Coincident with the near-formal demise of Carbon Legislation as one of many ‘intended consequences’ from the US mid term elections, a number of carbon-related topics seem to present themselves this month.
Fossil Fuels and Carbon – New perspective on an ongoing issue
How should Countries of the World allocate the responsibility for cutting carbon emissions (or should they at all, according to nearly half of US voters)? A fascinating segment in a recent Middle East Economic Survey (MEES) reports from an International Energy Agency (IEA) study of global energy subsidies. Some fun facts:
1) Saudi Natural Gas – Revisiting the locally hydrocarbon values ($0.75/mmcfe gas and $4.50/bbl crude oil), generally endorsed to assure cheap electricity and water. This policy has become progressively expensive, especially as new oil projects are (however modestly) more expensive and current associated projects require $4-6/mcf – comparable to US shale gas economics.
2) Saudi Aramco estimates that the domestic cost of ‘waste’ is around $13 billion, annually – about 4% of GDP (see below for a different angle).
3) The IEA’s annual study focuses on consumer subsidies, ignoring tax breaks and other factors which raise returns or lower the price of energy. In a $62 (Brent) environment, the agency estimates a $321 billion global subsidy for 2009 – about 40% oil, 30% natural gas, and 33% electricity. This compares to about $588 billion in a $102/bbl Brent environment for 2008. The leading subsidizers unsurprisingly include both the largest producers and the fastest growing developing customers:
| IEA Analysis – Fossil Fuel Subsidy | |||||
| All Fossil Fuel | Percent of | Per Cent of | |||
| Subsidies | Global energy | Local GDP | |||
| Iran |
66 |
1.80% |
20.00% |
||
| Saudi Arabia |
35 |
1.70% |
9.00% |
||
| Russia |
34 |
5.70% |
2.50% |
||
| India |
21 |
4.20% |
2.00% |
||
| China |
19 |
19.50% |
1.00% |
||
| Egypt |
18 |
0.70% |
9.00% |
||
| Total ($ billions) |
321 |
||||
4) The study goes on to estimate that, while well designed subsidies serve a valuable role as safety nets for the poor, 80% of all the benefits accrue to the richest 40% of consumers, worldwide. In other words, most of the benefits are not realized by those who most in need.
5) Finally, the IEA estimates that, in the absence of these subsidies, 2020 demand for crude would be about 5% below current forecasts. The benefit from this reduced demand would contribute 40% of the carbon emissions reduction necessary to meet most recent “2 degree warmer” targets. Put another way, the estimated saving matches the combined carbon dioxide generation from Germany, France, and the United Kingdom.
This is all interesting and offers a window on yet another opportunity to address global emissions – as I like to say “just use less…and smarter.” But that’s not the whole story. The study only addresses consumer – level subsidies. Tax breaks (versus other domestic policy) provide additional benefits which generally lead to increased production/consumption. In the US, for instance, something like $10-20 billion of oil-related tax breaks, and $10+ billion in alternate fuel subsidies, contribute to a below-market price environment and, presumably, less efficient consumption.
Other anecdotes include the observation that Saudi’s market price for drinking water is about 1% of full cost economics, primarily due to heavily subsidized electricity. The payback from substituting solar for oil fired power (freeing up crude for export sales) is 4-5 years at $90 oil. Wow.