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Posted on Tuesday, 11 August 2015 11:23

Why the fuel subsidies pump should be switched off

By Max Bankole Jarrett, Deputy Director of the Africa Progress Panel

Max Bankole Jarrett, Deputy Director of the Africa Progress Panel. Photo©All Rights Reserved Despite the climate challenge, we see that billions of dollars are still spent subsidising fuel consumption within Africa and providing exploration subsidies to international fossil fuel companies.

In a "previous life", I spent over a decade in international broadcasting interviewing politicians daily. One thing never ceased to amaze me during those verbal jousts: how politicians and the vested interests they sometimes served would so often stop at nothing to divert attention from the true facts of a given situation.

the world stands to gain from Africa avoiding the high-carbon pathway followed by today's rich world

These days, I have a similar reaction as I follow the ongoing debate around fuel subsidies both internationally and around Africa.

The facts here are clear. As we highlight in this year's Africa Progress Report, "Power, People, Planet: Seizing Africa's Energy and Climate Opportunities", the carbon-intensive energy systems now driving economic growth are locked into a collision course with the ecological systems that define our planetary countries.

There is now a real and present danger that climate change will stall and then reverse the fragile gains made over the past two decades.

How to get out of a hole

Meanwhile, over half of Africa's population lacks access to basic electricity and clean cooking facilities – and the numbers are rising.

Averting that collision – while eradicating poverty, building more inclusive societies and meeting the energy needs of the world's poorest countries and people – is the defining international cooperation challenge of the 21st century.

It's often said that the first step to getting out of a hole is to stop digging. Yet when you listen to the arguments of the proponents of fuel subsidies they remain indispensable, for now.

Despite the climate challenge, we see that billions of dollars are still spent subsidising fuel consumption within Africa and providing exploration subsidies to international fossil fuel companies.

Vested interests are behind the continuation of both, to the detriment of the greater good. Proponents continue to claim that these subsidies are in the interest of the public at large.

Our report finds, however, that provision of fuel subsidies in Africa is dangerous waste that fails to benefit the majority and poorer sections of society. We urge African leaders to end them now and divert the finances towards more productive pro-poor spending.

Ending subsidies for fuel is essential to the boosting of investment in low-carbon, climate-resilient development.

Redirecting the US$21 billion spent on subsidies to wasteful utilities and kerosene to productive energy investment, social protection and targeted connectivity for the poor would show that African governments are ready to do things differently.

Africa stands to gain from developing low-carbon energy, and the world stands to gain from Africa avoiding the high-carbon pathway followed by today's rich world and emerging markets.

Unlocking this "win-win" requires decisive action on the part of Africa's leaders, not least in reforming inefficient, inequitable and often corrupt utilities that have failed to develop flexible energy systems to provide firms with a reliable power supply and people with access to electricity.

The waste of scarce resources in Africa's energy systems remains stark and disturbing.

Current highly centralised energy systems often benefit the rich and bypass the poor and are underpowered, inefficient and unequal.

They spend 80 times more

Energy-sector bottlenecks and power shortages cost the region 2-4 per cent of GDP annually, undermining sustainable economic growth, jobs and investment. They also reinforce poverty, especially for women and people in rural areas.

It is indefensible that Africa's poorest people are paying among the world's highest prices for energy: a woman living in a village in northern Nigeria spends around 60 to 80 times per unit more for her energy than a resident of New York City or London. Changing this is a huge investment opportunity.

Millions of energy-poor, disconnected Africans, who earn less than $2.50 a day, already constitute a $10-billion yearly energy market.

What would it take to expand power generation and finance energy for all? We estimate that investment of US$55 billion per year is needed until 2030 to meet demand and achieve universal access to electricity.

The redirection of the billions of dollars spent each year on subsidies for loss-making utilities and electricity consumption, that the Africa Progress Panel (APP) is calling for – which benefit mainly the rich - would provide a sizeable portion of the funds required.

Subsidising connections for the poor is more efficient and equitable than subsidising energy consumption by the rich and subsidising kerosene is of limited value as a tool for achieving universal access.

Governments in the major emitting countries also have essential steps to take to show they are serious in moving to a low carbon economy.

For a start, they must place a stringent price on emissions of greenhouse gases by taxing them, instead of continuing effectively to subsidise them, for example by spending billions on subsidies for fossil-fuel exploration.

Unburnable hydrocarbons?

While many factors are at play, the political power of multinational energy companies and other vested interest groups weighs far too heavily in the decision-making processes of many governments.

International leaders must be bolder in tackling the political influence of multinational energy companies and other vested interest groups, who continue to lobby hard for these subsidies. Their power in this area which remains far too strong.

In 2013, G20 countries provided US$88 billion in fossil fuel subsidies for exploration and production alone. Instead of taxing emissions, G20 countries are effectively subsidizing them.

To avoid catastrophic climate change, two-thirds of existing reserves have to be left in the ground, begging the question of why taxpayers' money is being used to discover new reserves of "unburnable" hydrocarbons.

Despite pledges and the known threats, far too many countries are failing to take decisive action to end these subsidies swiftly. This situation needs to change.

The renewed pledge from the G7 to phase out fossil fuels, following the 2015 G7 Leaders Summit in Germany, is thus notable.

However, as the APP Chair Kofi Annan, often states "the only promises that matter are those that are kept". The world is watching and awaiting concrete action on this front from the G7 and other countries that continue to drive the high carbon economy.

This year has provided a platform for high level discussion and deepening international cooperation to set a course that avoids climate disaster.

The APP hopes that all this talk will ultimately lead towards an international agreement on a comprehensive phase-out of all fossil fuel subsidies by 2025, with appropriate support for low-income countries.

Tackling the misinformation

Eliminating subsidies for fossil-fuel exploration and production – especially coal – should also be a priority.

Developed countries should withdraw by 2018 all tax concessions, royalty relief and fiscal transfers, and all state aid to fossil-fuel industries by 2020.

The G20 countries should set a timetable for acting on their commitment to phase out fossil-fuel subsidies, with early action on coal. The private sector has a critical role to play in moving this agenda forward.

Institutional investors need to urgently review their portfolios with a view to progressively eliminating carbon-intensive assets, starting with equity stakes in coal.

Regulatory authorities, investors and stock exchanges can also aid the process by requiring companies and institutional investors to fully disclose the carbon exposure of their assets.

Action by the World Business Council on Sustainable Development meanwhile could tackle the misinformation that is hindering progress by reviewing and reporting upon the misleading claims made by multinational mining companies with respect to the benefits of coal for reducing poverty.

The swift end of fuel subsidies and redirection of the funds currently wasted on them will help to avert climate catastrophe and charge up the low carbon economy.

We must seize the opportunity to do so now, before it is too late.

Max Bankole Jarrett is the Deputy Director of the Africa Progress Panel. From 1990-2001 he worked as a broadcaster presenting and producing BBC World Service radio programmes for Africa, most notably the current affairs programmes "Network Africa" and "Focus on Africa".
Twitter: @mbankolej



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