Subsidies for fossil fuels and climate change: A comparative perspective

Abstract

This paper argues that the most obvious measure to combat greenhouse gas emissions is to remove the vast subsidies that promote higher energy consumption in more than half of the countries in the world, and that this measure should take precedence over many others. The article discusses also why removing energy subsidies is so difficult, and which type of state may succeed. This question is examined with reference to China, India and Russia, all major contributors to global warming. Non‐democratic governments and energy importers might be expected to be more likely to halt subsidies. In fact, energy trade imbalances do not seem to significantly affect the capacity to reduce subsidies. The risk of social unrest is a political restraint in all three countries. Perhaps surprisingly, democratic states may be better positioned to remove subsidies than non‐democratic ones.

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Subsidies for fossil fuels and climate change: a comparative perspective
Indra Overland
ab
a
Norwegian Institute of International Affairs (NUPI), PB 8159 Dep., 0033 Oslo, Norway
b
University of
Tromso, 9037, Tromso, Norway
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International Journal of Environmental Studies, 67: 3, 303 — 317
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International Journal of Environmental Studies,
Vol. 67, No. 3, June 2010, 303–317
International Journal of Environmental Studies
ISSN 0020-7233 print: ISSN 1029-0400 online © 2010 Taylor & Francis
http://www.tandf.co.uk/journals
DOI: 10.1080/00207233.2010.492143
Subsidies for fossil fuels and climate change: a
comparative perspective
INDRA OVERLAND*
Norwegian Institute of International Affairs (NUPI), PB 8159 Dep., 0033 Oslo, Norway; and University
of Tromso, 9037, Tromso, Norway
Taylor and FrancisGENV_A_492143.sgm
(Received 7 May 2010)
10.1080/00207233.2010.492143International Journal of Environmental Studies0020-7233 (print)/1029-0400 (online)Original Article2010Taylor & Francis0000000002010IndraOverlandindra.overland@nupi.no
This paper argues that the most obvious measure to combat greenhouse gas emissions is to remove
the vast subsidies that promote higher energy consumption in more than half of the countries in the
world, and that this measure should take precedence over many others. The article discusses also why
removing energy subsidies is so difficult, and which type of state may succeed. This question is
examined with reference to China, India and Russia, all major contributors to global warming. Non-
democratic governments and energy importers might be expected to be more likely to halt subsidies.
In fact, energy trade imbalances do not seem to significantly affect the capacity to reduce subsidies.
The risk of social unrest is a political restraint in all three countries. Perhaps surprisingly, democratic
states may be better positioned to remove subsidies than non-democratic ones.
Keywords: Climate change; Energy subsidies; Political obstacles
1. Stuck in fourth gear
A global effort to limit greenhouse gas emissions is underway, to reduce the trend to global
warming and climate change. The instruments of this effort include cap and trade mecha-
nisms, increased energy efficiency, the development of renewable energy sources and taxes
on fossil fuels. If greenhouse gas emissions are to be reduced, all these measures will have to
be implemented more ambitiously than today. Nonetheless, another policy measure should
actually be first in line, namely: reducing the subsidies that promote energy consumption.
Although this is an obvious element of climate policy that has been discussed in international
negotiations and which receives attention in organisations such as the OECD, IEA and G20,
it is not receiving sufficient attention in a climate policy context.
More than half the world’s states subsidise fossil fuels in some form or another. Globally,
subsidies just for petroleum products amount to USD 740 billion per year, or approximately
1% of world GDP in 2010 [1]. Subsidies on fossil fuels distort economies, encourage ineffi-
ciency and contribute to the emission of greenhouse gases. At the same time, they are
difficult to remove. This article examines the key obstacles to removal in three of the world’s
biggest energy subsidisers and greenhouse gas emitters: China, India and Russia. Although
*Email. indra.overland@nupi.no
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304 I. Overland
many Western countries and Middle Eastern petroleum producers have higher emissions per
capita – and their climate negotiators do tend to gloss over this fact – it is still the case that a
significant and rising proportion is coming from so-called emerging markets such as the three
examined in this paper.
1.1. The use and abuse of energy subsidies
In a budgetary context, subsidies may be defined as ‘unrecovered costs in the public provi-
sion of private goods’ [2]. Whereas the most visible form of subsidy is a direct, untargeted
price subsidy, many other forms exist. Untargeted indirect price subsidies, including
exemptions on value-added or other sales taxes, dual exchange rates, export taxes, production
quotas, subsidies on transport and storage and domestic sales of a commodity below interna-
tional opportunity cost are all forms of subsidisation [3]. Furthermore, a commodity may be
cross-subsidised, meaning that some consumers are charged a price above cost so as to
finance a price below cost for other consumers [2]. For example, in terms of electricity
consumption, commercial consumers may pay a price well above cost in order to finance a
subsidy on electricity for agricultural users. Although subsidies are, in one sense, economic
phenomena, in other respects they are political – the result of politically determined efforts to
compensate for market failure, to help the poor or to accelerate development.
Governments commonly cite two main justifications for energy subsidies. First, they
promote overall economic development. This includes stimulating fledgling economic
sectors. This accelerates industrialisation, increases the mobility of goods and the workforce,
and improves the working conditions for welfare institutions dependent on energy supplies
(hospitals, schools, water processing and so on) [4]. Second, subsidies often benefit the
poorer members of the population in particular through the employment opportunities that
result from accelerated development and from subsidies specifically targeted at the forms of
energy used by the poor.
Despite these beneficial effects of subsidies, there are also important reasons to reduce or
remove them. First, as long as prices remain artificially low, energy conservation will be less
attractive to consumers and greenhouse gas emissions will be unnecessarily high. A 2009
study by the OECD concluded that phasing out subsidies for fossil fuels only in the 20 main
subsidising countries would reduce global greenhouse gas emissions by 10% by 2050 [5].
The benefits of reducing subsidies, however, go beyond these 6%. Most of the future increase
in energy demand and greenhouse gas emissions will come from China and India and major
petroleum-exporting countries such as Russia, all of which are big subsidisers [6,7]. Thus,
any reduction is likely to be greater in terms of future global consumption because today’s
main subsidisers are going to be the biggest energy consumers in the future. The financial
savings achieved through reduced subsidies could also be spent on many good causes
including improved public transportation, anti-desertification efforts, and efficient irrigation.
This redirection of resources would further amplify the effect of subsidy cuts.
Second, subsidies are a burden on government budgets, especially when international
market prices for energy are high. Although the prices of petroleum products have been
volatile since 2000, the general trend has been upwards, pulling up the prices of most other
energy carriers as well. The global recession which started in late 2008 brought about
somewhat lower oil prices, but it worsened the burden for many subsidising states, as falling
tax revenues make it even harder to sustain subsidy levels. This is a significant problem in
many developing countries since increased relative spending on subsidies detracts attention
and funds from other priorities, including education, healthcare and infrastructure. There is
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Subsidies for fossil fuels and climate change: a comparative perspective 305
also the issue of rent-seeking behaviour: subsidy regimes can encourage policy-makers to
manipulate subsidy rules for individual rather than collective gain.
Third, subsidies provide significant market barriers to the development of renewable
energy, which cannot compete against artificially low prices for fossil fuels and nuclear
power. In addition, the vast sums spent on subsidies eat up capital that could otherwise have
been made available for investment in renewable energy. Although renewable energy is
already subsidised in many countries, further funds could be released for this purpose. On the
other hand, this does not mean that subsidies should be provided for renewable energy
blindly, as misplaced subsidies in this area can be detrimental too. In regard to greenhouse
emissions, however, it clearly makes more sense to subsidise renewable energy than
consumption of fossil fuels.
Fourth, the high energy consumption promoted by energy subsidies can also result in
severe environmental problems at the local level. For example, in parts of China emissions
from coal used to generate electricity and diesel used for trucking have significantly reduced
the standard of living and life expectancy [8].
Fifth, underpricing of energy causes sub-optimal investment decisions on the type and
placement of capital equipment and infrastructure in the energy sector.
Finally, higher energy consumption promoted by energy subsidies forces emergent net
energy importers to step up their imports as domestic reserves dwindle. This aggravates the
threat to energy security from external supply disruptions, and also increases friction with
other importing countries. China’s and India’s subsidy-driven, rising imports of energy have
led to greater competition and occasional friction with established major energy importers
such as the European Union and the US in the upstream sector in African and Latin American
petroleum-exporting countries [9].
In sum, at the economic and environmental levels there are more reasons to remove energy
subsidies than to retain them. Nonetheless, it is difficult for decision-makers in low- and
middle-income countries to remove them because this may generate political discontent
among the beneficiaries.
One might expect that democracies would have a harder time abolishing subsidies than
non-democratic governments. After all, democratic politicians need to maintain their popu-
larity in order to stay in office, so they should be loath to remove subsidies that could have
the short-term effect of making the lives of their constituents more difficult. By contrast,
authoritarian leaders appear to be more isolated from such pressures and should have less
trouble implementing unpopular policies. Likewise, one would expect energy importers to
have an easier time removing subsidies because, with high energy costs, they cannot afford to
maintain such payments to the population. Conversely, energy exporters, flush with cash,
should be better placed to continue energy subsidies for their populations.
1.2. The big three
In order to chart further the issues outlined above, I have chosen to look at energy subsidies
in three countries: China, India and Russia. I focus on these three both because of what they
represent collectively and because of the contrasts among them. These states all rank among
the top five in subsidy spending, thus representing a large part of the world’s energy subsi-
dies. All three have experienced rapid economic growth in the past decade accompanied by
corresponding increases in energy demand. Due to their rapid development, they also have
the potential to serve as growth models for poorer developing countries, so their energy
policy choices have implications for many other governments.
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306 I. Overland
Furthermore, these three states show both strong similarities and marked differences.
Whereas China and India are two of the largest energy importers, Russia is the world’s
largest exporter of energy [10]. Income levels vary widely among the three, here stated in
terms of GNI per capita/USD/PPP: India 2740; China 5370; Russia 14,400 [11]. Politically
speaking, they range on a scale from democratic to authoritarian. Whereas India is considered
the world’s largest democracy, Russia is seen as having a semi-authoritarian or hybrid
regime, while China remains a one-party state (for more on the concepts of hybrid regimes
and semi-authoritarianism, see Diamond [12] and Schedler [13]).
2. China
China’s energy industries are governed by a group of ministries and commissions and
companies with varying levels of power and influence such as the Chinese National
Petroleum Corporation (CNPC) and the China Petroleum and Chemical Corporation
(Sinopec). These companies originally comprised one ministry before being converted to
separate state companies in the 1980s. They have retained the same hierarchical rank as
government ministries, putting them higher than the sub-ministerial bureau charged with
supervising them [14]. These complex organisational structures and interrelationships
complicate any efforts to change the way energy is priced and billed. (As we will see in the
sections on India and Russia, this is not unique to China.)
The overarching element in the Chinese political system above these energy institutions is,
obviously, the Chinese Communist Party. Although the party is no longer much more than a
fantasy, the pervasive adherence to this fantasy amid a potentially uncontrollable boom (and
potential bust) involving unsustainable attempts at large-scale management of nature and a
construction boom that is out of proportion and out of control, make for an even more
complicated situation. The seeming lack of both the will and the ability to confront the
party’s horrific past also encumber any attempts at staking out a clear direction for the future.
Bearing this in mind, it is not easy to say where China is really headed, but it is possible to
say something about what it is doing and not doing on energy subsidies.
2.1. Subsidies
Although it is difficult to measure Chinese energy subsidies, the country oversaw approxi-
mately USD 26 billion worth of subsidies in 2005, according to the International Energy
Agency, making it the third largest subsidiser in the world (in nominal terms, not per capita)
[15]. China’s communist system once provided widespread subsidies, but now prices are
closer to world levels. While price guidelines in China are set by the National Development
Research Council (NDRC), the country’s top economic planning agency, actual costs and
subsidies vary across China as prices are influenced by local regulators [14]. A 2007 govern-
mental white paper acknowledged that ‘China’s energy market system is yet to be completed,
as the energy pricing mechanism fails to fully reflect the scarcity of resources, its supply and
demand, and the environmental cost’ [16].
China has the second-largest electricity market in the world after the United States, but
with per capita energy consumption less than one-fifth the OECD average [17]. Yet, the
Chinese electrification scheme has been a resounding success – and contributed significantly
to poverty reduction [17,18]. In 2005 alone, China added 66 gigawatts (GW) of generating
capacity to its power grid, and in 2008 it added an additional 102 GW, an increase credited
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Subsidies for fossil fuels and climate change: a comparative perspective 307
entirely to small- and medium-sized coal-powered plants [19]. The NDRC sets electricity
tariffs on a province-by-province basis on the recommendations of local bureaus that answer
to local officials. The NDRC has attempted to standardise energy pricing and reduce overall
energy consumption, but local social and economic concerns often hinder these efforts.
Electricity has long been underpriced and subsidised, and local officials often renegotiate
special arrangements for their constituencies [14]. Despite this, the country’s greater
immersion into global energy markets has led to the linking of electricity prices to the cost of
coal and consumption, with the introduction of more transparent pricing mechanisms. China
has two-tier tariff rates designed to reduce electricity consumption by energy-intensive
industries, while retail electricity prices have also risen to reflect higher coal prices [20].
China consumes more coal than the EU, Japan and the US combined [18,19]. Electricity is
four-fifths coal-based, and demand for electricity is booming. Beijing has now begun import-
ing coal in larger amounts, reaching a high of net imports of 22 million tonnes between
January and May 2009 [17,21]. Prior to 1993, coal prices were set by the Ministry of Coal
and the State Planning Commission, but since then prices have gradually become more
market-based. Yet, with electricity price controls still in place, steam or power coal prices are
still often set below cost with little price visibility [17]. During the summer of 2008, high
energy demand prompted Beijing to request that coal mines maintain full processing capac-
ity, even calling for the re-opening of smaller mines previously shut down due to safety
concerns. At the same time, two provinces, Shaanxi and Shandong in east-central China,
broke with Beijing and introduced their own price caps in order to avoid social discontent
[22]. This illustrates the complex relationship between central and regional authorities. We
shall see that this is the case not only in China, but in India and Russia too. Although the
General Secretary of the Communist Party of China, Hu Jintao, has stated publicly that there
is a need for greater ‘coordination’ at the regional level on development and environmental
protection, in practice there is little improvement [23].
As regards oil, in theory China pegs domestic prices for petroleum products to interna-
tional oil prices via a weighting system linked to prices set in Singapore, Rotterdam and New
York. In reality, Beijing has been reluctant to adjust prices in the wake of rising oil costs out
of concern for the fragility of its domestic economy [18]. It continues to control refinery gate
prices, thus squeezing the margins of refiners. The goal of the Chinese pricing control system
is to ensure affordable access to oil products for those most in need (or most politically influ-
ential), to mitigate discontent amidst the country’s rapid growth. Consequently, oil and
derived product subsidies target end-users such as farmers, truckers, fishermen and motorists
rather than industrial users. For these groups, prices are 15–20% below market levels for oil
products, thereby contributing to a significant growth in demand [24]. Oil is China’s second-
most subsidised energy commodity after coal [25].
2.2. Reform efforts
Despite an increasingly liberal approach to economic policy, Beijing has approached
energy market reform conservatively, regarding energy as a key strategic commodity while
still seeking to adjust to global market conditions. Following 30 years of a gradual but
slow convergence with world prices, progress has accelerated since 2005. The IEA esti-
mates that subsidies (after taxes) fell 58% from 2005 to 2006 to a total of USD 11 billion.
Nominal subsidies on oil products and coal have fallen, although subsidies on household
heating and cooking fuels remain in place. One of the main reforms contained in the 11th
Five-Year Plan concerns the system of energy pricing and taxation. This will require a
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308 I. Overland
further upward adjustment of oil and natural gas prices, along with support for renewable
energy.
Coal subsidies have been significant, and international observers voiced concern when a
US report in January 2008 revealed that Beijing had provided USD 15.7 billion in energy
subsidies specifically for the Chinese steel industry in 2007 (an increase of 3800% since
2000) [26]. As fuel prices continue to be set by the state, many Chinese consumers have been
shielded from the spikes in global prices since the middle of the past decade.
But, in June 2008, Beijing announced a price rise of 16% for petrol and 18% for diesel oil,
and the average price of petrol jumped to about USD 0.85 per litre. That was still well below
the average 2008 high-tax EU rates, but on a par with prices in the US. Further, electricity
prices increased by an average of Rmb 0.025 (USD 0.004) per kilowatt hour in July 2008.
The effects of these increases were unevenly distributed, however, as Beijing also announced
a series of side subsidies totalling about USD 2.9 billion to relieve the additional financial
burden on grain farmers, taxi drivers and lower-income persons, all to quell popular unrest.
Such sweeping increases had not been expected to take place until after the August 2008
Beijing Olympic Games, but strains caused by international prices, inflationary pressures and
fuel shortages in the country probably prompted the government’s decision not to implement
the price hike [27,28]. There have also been calls for a more equitable distribution of subsi-
dies – including a recommendation in 2006 by the head of the Chinese Central Bank to end
energy subsidies, and to provide more support for the services sector in China, which is
comparatively more energy-efficient and has less of an environmental impact than manufac-
turing [29].
Since January 2009, Chinese consumers have been paying higher fuel taxes; the tax on
petrol has risen fivefold, to Rmb 1 (USD 0.12) per litre and diesel from Rmb 0.1 to 0.8 per
litre. Nevertheless, the government has stated that these taxes will replace six different fees
currently paid by consumers, including road tolls. Consumer prices will reportedly not rise as
a result of this reform, which suggests that the headline retail price will be lowered signifi-
cantly when the new system is introduced. Since the start of 2009, there has been a new pric-
ing plan in place. Then came a series of price increases on fuels, including a 9–10% rise in
petrol and diesel rates announced in June 2009, but even so there do not appear to be strong
signs that driving habits are being curtailed as a result of these reforms [30,31]. Further price
increases have been postponed while the financial crisis continues.
3. India
India is the third-largest user of coal products (as a country rather than per capita) after China
and the United States. Thus, Indian energy consumption is a significant factor in global
greenhouse gas emissions. Although the IEA predicts that primary energy demand will
double by 2030 [17], the per capita energy demand at present is extremely low. With 17% of
the world’s population, India accounts for only 5% of world energy demand – which helps
explain the Indian government’s reluctance to commit to greenhouse gas emission caps.
Improving access to energy is a major issue in India: approximately one-third of the world’s
population without access to electricity live there, and roughly 40% of Indians lack access to
any modern form of energy [32], making these subsidies particularly difficult to remove.
In terms of governance, the central and state governments divide responsibilities. At the
central government level, five different ministries and several government commissions and
agencies divide policy-making and implementation in the energy sector. State governments
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Subsidies for fossil fuels and climate change: a comparative perspective 309
have significant responsibilities for energy, especially electricity. Indeed, the Indian Parlia-
ment is prevented from legislating in some respects for the power sector. For the most part,
the local state authorities are responsible for implementing national laws, but may also pass
state laws and regulations applicable in their own state [17]. Key state-level agencies include
the State Electricity Boards (SEBs) and the State Electricity Regulatory Commissions
(SERCs). The SEBs are responsible for the majority of electricity generation and virtually all
transmission and distribution, while the SERCs oversee the setting of tariffs for public utili-
ties and private companies [33]. Even more so than multiple bodies in China, India’s federal
structure is bound to complicate any efforts to change energy subsidies and pricing.
3.1. Subsidies
In total, the Indian government spends approximately USD 19 billion on energy subsidies
annually [34]. Even for a country as large as India, this figure is significant as it equates to
USD 17 per person – a considerable amount in view of the fact that an estimated 456 million
Indians subsist on less than USD 1.25 a day [10]. Pachauri and Jiang estimate that the energy
expenditure in urban areas was approximately 2.5% of the total household budget, while it
was double that for rural households [35]. Electricity subsidies in India have been particu-
larly substantial, about USD 9 billion annually [17].
Energy subsidies have long been a favourite tool of Indian politicians seeking to win the
next round of elections [36]. An important characteristic of these subsidies is the significant
disparity in prices paid by end-users due to cross-subsidisation. The rate of subsidy using
1999–2000 cost data represents 93% of the total cost of electricity for agriculture and 58%
for households [37]. Despite this high cost, state governments have hesitated to reduce subsi-
dies because of the significant political power held by those who benefit from current subsidy
rates, especially farmers and other rural interests [33].
India subsidises fuels in a variety of ways. Kerosene and liquid petroleum gas (LPG) are
subsidised directly, while other fuels such as diesel are kept artificially inexpensive by
preventing price hikes by the state oil companies. These companies are kept afloat with
bonds guaranteed by the government, a situation which one rating agency noted was distort-
ing prices and passing costs on to future generations [37]. Therefore, in terms of setting
prices and subsidy rates, the central government controls the cost of kerosene, LPG and
diesel fuels, whereas the individual states control electricity prices [36].
Cross-subsidies are an important feature of the Indian energy sector. The overarching logic
of cross-subsidisation is to use revenue from the sale of petrol and aviation fuel, consumed by
the relatively well off, to subsidise kerosene, cooking gas and fuels for fertiliser production
and distribution, i.e. necessities for the poor [2]. By charging some consumers a price higher
than cost, governments can provide fuel to other consumers below cost.
3.2. Reform efforts
During the 1990s, after an economic crisis, the Indian government began a series of reforms
in the energy sector. These changes included removing trade restrictions and opening up the
energy sector to private and foreign investment, including privatisation in some cases [37]. In
2002, New Delhi abolished the administered price mechanism for all petroleum products
except kerosene and LPG, although price controls on petrol and diesel were subsequently re-
imposed [17]. Other energy-sector reforms have proceeded very slowly [32]. Kale outlines a
number of reasons for this: the balance of social and political power both within states and
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310 I. Overland
nationally, changes in the global ideology of electricity supplies towards liberalisation, and
the strength of rural interests and labour unions [33]. Nevertheless, there are signs that New
Delhi is seeking further adjustments, as evidenced by the government’s June 2008 Economic
Survey, which called for the reform of petroleum and fertiliser subsidies, including
restrictions on subsidies for domestic cooking gas up to six to eight cylinders per year [38].
4. Russia
Energy consumption per dollar of purchasing power parity GDP in Russia has been estimated
to be 2.3 times the world average and 3.1 times the European average [39]. About half of all
Russian energy, equal to the annual primary energy consumption of France, is lost in produc-
tion, transport, transmission or inefficient consumption – much of this due to artificially low
prices which reduce incentives to improve efficiency [39,40]. (This is comparable to Russia’s
loss of foodstuffs, due to poor logistics among other things.)
4.1. Subsidies
According to the World Bank and the IEA, Russian energy subsidies make up the largest
gross sum of any country in the world [40], totalling USD 50 billion in 2007 [41]. Different
levels of government are responsible for pricing different supplies of energy, also depending
on sector and commodity. The Federal Tariff Service sets gas and wholesale electricity
prices, the Regional Energy Commissions set co-generated electricity and heating prices, and
municipalities set prices for heat transmission and heat generation by municipal boilers.
Heavily subsidised district heating – the distribution of heat from a central locale to subsid-
iary commercial or residential areas – plays a major role, providing over one-third of the
energy requirements for industry and close to half of those for the commercial and household
sectors. Almost 50% of primary energy consumption in Russia is used for heat generation,
transmission and distribution [42]. In 2002, total budget allocations for heat ranged from
USD 3.5 billion to USD 4 billion, of which roughly USD 2 billion were subsidies in the form
of payments to heat suppliers and low-income families. The government also offers interest-
free loans for the supply of fuel to district heating companies in remote locations.
Gazprom, which was responsible for 85% of gas production in 2007 and accounted for
approximately 25% of federal tax revenues, is required by law to supply the natural gas used
to heat and power Russia’s vast domestic market at government-regulated prices, regardless
of profitability [10]. As noted by Ahrend and Thomson, the Russian gas sector has been
highly resistant to liberalisation, and ‘the domestic gas market is a market in name only. It is
in reality a rationing mechanism with market-based activity at the fringes’ [39].
Over the past decade, domestic gas prices have mostly been under one-fourth of the market
rate at which Russian gas is sold to Germany [39]. Tariffs for households are kept even lower
than those for industry, out of concern for social welfare.
Electricity has also been extensively subsidised in Russia, although these subsidies will
gradually decrease as prices continue to rise as a result of electricity sector reform. The IEA
noted in 2006 that wholesale electricity prices would need to increase by an additional 40%
before covering the costs of electricity production, and electricity subsidies totalled USD 15
billion that year [15]. Despite Russia’s status as a major producer and exporter of energy, it
has been estimated that approximately five million farms and ten million Russians are not
connected to the major grids [43].
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Subsidies for fossil fuels and climate change: a comparative perspective 311
4.2. Reform efforts
Moscow has repeatedly and most recently in 2009 announced that it intends to increase grad-
ually domestic gas and electricity prices [44]. The official target, although frequently
adjusted, has been to achieve parity with international market prices for the Russian industrial
sector in 2011 and for households a few years later. Even so, Russia’s struggle with the global
recession has hampered this process. Recent energy reforms include the 2008 dissolution of
the Russian electricity monopoly RAO-UES, with tariff rates partially levelled out across the
country. In 2006, the generating sector was divided among multiple wholesale electricity
companies (OGKS), which participate in a new competitive wholesale market. Moreover, 14
territorial generating companies (TGKs – territorialnye generiruyushchie kompanii) were
created, generating over USD 24 billion in private investments in 2007 [45,46].
Russia has gradually increased gas and electricity prices over the past few years [47]. On
average, electricity tariffs increased by approximately 240% between 2005 and 2009,
although inflation, at about 12% per year, has also softened the price hike. While the Russian
electricity sector was cross-subsidised with residential prices lower than industrial prices for
a long time, the phasing out of cross-subsidies saw average increases from about 60% of
industrial tariffs in 2000 to near-parity by 2004 [48].
5. A common pattern: two steps forward, one step back
Despite the differences in political systems and their status as energy importers or exporters,
there are many similarities between the energy subsidy policies of China, India, and Russia.
Although all three countries have greatly reduced the energy subsidies that they provide to
their population, they have not been able to end them.
Even when governments make the painful decision to reduce or end subsidies, the imple-
mentation of reform policies is contradictory. All three countries share a pattern of two steps
forward, one step backward on subsidy reform. Or perhaps more precisely, it is a pattern of
two steps forward and then a pause before moving on. For instance, China has been success-
ful in extending its grid connection to 99% of the population, while decreasing subsidies by
an impressive 58% between 2005 and 2006 [17]. Russia increased average electricity prices
by approximately 240% between 2000 and 2004, with residential tariffs increasing by
approximately 340% and industrial tariffs by 200%. These are both examples of big steps
forward.
Nevertheless, reform efforts have only been partially implemented and in some cases have
been rolled back. Although China’s greater immersion into global energy markets has led to
the linking of electricity billing to the cost of coal and consumption levels, the current situa-
tion is one of using two-tier tariff rates to reduce electricity consumption by energy-intensive
industries, while the household sector remains more heavily subsidised [20]. While Russia
has made some progress in reducing subsidies for natural gas, politicians have repeatedly
revised targets downwards, particularly before elections. After removing price controls, New
Delhi was forced to re-impose them to protect consumers after rapid oil price increases
during mid-2008, yet another example of a step back.
5.1. Why is it so difficult to kick the energy subsidy habit?
Politicians in all three countries have been wary of provoking social unrest by imposing
unpopular energy price hikes. This problem is not more acute for democratic India – where
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312 I. Overland
one would expect to see such problems – than it is for non-democratic Russia and China. Nor
does it matter whether a country is an energy exporter or importer. One might expect to find
energy subsidies in Russia, where energy supplies are abundant, but net importers China and
India have been operating large subsidy programmes as well.
Although all three countries have announced their commitment to subsidy reform, a major
barrier to reducing subsidies has been the powerful constituencies that benefit significantly
from the current subsidy regimes, and therefore gain from the status quo. These interests vary
from country to country: farmers and the urban middle class in India; truckers, farmers,
fishermen and car owners in China; energy-intensive industries and residential consumers of
gas and district heating in Russia. These groups are powerful constraints on state policy,
regardless of whether the state is democratic or not.
The fractious nature of Indian politics creates a poor basis for large-scale subsidy reform in
India, but why cannot the authoritarian and semi-authoritarian regimes in China and Russia
make more progress? The answer may lie in the implicit social contracts that help sustain
these regimes. The people of China and Russia tolerate and accept reduced social freedoms,
provided their governments ensure stability and increase real incomes. This is similar to the
developmentalist model of economic modernisation practised in East Asia during that
region’s period of rapid growth in the 1970s and 1980s [49]. Although semi-authoritarian and
authoritarian regimes may have an easier time formulating subsidy reform policies than a
democratic India, they are highly cautious about the speed of implementation and try to
synchronise it with economic growth, regime popularity, inflation and real incomes.
Decision-makers in all three countries are wary of hasty and harsh subsidy reforms that
would greatly increase the burden on much of the population.
Energy protests and resistance have become more frequent in recent years in each of these
states. China saw a number of protests in 2008, including one incident when a shortage of
diesel in the economically dynamic southeast resulted in loud protests [24]. Russia too, has
experienced growing numbers of demonstrations of late, with people protesting against rising
energy prices, mismanagement of the economy, unemployment and increased duties on
imported cars [50–52]. In India, protests against government attempts to raise energy prices
have occurred for many years. Such protests in India reflect democratic habits developed in
the struggle for Independence (1947).
An additional constituency that prevents central policy-makers from removing subsidies
are the sub-national governments. Provincial governments are responsible for implementing
central government policy, but often also set subsidy rates in many areas. While provincial
governments may be required by law to reduce subsidies, they may circumvent such require-
ments by indirect means such as tax cuts, creative accounting, tax exemptions, quotas or dual
exchange rates. In China, farmers, truckers, railroads and shipping companies – highly vocal
constituencies campaigning to keep fuel prices down – often find a receptive audience in
their sub-national governments [24]. A 2007 report noted that, despite Beijing’s 2002 direc-
tive that sought to limit the number of new coal-burning plants, the north-central province of
Ningxia built at least three that either did not have the required permits or failed to live up to
new environmental standards [53].
5.2. Playing the green card
The situation is not completely bleak. One way to convince the citizenry of the need for
subsidy reform could be its effects on reducing local pollution, thereby improving the ‘Green
GDP’ – meaning the GDP of a given state minus costs related to environmental damage,
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Subsidies for fossil fuels and climate change: a comparative perspective 313
including cleanup and healthcare costs [54]. For example, only 1% of China’s 560 million-
strong urban population breathe air considered safe by EU standards [19]. If Beijing can
convince people that reducing subsidies will result in improved air quality, it will face far
fewer roadblocks to the implementation of these policies.
The question of climate change has so far had little response from the populations or
governments of the three countries under study [55]. Russian scientists and decision-makers
have been sceptical about anthropogenic climate change [56,57], whereas India and China
have resisted emission caps, stressing their right to economic growth and development, and
their own relatively low per capita energy consumption. Nonetheless, climate politics in the
form of the Kyoto Protocol and potential agreements in the wake of the December 2009
Copenhagen Summit could be used to promote subsidy reductions in these countries on a
purely financial basis. Russia could benefit from the implementation of Joint Implementation
projects under Kyoto, and so could China and India under the Kyoto Protocol Clean Devel-
opment Mechanism. Both courses of action could lead to foreign direct investment and job
creation. So far neither mechanism has succeeded, but that could change if the rules
surrounding them were simplified and global emission quotas were reduced. New and more
effective mechanisms may also be established under a post-Kyoto regime. Linking subsidy
reduction to increased economic opportunities, foreign direct investment and higher
international standing could help mitigate any social discontent and unrest resulting from the
implementation of subsidy reductions. Explicit expressions of will to remove subsidies for
fossil fuels by both the G20 leaders and the APEC Summit in 2009 give grounds for hope:
‘We also commit to rationalise and phase out over the medium term fossil fuel subsidies that
encourage wasteful consumption’ [58,59].
5.3. Impact of the global recession
Even in the face of the global economic recession, Beijing and Moscow have thus far been
able to afford subsidies. China has large budget surpluses and currency reserves, and Russia
is one of the world’s largest energy exporters. Still, with a weakened world economy, the
question remains whether these countries can maintain their subsidy regimes.
Over the past three years, Russia’s economy has deteriorated rapidly, fuelled by the dual
problems of the global financial crisis and oscillating oil prices. Its budget, heavily dependent
upon oil and gas revenues, was calculated on the basis of an estimated USD 70 a barrel, yet
Urals Crude was trading at USD 47 a barrel in early 2009 [60]. The price has since risen
again, but Russia’s dependence on high oil prices remains a major liability for the country
and its rulers. Despite Russia’s success in increasing electricity and gas prices, the yearly
price increases are substantial, and combined with a deteriorating economy may have severe
consequences for the Russian population and industry. Moscow is reluctant to increase the
economic stress on the population in the current situation, but this seems unavoidable as a
large part of its tax revenue has been lost. Although raising prices to international levels
should be easier now that gas prices have fallen in conjunction with the financial crisis, the
reduced purchasing power of the population makes it harder to carry through.
6. Conclusions
Clearly there are too many people on this planet. If they are also paid to use more energy than
they would otherwise do, this can only contribute to disaster. Although certain to be
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314 I. Overland
embraced by neo-liberal economists, this conclusion cannot be monopolised by them and is
not dependent on their paradigm. It is just common sense.
Dealing with the subsidy-fuelled wastage does not require some radically new form of
economics or non-economics, although it does behove one to look closely at the questions
surrounding valuation and pricing of natural resources and the environment, both at the local
and the global level. For such economic analysis, the late David Pearce provided an excellent
framework, not least in Valuing the Environment in Developing Countries, of which he was
the main editor [61]. As this article has, however, shown, the challenges related to the actual
removal of subsidies are rooted not only in economics, but also and just as much in politics.
Energy subsidies are a complex subject, with many economic, social and political vari-
ables. There are also limitations on up-to-date data from countries such as China, India and
Russia. Nevertheless, these three countries are such an important part of global energy
consumption that they repay close study. We can discern some interesting patterns. Since
the countries and their energy sectors are dissimilar in many respects, the consistency in
these patterns may seem paradoxical. Neither the differences in degree of democracy,
income level, status as an importing or exporting country or the types of energy used and
subsidised seem to have a significant impact on the capacity for subsidy reform in these
three countries.
Subsidy reforms in countries such as these will result in major changes in the way energy
is priced and used over the medium to long term at the global level. This in turn has implica-
tions for crude oil demand, for geopolitical competition over energy resources and, not least,
for global climate policy. The impact on global climate policy will not come so much from
other countries modelling their policies on those of China, India and Russia – they are too
different from most countries in the world for that – but rather because the policies of these
countries will be an important part of the framework conditions for any future international
climate negotiations. If these three cannot fit new internationally agreed measures into their
national policies, countries such as the US are likely to refuse to do so in their own domestic
policies, and the already weak prospects for a far-reaching international climate agreement
will unravel.
In all three countries, there is an apparent political will to proceed with reducing energy
subsidies. Nonetheless, the implementation of subsidy reform is not a straightforward
process: although subsidy reform is proceeding, it will take time and will advance by fits and
starts. Obstacles to subsidy reform in these countries include: rent-seeking by entrenched
interests that benefit from the status quo, incongruence between the national and provincial
levels of government that encumbers the implementation of reforms, the poor state of
infrastructure, and the global economic downturn.
It is also a major challenge for governments to convince their populations that reducing
subsidies will benefit them directly since subsidies have failed to achieve their original goals.
This in turn will depend on the capacity of the government to turn the profits from reduced
subsidies into other welfare goods. Such efforts will require trust between politicians and the
people. Thus, democracy may ultimately be at least a partial precondition for eliminating
subsidies. As a result, India may possibly have an easier time removing subsidies because its
political system is used to dealing with and can accommodate political protest. The more
rigid systems of Russia and China, while theoretically better insulated from popular demands
and capable of adopting economically rational policies, may prove more politically brittle in
dealing with the stresses caused by the phasing out of energy subsidies. Of course, the find-
ings of such a three-country study can only be indicative, but they certainly warrant further
research into this question.
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Subsidies for fossil fuels and climate change: a comparative perspective 315
It would have been tempting to include one of the Middle Eastern petroleum producing
countries in this article, as many of them are among the world’s most dedicated energy subsi-
disers. I have experienced personally the astonishing scale of these subsidies, among other
occasions on a taxi ride over 1000 km across Iran, from the Azeri border to that of Turkmen-
istan. The cost of petrol for such a ride is negligible, the only significant cost being food to
keep the driver and his family alive and coffee to keep him awake. Currently most of the
governments in the region seem entirely unprepared to deal with such drains on the econo-
mies and welfare of their countries, and their international interlocutors either unwilling or
uninterested in alerting them to the facts. Covering one of these Muslim countries, however,
would make it necessary to deal with the many cultural and religious elements, including
authoritarian regimes and their counterparts in radical Islam, that underlie the stubborn over-
population, extravagantly wasteful practices such as indoor ski slopes, artificial islands and
disregard for the carrying capacity of the land in the Middle East. Those are large and
demanding topics which will have to wait for a future paper.
Acknowledgements
This article was written as part of the RussCasp project, which is financed by the PETRO-
SAM programme under the Research Council of Norway. Marc Lanteigne (University of St
Andrews) and Grant Dansie (Norwegian Institute of International Affairs) made important
contributions to this article.
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