Given the constellation of concerns over fuel subsidies—environmental, macroeconomic, and corruption-based—reformers hailed the prospect of significant changes in the wake of the pandemic.
Previous reform efforts, after all, had faced stiff resistance. Fuel subsidies often benefit political and business elites and are also hugely popular among many citizens of developed and developing countries alike who benefit from the availability of cheap energy for transportation, cooking, air-conditioning, heat, and other key functions. As with other social spending benefits, citizens can be loath to accept fuel subsidy reform efforts. Between and , efforts to reduce or eliminate gasoline subsidies led to protests in at least 24 countries.
It is, therefore, perhaps unsurprising that attempts at fuel subsidy reforms have been halting and that fuel subsidies have proven resistant to change , despite the compelling environmental and economic evidence against them. That is not to say, however, that reform has been impossible. Between and , at least 50 countries modified their fuel subsidy regimes. Since the pandemic and its attendant drop in oil prices and government revenue, countries have been reducing or eliminating fuel subsidies with far less backlash than before.
In Nigeria—where a attempt at oil subsidy reform led to two weeks of protests, a nationwide strike, hundreds of injuries, several deaths, and a swift reversal of policy—a June announcement that the government would be phasing out the subsidy entirely was met with relative quiet. Because oil prices are already low, the elimination of the subsidy was more readily accepted by citizens.
They tend to increase health, employment and welfare indicators while being economically efficient. This money could be used to reduce the deficit, stimulate the economy, or fund other social development priorities.
Encouragingly, this package could gain traction politically, according to experts we interviewed for the study. The study is only as good as the data available, so our results should be interpreted with caution. It also does not cover all aspects that governments should consider before removing subsidies. For instance, we only analyze the impact on consumers, while some firms and workers could also be exposed to the negative impacts of subsidy removal. Nonetheless, our study demonstrates again that energy subsidies are expensive, inefficient and counterproductive.
Reforming them to save money, help poor households, and reduce air pollution and greenhouse gas emissions is a step that all countries at any income level can consider to kickstart a just transition towards inclusive and sustainable development. Foto Copyright: alh1 — Flickr. Adrien's work focuses on the design of effective and politically acceptable climate strategies.
He develops tools to align decarbonization policies with development goals in all sectors and to manage political economy issues in the transition to net-zero — including labor, social and fiscal impacts. Adrien also works on methods to build socio-economic resilience to uncertain climate change impacts, and to facilitate the co-construction of public policies involving a variety of stakeholders with different objectives.
Adrien is a trained engineer, holds a PhD in economics and is the author of 7 books or monographs, and more than 30 academic papers on climate change and development. Rafael Soria is a specialist in Energy Planning, renewable energy and environment. He is currently an Associate Professor at the Faculty of Mechanical Engineering of the National Polytechnic School, and teaches undergraduate, masters and doctorate classes.
It has 14 scientific Q1 publications, book chapters and international conferences. The federal government provides numerous subsidies, both direct and indirect, to the fossil fuel industry. Special provisions in the U. Other provisions in the tax code aimed at businesses in general create indirect subsidies that are not exclusive to the fossil fuels industry. In certain cases, quantifying these subsidies is fairly simple. In the case of indirect subsidies, establishing an amount associated with these subsidies is more challenging.
While not covered in this fact sheet, another source of federal aid to the fossil fuel industry is the discounted cost of leasing federal lands for fossil fuel extraction. In May , the UN Environment Programme UNEP published a report detailing an internationally accepted methodology that will help countries make their fossil fuel subsidies more transparent.
Intangible Drilling Costs Deduction 26 U. This provision allows companies to deduct a majority of the costs incurred from drilling new wells domestically. Percentage Depletion 26 U. Depletion is an accounting method that works much like depreciation, allowing businesses to deduct a certain amount from their taxable income as a reflection of declining production from a reserve over time.
However, with standard cost depletion, if a firm were to extract 10 percent of recoverable oil from a property, the depletion expense would be ten percent of capital costs.
In contrast, percentage depletion allows firms to deduct a set percentage from their taxable income. Because percentage depletion is not based on capital costs, total deductions can exceed capital costs.
This provision is limited to independent producers and royalty owners. These subsidies create a series of tax credits for energy investments, particularly for coal. These included 30 percent investment credits, which were made available for gasification projects that sequester 75 percent of carbon emissions, as well as advanced coal projects that sequester 65 percent of carbon emissions. Sunsetted in , this tax credit was created by the Crude Oil Windfall Profit Tax Act of to promote domestic energy production and reduce dependence on foreign oil.
This allows the most expensive reserves to be sold first, reducing the value of their inventory for taxation purposes. Foreign Tax Credit 26 U. Typically, when firms operating in foreign countries pay royalties abroad they can deduct these expenses from their taxable income. Instead of claiming royalty payments as deductions, oil and gas companies are able to treat them as fully deductible foreign income tax.
This structure combines the investment advantages of publicly traded corporations with the tax benefits of partnerships. While shareholders still pay personal income tax, the MLP itself is exempt from corporate income taxes.
More than three-quarters of MLPs are fossil fuel companies. This provision is not available to renewable energy companies. Put in place in , this subsidy supported a range of companies by decreasing their effective corporate tax rate.
We can do that with the tax code to take those special provisions away. Clean Energy for America Act S. Click here to cancel reply. Time limit is exhausted. Follow us. Directed by. Agricultural technology Economics of Ebola Election debates Fossil fuel subsidies Increasing foreign investment Industrialisation in Africa Management matters Prepaid electricity Public sector workers Reducing pollution Seasonal migration Tax collection Ultra-poor Women in the workforce. Call for proposals — How to apply.
Future events Past events Events policy. Projects Publications. This was driven by a lack of demand due to low economic activity worldwide. This temporary season of low oil prices presents an opportune moment for countries to remove inefficient fuel subsidies and reduce the knock-on effect to citizens. This reform also provides developing country governments with much needed resources for immediate response to the COVID crisis and long-term investments in productive sectors, such as education and health care.
Inefficiencies of fuel subsidies Consumers enjoy low fuel prices and history has consistently shown us that increases in such prices can drive protests and revolution. Effective fuel subsidy reform Although public discontent cannot be avoided, it can be mitigated if subsidies are removed at a time when oil prices are low, which lowers the knock-on impacts to citizens.
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