2010 and at Paris in 2011 to see what practical news – if any – emerges to show that the countries are seriously committed to pursuing their agreement on fossil-fuel subsidy reform and changing course from plans towards concrete actions. In the end, the final proof of the pudding is an actual reduction of energy subsidies; that will be the real breakthrough.

Cees van Beers is professor of Innovation Management and head of the section Technology, Strategy and Entrepreneurship at the Delft University of Technology. In addition to his work on subsidies, his research focus is on the impact of information technology investments and adoption, innovation performance, entrepreneurship and export behaviour, government policy failures and sustainability.

André de Moor is now senior policy advisor at the Netherland’s Ministry of Education, Culture and Science. Previously, over a period of 10 years he worked on public subsidies and published extensively on the subject. He has also worked and published on environmental policy and climate change issues.