In 2009, the G20 countries agreed to end subsidizing fossil fuels. The advantage – keeping energy costs low for consumers – did not outweigh the many disadvantages: rising budget deficits, inefficient distribution of economic goods, climate change and greater inequality because higher income groups mainly benefit from the subsidies.
By 2020, fossil fuel subsidies (oil, gas and coal) had nevertheless reached $6,000 billion (6 trillion) — 6.8 percent of world GDP. This included both direct subsidies (supplying fossil fuels below cost) and indirect subsidies (financial support to mining and energy companies and tax rebates). That is why last year the theme was high on the agenda of the so-called COP26, the climate conference in Glasgow, where 197 countries pledged to phase out subsidies.
If the prices of gas, electricity and petrol were left to the market, this provided an incentive to save and look for sustainable alternatives. Western countries looked especially reproachfully at developing and emerging countries such as India, Brazil, Peru, Mexico and Nigeria, where governments deliberately keep fuel prices low. In those countries, these subsidies are still a matter of vital importance for many people, because otherwise they would be out in the cold, unable to cook or lose their livelihood – a tuktuk, moped or truck. Higher energy prices could lead to social unrest, or even a mass popular uprising or coup.
But now everything has changed. The governments of the western countries have lost their faith because of the war in Ukraine. Not the market, but politics should determine the prices. Incentives no longer matter. Everyone has butter on their head. If fossil fuels are not subsidised, drivers fear being wiped off the map electorally. It is not yet a matter of life and death for citizens here, as in the third world, but it does lead to increasing poverty among lower incomes. Even Brussels – the champion of the free energy market – is now thinking of a price ceiling.
The Netherlands was early on and already lowered the excise duty on the petrol price by 20 percent on 1 April, because a country of ‘happy drivers’ is a great asset. Other considerations include a reduction in energy tax, a one-off energy surcharge and the temporary VAT reduction on energy. The new British Prime Minister Liz Truss is completely furious. As a welcome shower, he has frozen energy prices, which means that a giga bill of 150 billion euros will be passed on to future generations.
The paradox is that subsidies on energy costs for the most part end up with the people with above average and top incomes – those who can actually afford high prices. They drive the biggest cars and have the biggest houses. Governments would be better off leaving energy prices to the market even in times of crisis. And if compensation has to be made, this must be done through higher benefits and tax relief for the people with the lowest incomes.
Even though they usually stay at home during the elections.