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Renewables are just too expensive. Or are fossil fuels too cheap?

posted by Susanna Olai on 09 November 2011

tags: Business , Public Sector , renewable energy , Feed in tariffs ,

It’s not news that government policies heavily influence our use of energy. Our reliance on fossil fuels such as oil, coal and gas is greatly encouraged by massive subsidies worldwide.

On 2 November, IEA Chief Economist Dr. Fatih Birol delivered a keynote speech at the B20 Business Summit, saying that subsidies towards fossil fuels totalled $409 billion in 2010 – about $110 billion up on 2009 due to the rebound in global energy prices. He warned that without further reform, spending on fossil fuel consumption subsidies is set to reach a mind-boggling $660 billion in 2020, or 0.7% of global GDP.

This policy of supporting fossil fuel consumption is most common in developing countries, and has been introduced with the aim to assist poor as well as to encourage economic development. These are important and admirable goals, but it is disputed whether these subsidies actually have the intended effects. The distortion of energy markets may result in an inefficient allocation of resources and encourages a wasteful use of energy. According to IEA’s World Energy Outlook 2011, phasing-out fossil fuel consumption subsidies by 2020 would slash growth in energy demand by 4.1%, reduce growth in oil demand by 3.7 mb/d and cut growth in CO2 emissions by 1.7 Gt.

Energy subsidies have been hotly debated in England after the government announcement that the Feed-in Tariffs will be revised (and most likely slashed by 50%). Investors have voiced worries that renewable technologies only cost in with government support. However interestingly enough, analysis carried out by Bloomberg New Energy Finance show that fossil fuel subsidies are approximately 12 times that of support to renewable energy. In 2008, approximately $43 to $46 billion was spent on renewable energy through tax credits, alternative energy credits and guaranteed electricity prices through initiatives such as Feed-in Tariffs. For the same period IEA figures show that around $557 billion was spent on supporting fossil fuels in 2008.

According to the US Carbon Dioxide Information Centre (CDIAC), 2010 was by far a record year for CO2 emissions from fossil fuel combustion and cement manufacture. Emissions are estimated at 33.5 billion metric tons of CO2. The previous record year was 2008 and the 2010 emissions represent a 4.5% increase compared to 2008.

Reducing fossil fuels subsidies would allow renewable technologies such as solar and wind power to become more competitive, which would lead to a much needed halt in the increase of CO2 emissions. A policy change is urgently needed.

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