IEA top economist calls for bonfire of the fossil fuel subsidies

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This article is part of our special report Solar Power.

The chief economist of the International Energy Agency (IEA) has urged the world to slash hundreds of billions of dollars of fossil fuel subsidies or face the prospect of a catastrophic 3.5 degrees Centigrade rise in global temperatures.

“Today $409 billion equivalent of fossil fuels subsidies are in place which encourage developing countries – where the bulk of the energy demand and CO2 emissions come from – [towards a] wasteful use of energy,” Fatih Birol told EURACTIV in an exclusive interview.

The sum represents a $110 billion increase on the 2009 level.

According to Birol, cutting such subsidies in major non-OECD countries is “the one single policy item” which could help reorient the world towards a trajectory of 2 degrees global warming.

It would also reduce CO2 emissions and help renewable energies such as solar and wind power to get a bigger market share, according to the IEA's World Energy Outlook 2011 report which will be released on 9 November.

Analysis in the report “indicates that the door for a 2 degrees trajectory may be closing if we do not act urgently and boldly,” Birol said.

“In our central scenario, seven countries introduce some form of carbon pricing which brings us to a 3.5 degree trajectory,” he added.

“But if we want to keep the temperature increase to 2 degrees, many more countries need to do so. The most important condition is that there’s coordinated international action in place.”

Irreversible impact

A 3.5 degree temperature rise would cause “irreversible impacts” according to the Inter-governmental Panel on Climate Change (IPCC), including the mass extinction of an estimated 40%-70% of the world’s species.

To avoid this nightmare scenario, Birol said that the upcoming Climate Change conference in Durban, South Africa, could be “very important and in fact one of the last opportunities if we are serious about limiting temperature increase to 2 degrees Celsius.”

“However, looking at the current international policy debate on climate change I would say that the wind is not blowing in the right direction,” he warned.

Outside of the talks, an international consensus already exists on the need to try to cut CO2 emissions by providing start-up finance to renewable energy firms through loans, tariffs, guarantees, and incentives.

Lion's share of spending not on renewable

But research by Bloomberg New Energy Finance in 2010 found that governments around the world were spending twelve times more on fossil fuel subsidies than on those for renewable energy.

“Since fossil fuel prices are heavily subsidised, renewable energies have to compete with a low price fossil fuel energy production, which is definitely unfair,” Birol said.

By 2020, the IEA expects global fossil fuel consumption subsidies to reach $660 billion, or 0.7% of global GDP.

If the aid was phased out, growth in energy demand would be cut by 4.1%, oil demand would fall by 3.7 million barrels a day and CO2 emissions would be cut by 1.7 Gigatonnes.

Some developing world economies are unenthusiastic about removing aid to money-spinning fossil fuel industries that are trying to compete with their already well-established (and previously subsidised) Western counterparts. 

Ending subsidies

Christopher Burghardt, the Vice President of a leading US solar energy firm, First Solar, said that the issue for him was “less about levelling [fossil fuel] subsidies than ending them”.

“Such a step would be a critical one on the way to an electricity market in which renewable and traditional generation can compete on a level playing field,” he added

In an interview with EURACTIV earlier this year, Achim Steiner, the executive director of the United Nations Environment Programme also argued that state aid to fossil fuel industries was incentivising greenhouse gas emissions. 

“If you remove those subsidies, other power-producing technologies for electricity and mobility will quickly make their way into the market,” he said.

In 2008, the EU's 27 governments committed to increase the share of renewables in their energy mix by 20% on 1990 levels by 2020. This was intended to reduce climate-baking emissions, create new technology jobs and reduce reliance on fuel imports.

The economic crisis initially slowed EU industrial output, aiding its plans to cut greenhouse gas emissions. But these quickly picked up again as economies partially recovered.  

European governments are split between those that have put money and action behind the promised green-tech revolution, such as Germany and Denmark, and those that have merely paid lip-service to the goal.

Industry is also divided. Europe invests around €30 billion a year on green energy, but about €290 billion is needed annually to meet its targets, according to a report by Accenture and Barclays Capital.

  • 9 Nov.: IEA World Energy Outlook 2011.
  • 28 Nov.-9 Dec.: World Climate Summit in Durban, South Africa.

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