Subsidy Link to Global Warming

Major developing countries like China could help curb global warming by cutting billions of dollars in subsidies for fossil fuels, the International Energy Agency (IEA) said in its annual world report.

The finding may put the focus on energy policies as the most immediate way to control climate change and carbon emissions from consumption of coal, oil, and gas.

Taken together, developing countries paid over 80 percent of the U.S. $312 billion spent on fossil fuel subsidies in 2009, the Paris-based IEA said. The amount was five times more than the support for renewable energy last year.

By removing the financial props for fossil fuel consumption, the world could slash 5.8 percent from its carbon dioxide (CO2) emissions by 2020, the report estimated.

Ending subsidies is "the single most effective measure to cut energy demand in countries where they persist," the IEA's executive director Nobuo Tanaka said.

Governments typically pay subsidies to shield consumers from the full costs of supplying fuel and power, but the practice frequently leads to excess consumption, corruption, and waste.

Despite the huge burden last year, subsidies were down sharply from the $558 billion spent in 2008 when world oil prices spiked, the IEA said in its 731-page World Energy Outlook.

Subsidize power prices

In 2008, China paid $45.4 billion in subsidies, or 1 percent of GDP, but payments dropped to $18.6 billion last year. Nearly half the cost was to subsidize power prices, the report said.

Although China's subsidies were less than those of petroleum exporters like Iran and Russia, its policies play a key role because the country is the world's top energy consumer, accounting for 36 percent of estimated demand growth in the next 25 years.

"It is hard to overstate the growing importance of China in global energy," said Tanaka. "How the country responds to the threats to global energy security and climate posed by rising fossil fuel use will have far-reaching consequences for the rest of the world."

China's CO2 emissions are expected to climb 54 percent between 2008 and 2035, accounting for 58 percent of global growth. The country's energy demand will soar by 75 percent during the period, the IEA said.

China has partially reformed its pricing systems for energy, but lag times in adjusting fuel prices to reflect world price changes can still lead to temporary subsidies, the report said.

The country has also made changes to its price regulations for natural gas, but the National Development and Reform Commission (NDRC) said in September that importers had suffered "huge losses" on gas piped from Central Asia because of price disparities.

In the past, such complaints have usually been followed by demands for retroactive subsidy payments.

Tool to check social pressures

Despite the downsides of subsidies, experts say it's unlikely that all countries will eliminate them by 2020.

"Some will, some won't," said Robert Ebel, senior adviser to the energy and national security program at the Center for Strategic and International Studies in Washington.

"The question is how many will and how many won't, and 2020 is really not that far away," he said.

Ebel also doubts that China's government will abandon a key tool for easing social pressures when world market energy prices rise.

"They've got 1.3 billion people to look after and they don't want any uprisings or people out on the streets because the subsidies have been taken away from them, so they have to be very careful on how to manage their withdrawal," Ebel said.

China also uses some subsidies for social purposes that may not be reflected in the IEA figures, which focus on payments to alter energy prices and costs.

In recent years, for example, China has promoted a series of subsidy programs to promote sales of electric appliances to help raise living standards in rural areas.

Some appliance replacement programs may save energy, but others appear to be thinly disguised economic stimulus programs that increase production and power demand.

Last month, for example, the Ministry of Commerce reported that sales under its rural subsidy program tripled to over 115.8 billion yuan ($17.3 billion) in the first three quarters of the year.

Over 52 million appliances were sold including refrigerators, washing machines, televisions, and DVD players, thanks to a 13-percent discount from the government, state media said. It is unclear how much the subsidies are adding to China's power consumption.

The country's electricity demand will triple between 2008 and 2035, the IEA said. By 2025, China's increase in generating capacity is expected to equal the current total installed generating capacity of the United States.