How to end fossil fuel subsidies without hurting the poor

Imagine there was a way to cut carbon emissions which saved everyone money, left the poor better off and freed up public funds for spending on things like health and education, which paid for itself, required no capital intensive investments in new or smarter infrastructure, relied entirely on existing and proven technologies, and in fact provided an opportunity to re-build (or, in some cases, build for the first time) a relationship of trust between hundreds of millions of citizens around the world and their governments. 

Well, there is. Replace all fossil fuel subsidies with cash distributions to the entire people, set at a level which covers the rise in prices for the average citizen – the Dividend Subsidy Swap. Those on below average incomes will be net positive and most of the burden of rising energy prices will be absorbed by the richest 10 per cent, which is only fair since energy subsidies are always regressive and the well-off have effectively enjoyed large scale subsidies than the poor for decades. 

The climate change talks that just finished in Doha hashed over the issue of fossil fuel subsidies, again. This year, governments will spend something like $600bn on subsidising oil, gas and coal – five times as much as subsidies of renewables, for reference the next time you hear some Big Oil CEO or stooge (Mitt Romney was the latest) saying they’re all in favour of green energy “when it becomes competitive”. 

Energy subsidies

The list of subsidies country by country is testament to the enormous lobbying power the energy industry has enjoyed since its inception. In an age of machines, there’s something about providing the fuel which makes governments want to get close to the industry in a way which goes beyond any rational explanation of political constituencies and economic planning. It’s about holding the keys to the machine. It’s just sexy. 

At the top of the list of subsidy bills by country, we find Iran, Russia and Saudi Arabia who total about a quarter of the global bill at $160bn. No great surprise there. Major oil producers have always given the stuff away for free or near free in a phenomenon economists call the Export Land Model Effect. But there are also five energy importing countries in the top 10: India, China, Egypt, Indonesia and the United States. 

Shockingly, in some 15 countries around the world, spending on energy subsidies outstrips spending on healthcare. Whatever the reasons for subsidy introduction – poverty alleviation, a proxy social contract, driving industrialisation – the system has been driven out of control by spiralling world energy prices which have left the bills to be covered at a staggering level for many countries. 

There’s a massive environmental price also to the subsidies, which is how they came up at the Doha Summit. In Europe, energy efficiency in terms of economic production – the amount of energy it takes to produce a dollar of GDP – has increased by 60 per cent in the last 30 years. 

In North America, it has increased by 80 per cent over the same time, arguably from a low base brought about by wasteful consumption in the first place, but nevertheless. Whereas in Africa, energy efficiency has stayed static over the same period and it has actually gone down in the Middle East, the epicentre of global fuel subsidies. Carbon emissions could be cut by as much as 10 per cent by 2050 if all subsidies on fossil fuels were removed. 

But little progress has been made to lifting the subsidies because the only advice offered to governments has been classic neo-liberal economics which basically amounts to saying the price liberalisation is good for you in the same way that a cold shower every morning is. Gets the circulation going, don’t ya know? 

Governments occasionally lend an ear to this advice, usually pressured by ongoing debt or loan negotiations and try to implement price hikes – only to face street protests within hours followed usually by a hasty back down. Nigeria and Jordan are only the latest to join the club of failed reformers this year. 

But there is a way out – if you step outside capitalist orthodoxy enough to consider cash dividends. Not social welfare programmes, reliant on low functioning bureaucracies, which people don’t believe in anyway. Universal cash distribution based on a rights paradigm, close in spirit to the idea of a Basic Income. 

The reason this can work practically is because energy subsidies are so massively regressive in the first place. The IEA estimates that only 8 per cent of the value of fuel subsidies goes to the bottom 20 per cent of the population worldwide. Another estimate puts the benefit to the bottom 40 per cent at 15-20 per cent. 

In Egypt, some 93 per cent of $1.5bn the government spent last year on subsidising gasoline went to the top 20 per cent of the population. It stands to reason. The well-off have cars to use cheap gasoline and air conditioning in every room of their spacious houses. 

Structure of subsidies

So it’s pretty simple, really. Study closely which segments of the population use which energy sources and how much. Model the impact of price rises caused by lifting subsidies on the household income of the median family. Then, set up a system to distribute that amount of money to everyone in the country, in cash, using digital cash and mobile phone systems like MPESA to create a direct link. 

Lead with the dividend, follow with the price rises. Everyone below the average will be net positive. The imbalance in the subsidy system means you can remove prices, protect the bottom half of the population and save public funds all at the same time. 

In Egypt, for example, where energy subsidies are more than health and education spending combined, such a dividend could start at about $5 a month and rise to $15 a month. Subsidies on all energy products could be removed over five years and the government would still save up to 3 per cent of GDP – enough to double spending on education, for example. 

If the people saw cash in hand before the price rises came, the trust issue could be largely solved – itself a huge possible gain in social fabric in many countries. And it would pay for itself. 

The structure of subsidies in many countries is similar enough that a similar model – pay out cash to everyone based on average energy consumption, then remove subsidies – would work in some form or other. 

So why aren’t cash dividends on the agenda to solve a problem with such big consequences? Various reasons are proposed by mainstream economists and aid mandarins: risk of inflation, risk of encouraging dependency, a weakening of government structures, the inherent injustice of providing any public funds at all to the middle class and the rich. 

But there are manageable solutions to all of these issues. The real basis for opposition to dividends, it seems, is more ideologically and culturally rooted. A visceral dislike of people “getting something for nothing”, a reluctance by experts to give up the assumption that all problems need experts to constantly manage solutions. 

Some primal conviction that people should know their place in the global economic caste system, and only graduate up or down a pecking order based on demonstrated competitive edge – by being able to play the capitalist game better, not by abandoning its rules. 

In the meantime, we keep on paying for a few rich people to pump more greenhouse gasses into the air.

Johnny West is founder of OpenOil, a Berlin-based consultancy in oil and other extractive industries. He has covered global energy markets since the early 1990s. He regularly contributes to The Guardian, Huffington Post and Petroleum Economist.