Addicted to Cheap Fuel, Emerging Markets Face a Climate Dilemma
(Bloomberg) -- Rising oil prices are testing the developing world’s resolve to quit fossil fuels.
The president of Brazil has fired the chief of the country’s largest oil producer -- inadvertently sending its currency, bonds and stocks plunging -- in a bid to keep diesel prices from spiking. Nigeria’s dependence on low-cost gasoline threatens to scupper a year-long effort to phase out fuel subsidies. Peru and Mexico are reversing fossil fuel taxes as oil prices rise and families struggle to make ends meet, and India is under pressure to do so.
Around the world, countries spend a staggering $300 billion a year to keep a lid on fossil-fuel prices, stave off civil unrest and prop up their economies. And this year’s 20% rally in oil prices has only kept those subsidies flowing. While world leaders from the U.S. to Europe to China vow to slash emissions in their bid to combat climate change, some emerging markets are deepening their dependence on dirty energy and delaying the transition to clean energy.
“They are continuing to subsidize the production and consumption of fossil fuels,” said Nathalie Girouard, head of the Environmental Performance and Information division at the Organization for Economic Co-operation and Development.“At this stage it is not very encouraging.”
Pandemic recovery efforts are exacerbating the issue, with 31 major economies having pledged at least $292 billion in Covid relief to fossil-fuel intensive sectors, according to energypolicytracker.org, a consortium of research organizations including the Columbia University Center on Global Energy Policy.
While 2020’s oil crash offered a “golden opportunity” to start eliminating federal support for fossil fuels, according to the International Energy Agency, political and economic pressures surrounding the pandemic have frustrated efforts to do so. Price reform remains deeply unpopular in countries where cheap fuel is one of the only economic advantages available to citizens already squeezed by Covid-related unemployment, inflation and poverty.
``There's always an argument that the money is better spent elsewhere,'' said Ben Cahill, a senior fellow at the Center for Strategic and International Studies. ``But at a time like this when prices have risen as rapidly as they have since November, it's a challenging time'' to phase them out.
Governments are now more concerned with supporting families and businesses than with price reform – even though unwinding subsidies would offer much-needed relief to government coffers, and upholding them can have dire consequences for both climate and economies.
Simply allowing the market to dictate fuel prices would reduce global greenhouse gas emissions by up to 3.2% in 2030, according to Purdue University’s Center for Global Trade Analysis. Taxing fuel to account for air pollution and health would have lowered emissions 28% in 2015, the International Monetary Fund said in a 2019 report.
Instead, many countries are earmarking pandemic recovery funds for carbon-intensive industries. Government recovery funds for production alone surpassed the $264 billion earmarked for clean energy, according to energypolicytracker.org. In 2019, fossil-fuel subsidies for consumers and producers totaled $468 billion in 2019, according to the OECD.
“It is very uneven. Some governments are looking at this as an opportunity for energy transition,” said Bronwen Tucker, who researches subsidies for Oil Change International, a clean energy advocacy group. “But there are governments taking big risks by doubling down on fossil fuels.”
The issue isn’t limited to the developing world. The U.K. gave tax breaks to oil producers leading up to the pandemic and is dedicating an estimated $42 billion in Covid relief to the industry. Including the untaxed cost that fossil fuels have on climate change and health, China and the U.S. are the world’s biggest subsidizers, according to the 2019 IMF report. But such support for fossil fuels can weigh more heavily on poorer countries that have less stable economies and tighter budgets.
Brazil’s move to preserve fuel subsidies has already roiled markets, driving the real to become the worst-performing major currency this year. Investors in state oil company Petrobras are bracing for a hit to its finances after it lost about $40 billion during the 2012-2014 oil price boom, when the company was forced to sell fuel at below-market prices.
It’s a problem plaguing most state oil producers. Petrobras, Saudi Arabian Oil Co. and Gazprom PJSC, all from countries with histories of fuel subsidies, are the worst performing major oil producers this year with Petrobras down 18%. The cost of selling oil, natural gas and coal below international levels was $296 billion globally in 2017, according to an International Monetary Fund working paper published in 2019.
Still, the matter defies party lines. Brazil’s left is even more eager to have Petrobras foot the bill for rising gasoline and diesel than Bolsonaro, a far-right populist. Former president Luiz Inacio Lula da Silva, Bolsonaro’s arch political enemy and a likely 2022 presidential candidate, attacked high prices in a comeback speech this month.
“The issue for the rest of the region is, how many of these countries can absorb the additional cost of keeping prices low?” said John Padilla, managing director of IPD Latin America LLC, a consultancy. “It’s an added economic burden.”
One problem with subsidies is they have a “mechanical effect” and cost more as soon as international prices rise, said Girouard. Governments should attach conditions to such economic aid, like what France has done with the airlines industry, she said.
While more than 40 countries still have polices in place keeping fuel affordable, there has been progress, with spending subsidies becoming more transparent in recent years. The Group of 20 is carrying out peer reviews of fossil-fuel support through a program with the OECD and New Zealand is expected to prioritize subsidy reform as head of the Asia-Pacific Economic Cooperation. Last year U.K became the first in the G20 to end overseas oil and gas financing, offering hope for a wider shift.
Countries that have successfully phased out subsidies have reaped climate benefits. Morocco, which began eliminating subsidies after the 2009-2010 oil-price spike, is now one of the few developing countries on track to curb its emissions by 2030, according to Climate Action Tracker. Its six-year wind-down included targeted social protection programs to insulate the most vulnerable citizens from rising fuel costs.
Tunisia has introduced monthly price adjustments for gasoline and diesel to reduce deficits while Egypt and Kazakhstan have both eliminated electricity subsidies benefiting dirty energy.
``In 2020 there was a unique opportunity for emerging markets, with oil prices tanking, to get rid of subsidies,'' said Thomaz Favaro, director of Brazil and the Southern Cone for Control Risks, a consultancy. ``Most countries actually have failed to revise that strategy, and now that oil prices are picking up again, that window of opportunity is closing and it is closing very fast.''
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