Drop in oil prices a great opportunity to abolish fossil fuel subsidies, says IEA

M Ramesh Chennai | Updated on March 24, 2020 Published on March 24, 2020

The steep fall in global crude oil prices is “also a great opportunity” for countries to lower or abolish subsidies for fossil fuel consumption, the International Energy Agency has said.

Crude oil prices have fallen precipitously due to lack of demand caused by economic activity coming to a grinding halt in many countries because of the coronavirus pandemic. On Sunday, the benchmark Brent crude prices slid to $25.89 a barrel, compared with $66.15 in March 2019.

Oil subsidies, the IEA estimates, amount to $400 billion, “more than 40 per cent of them are meant to make oil products cheaper.”

The Paris-based global energy watchdog observes that while there could be acceptable reasons for governments to make energy more affordable to the poor and vulnerable people, “many subsidies are inefficiently targeted, disproportionately benefiting wealthier segments of the population that use much more of the subsidised fuel.”

The subsidies only encourage consumers to waste energy, adding to the emissions and straining government budgets that could otherwise be spending that money on education and healthcare, IEA has said in a statement issued recently.

(India’s petroleum subsidy for 2019-20 was budgeted at ₹37,458 crore. Bulk of this goes to subsidise kerosene and LPG.)

Renewable energy push

IEA urges governments to use the “opportunity” provided by the coronavirus pandemic to push for renewable energy. “The costs of key renewable technologies, such as solar and wind, are far lower than during previous periods when governments launched stimulus packages. And the technology for both solar and wind is in a much better shape than in the past. Meanwhile, hydrogen and carbon capture are in need of major investment to scale them up and bring down costs. This could be helped by current interest rate levels, which were already low and are declining further, making the financing of big projects more affordable. Governments can make clean energy even more attractive to private investors by providing guarantees and contracts to reduce financial risks.”

However, the coronavirus sword cuts both ways. The epicenter of the pandemic, China, is a key player in the renewable energy industry, supplying cheap solar modules, wind turbines and EV batteries to the world. The disruption of the Chinese economy as the government tries to contain the virus has caused supply chain bottlenecks, notes IEA.

“This is why governments need to make sure they keep clean energy transitions front of mind as they respond to this fast-evolving crisis. IEA analysis shows that governments directly or indirectly drive more than 70 per cent of global energy investments. They have a historic opportunity today to steer those investments onto a more sustainable path.”

Published on March 24, 2020

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