Cheap oil helps India phase out fuel subsidies

The big question is whether that modest progress on removing fossil fuel subsidies can be locked in. If oil prices rise, there will be a lot of pressure to reinstitute support.

The difficulty for the international community in coming to an agreement on carbon emissions has largely been due to the great divide between developed and developing nations on who holds the most responsibility over climate change, and thus, who needs to take on more of the burden of cutting emissions.

In recent years, countries like the United States, which has finally started to make progress on reducing emissions, has balked at binding limits greenhouse gas emissions until fast-growing developing countries sign up as well. But the latter category, with China and India as the two largest countries, have resisted absolute caps on emissions, arguing that they deserve their own chance at growth development.

India, in particular, has been singled out as an intractable player, with China taking steps over the past year towards achieving a peak in its carbon pollution. (Related: What Is In Store For the Halliburton-Baker Hughes Tie-Up?)

But, since the collapse in oil prices, India has made more progress than some realize, at least according to the country’s Chief Economic Advisor, Arvind Subramanian. He argued in a May that many of the world’s top economies responded to the fall in oil prices by lowering taxes, rather than raising them. He points to the “regressive inaction” in advanced countries, where taxes on diesel and petroleum have dropped since June 2014 in places like Western Europe, Japan, and Canada (they remain unchanged in the U.S.).

Meanwhile, India has actually removed subsidies on fuel and transitioned into taxing them since 2014. Citing research from the World Bank, Mr. Subramanian says that India is essentially taxing carbon somewhere on the order of $60 per ton of CO2 for petrol and $42 per ton for diesel, “substantially above what is now considered a reasonable initial tax on CO2 emissions” of $25 to $35 per ton.

That provides India with a lot to brag about heading into the international climate negotiations later this year in Paris. Or as Mr. Subramanian puts it, “India – especially with a new PM – can credibly repudiate its past perceived image as a recalcitrant negotiator, focused on asking others to contribute without offering contributions of its own.” (Related: Gazprom Putting The Squeeze On Turkmenistan)

On subsidies of fossil fuels, he makes a good point. Fossil fuels enjoy $550 billion in subsidies each year, according to the IEA, more than four times the level received by renewables. The IMF says the figure is far higher, pegging the figure at$5.3 trillion annually, which includes the unpaid costs stemming from the environmental, social, and health damages of burning fossil fuels. To put that in context, that is equivalent to 6.5 percent of global GDP, and “more than what governments across the world spend on healthcare,” as The Economist recently noted.

 

The argument for subsidies is that removing them would hurt the poor. After all, countries like Iran, Venezuela, or Pakistan keep fuel prices low with the intention of helping the lower class. And removing them often invokes outrage from the people. But the IEA says that only 8 percent of fossil fuel subsidies actually go to helping the poor. The vast majority of financial support for fossil fuels actually accrues to the much better off, with policies that subsidize driving and flying and other consumptive lifestyles that the poor are unable to obtain.

Moreover, subsidies are wasteful, and not just from an environmental perspective. The billions blown on overconsumption could be rerouted to better causes, such as building schools, hospitals, or rebuilding infrastructure. (Related: Ongoing Security Concerns In Kurdistan Have Oil Companies On Edge)

There has been some headway made over the past year, however, as the dramatic fall in oil prices provided some breathing room for nervous governments. According to the International Institute for Sustainable Development, around 30 countries trimmed their fossil fuel subsidy programs over the past year. That is why, countries such as Indonesia, Egypt, China – and as Mr. Subramanian noted – India have been able to achieve subsidy reform. Without the fall in oil prices, there would be little appetite to implement such unpopular measures.

The big question is whether that modest progress on removing fossil fuel subsidies can be locked in. If oil prices rise, there will be a lot of pressure to reinstitute support.

By Nick Cunningham of Oilprice.com

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Original article: http://oilprice.com/Energy/Energy-General/Low-Oil-Prices-Enable-India-To-Abolish-Subsidies-And-Start-Taxing-Fuels.html