Scrapping fossil fuel subsidies could play an important role in cutting greenhouse gases while giving a small but not insignificant boost to the global economy a new report by the UN Environment Programme (UNEP) says. The report challenges the widely held view that such subsidies assist the poor arguing that many of these price support systems benefit the wealthier sections of society rather than those on low incomes.
Scrapping fossil fuel subsidies could play an important role in cutting greenhouse gases while giving a small but not insignificant boost to the global economy a new report by the UN Environment Programme (UNEP) says.
The report challenges the widely held view that such subsidies assist the poor arguing that many of these price support systems benefit the wealthier sections of society rather than those on low incomes.
They are also diverting national funds from more creative forms of pro-poor polices and initiatives that are likely to have a far greater impact on the lives and livelihoods of the worse-off sectors of society.
Globally around $300 billion or 0.7 per cent of global GDP is being spent on energy subsidies annually.
The lion's share is being used to artificially lower or reduce the real price of fuels like oil, coal and gas or electricity generated from such fossil fuels.
Cancelling these subsidies might reduce greenhouse gas emissions by as much as six per cent a year while contributing 0.1 per cent to global GDP.
The report acknowledges that some subsidies or mechanisms, whether in the form of tax breaks, financial incentives or other market instruments can generate social, economic and environmental benefits.
A case in point are feed-in tariffs that have kick-started a renewable energy revolution in countries such as Germany and Spain.
The report also accepts that there may be cases where some subsidies can, if well- devised and time-limited meet important social and environmental goals.
For example ones to encourage a switch from dirty, health-hazardous or environmentally harmful fuels such a charcoal.
The report also cites the case of Chile where well devised subsidies have increased rural electrification from around 50 per cent to over 90 per cent of the population over 12 years.
But the report argues that many seemingly well intentioned subsidies rarely make economic sense and rarely address poverty. The report therefore challenges the widely-held myth that scrapping fossil fuel supports would hit the poor.
The report cites the example of Liquid Petroleum Gas subsidies in India where $1.7 billion was spent in the first half of the current financial year on trying to get the fuel into poor households. "LPG subsidies are mainly benefiting higher-income householdsâ€¦despite the ineffectiveness of the subsidy the programme is being extended until 2010,"says the study.
Indeed the report concludes that in many developing countries the real beneficiaries of such subsidies are neither the poor nor the environment but well off households; equipment manufacturers and the producers of the fuels.
Achim Steiner, UN Under-Secretary General and UNEP Executive Director, said: "In the final analysis many fossil fuel subsidies are introduced for political reasons but are simply propping up and perpetuating inefficiencies in the global economy - they are thus part of the market failure that is climate change."
"There are now less than 500 days before the crucial climate change convention meeting in Copenhagen in late 2009. Governments should urgently review their energy subsidies and begin phasing out the harmful ones that contribute to the wasteful use of finite resources and delay the introduction of renewables or more efficient forms of generation while creating disincentives and barriers to public transport up to energy saving appliances," he added.
The new UNEP report â€“ Reforming Energy Subsidies: Opportunities to Contribute to the Climate Change Agenda-was released today at a meeting in Accra, Ghana of the UN Framework Convention on Climate Change (UNFCCC).
Here governments have gathered to continue negotiations under the Bali Road Map towards a conclusive and far reaching new climate deal by Copenhagen 2009.
CDM Takes Off in Sub Sahara Africa
Today UNEP also presented new findings on the penetration of the Clean Development Mechanism (CDM) in sub Saharan Africa.
The CDM, part of the Convention's Kyoto Protocol agreed in 1997, allows developed nations to offset some of their greenhouse gas emissions by funding cleaner energy projects in developing countries that generate carbon credits known as certified emission reductions.
These can range from wind and biomass energy projects to ones that tap methane from rubbish tips and schemes that encourage the use of less polluting fuels or power plants.
There has been concern that the benefits of the CDM, a contrasting example of a policy tool aimed at wider social, economic and environmental benefits when compared with fossil fuel subsidies have been by-passing countries in Africa.
The main countries benefiting to date have been the rapidly developing economies such as China, Brazil, and India.
The new figures, compiled by UNEP Risoe Centre in Denmark, indicate that this is changing with the first CDM projects emerging over the past 18 months in six countries - the Democratic Republic of the Congo (DRC); Madagascar, Mauritius, Mozambique, Mali and Senegal.
These include an oil well, gas flare reduction project in the DRC and a run-of river hydroelectric project in Madagascar.
In Kenya new projects include a 35MW extension of geothermal, hot rocks, generation and a sugar cane waste-into-energy project with Mumias Sugar Company.
Mr Steiner added: "Whereas fossil fuel subsidies are an example of a blunt policy instrument, perpetuating old and inefficient economic models, the CDM is an example of a more intelligent, market-based mechanism that is fostering the transition to a modern Green Economy".
He said the uptake in Africa was due, in part to the impact of the UN's Nairobi Framework initiative launched in 2006.
Here UNEP, along with partners including the UN Development Programme (UNDP) have been working to build the human and regulatory capacity of poorer countries to access carbon financing.
Other measures have included awareness-raising among banks and industry players on the Continent to new green finance opportunities.
UNEP Risoe has been monitoring global trends in CDM investment and the impacts of these activities for some time.
This still remains low compared to a global tally of close to 3,500 CDM projects, but does mark a departure from the very low levels of the past.
"As new policy drivers and planned capacity development activities bear fruit, the market will likely exhibit exponential growth like other regions," says Glenn Hodes, CDM Program Manager at UNEP Risoe. Indeed, assuming governments agree on a deep and decisive new climate agreement in 2009, Africa overall could see roughly 230 projects by 2012, according to Hodes and Appelquist's calculations."
These could cumulatively generate over 65 million certified emission reductions, worth close to one billion US dollars at a conservative carbon credit price of $15.
"Compared to CDM prodigies like India, Africa is poised to be the late bloomer," says Hodes.