In 2008, worldwide government subsidies that support the consumption of fossil fuel totaled $557 billion, according to an estimate by the International Energy Agency. Of that amount, $18.2 billion in subsidies were provided by the US government alone. Producers, like Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), and ConocoPhillips Corp. (NYSE: COP), received an additional $100 billion in subsidies. Total global subsidies for fossil fuel production and consumption are estimated at nearly $700 billion, or about 1% of global GDP.
The IEA also estimates that governments spend about $100 billion a year to subsidize alternative fuels. On a per unit basis, renewables and biofuels receive subsidies of $0.05/kWh. Nuclear power receives a subsidy equal to $0.017/kWh, and fossil fuels get $0.008/kWh.
It’s fair to ask why on earth should the governments spend a dime on subsidizing fossil fuels while at the same time spending money to reduce (and eventually eliminate?) the use of fossil fuels? The answer to that question is partly based on demographics.
Consumption subsidies on fossil fuels are often used by oil-rich countries to allow all citizens to benefit from the resource. If the gasoline were sold at US or European market prices, most ordinary citizens of resource-rich countries couldn’t afford to buy it. That could lead to civil unrest or worse.
Even in economies as large as the US and China gasoline prices are subsidized. It’s a cheap way for governments to spread the wealth.
There’s also a less cynical reason for subsidizing fossil fuels. More than a third of the world’s population still burns biomass for heating and cooking. This practice leads to deforestation and increased carbon dioxide emissions. Subsidies that encourage people to use fossil fuels promote reduced emissions, less wood-cutting, and provide a better quality of life.
Government subsidies are theoretically used to align public behavior with policy goals. The problem is that governments and policies change, and this favors the entrenched interests. This is just one more reason why people will continue to depend on fossil fuel energy for decades to come.
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