IEA demands end to $409bn a year fossil fuel subsidies

Fossil fuel subsidies will rise by more than a third to $660bn a year by 2020 if action is not taken to curtail the increases, the International Energy Agency (IEA) has warned today.

Analysis published by the OECD's energy watchdog said that removing "inefficient subsidies" will raise national revenues, reduce greenhouse gas emissions and encourage investment in renewables and energy efficient technologies.

The agency, which has been leading an increasingly vocal campaign against fossil fuel subsidies, said that government support for oil, gas and coal often fails to deliver on intended objectives, instead encouraging wasteful use of energy and contributing to price volatility by blurring market signals.

Eliminating fossil fuel subsidies by the end of the decade will cut global energy demand by five per cent and reduce carbon emissions by nearly six per cent, the report added.

"Both developing and developed countries need to phase out inefficient fossil fuel subsidies," said OECD secretary general Angel Gurria in a statement.

"As they look for policy responses to the worst economic crisis of our lifetimes, phasing out subsidies is an obvious way to help governments meet their economic, environmental and social goals."

The IEA estimates that subsidies to reduce the price of fossil fuels artificially are on the rise among the 24 OECD countries. Subsidies in 2010 were worth almost $110bn more than in 2009, while annual support from 2005 to 2010 ranged from $45bn to $75bn.

Over half the subsidies supported the oil industry, accounting for $193bn during 2010, while a further $91bn went to natural gas.

"It's a huge amount of money," Fatih Birol, the IEA's chief economist, told reporters. "Without further reform, spending on fossil fuel consumption subsidies is set to reach $660bn in 2020, or 0.7 per cent of global gross domestic product."

The IEA spoke out against subsidies earlier this year, while the World Bank claimed last month that the money would be better spent helping poor countries address climate change.

Birol noted that some progress has been made since 2009 when G20 leaders agreed to phase out subsidies that "encourage wasteful consumption, reduce our energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change".

He praised efforts to scale back subsidies in China, Russia and India, while the IEA report noted that the US 2012 federal budget proposes eliminating a broad range of energy industry subsidies as part of efforts to save more than $3.6bn.

"While this is an encouraging start, much work remains to be done in order to realise the full extent of benefits," added IEA executive director Maria van der Hoeven. "It is crucial that countries follow through on their commitments by implementing reforms that are well designed and durable."

The IEA is to publish more data on fossil fuel subsidies as part of its annual World Energy Outlook report, due for release on 9 November.