Crude & refined trading
In 2022, governments worldwide spent USD 1 trillion on fossil fuel consumption subsidies – more than double the amount spent in 2021. This drastic increase in subsidisation resulted from the conflict in Ukraine, with the priority shifting to protect the public by introducing fuel price caps, and so on.
The staggering value of subsidies allocated to fossil-fuel related activities sheds light on the significant financial support that these industries receive despite growing concerns about their negative environmental impacts.
The International Energy Agency (IEA) considers carbon subsidies to be a ‘roadblock’ on the path towards a sustainable future. The continuing subsidisation of fossil fuel production, exploration and consumption will only delay the shift to renewables – so what are the alternatives?
The EU recently announced that an additional €330 million would be provided under their agricultural subsidy, which seeks to incentivise sustainable practices. Is there something from this model that can be applied to fuel subsidies? Read on for our verdict.
The Many Forms of Carbon Subsidies
Among the most obvious types of carbon subsidies include direct financial support, where governments provide grants or tax breaks to fossil fuel companies to encourage their production and exploration activities. In addition, research and development funding aims to improve efficiency or reduce environmental impacts. However, these funds still perpetuate fossil fuel dependence rather than promoting cleaner alternatives.
As well as this direct form of subsidisation, implicit subsidies further slow the transition to renewables, including:
- Consumption subsidies: As mentioned, the $1 trillion mentioned above was on consumption subsidies alone.
- Investment in overseas projects: The US spends billions over year funding overseas fossil fuel projects.
- Fuel price controls: Fixing or capping fuel prices at levels below market rates to provide affordable energy to consumers results in increased consumption.
- Infrastructure spending: Maintaining existing fossil fuel infrastructure and constructing new pipelines and so on, such as the $6.6 billion Apallachian pipeline for which construction is set to resume.
- Insurance support: The provision of insurance to fossil fuel companies for risks associated with their operations, reducing their operational costs.
- Low costs for fossil fuel exploration: Providing access to public lands for fossil fuel exploration or extraction at low fees or under lenient terms can act as an implicit subsidy.
- Limited liability for environmental damage: The fossil fuel industry may not bear the full costs of environmental damage caused by their operations, leading to an implicit subsidy. For example, if the costs of cleaning up oil spills or mitigating air pollution are borne by taxpayers or affected communities, the fossil fuel industry benefits from avoiding these expenses.
Is the EU Farm Subsidy a Good Model for Developing Alternatives?
What is the EU Agricultural Subsidy?
The EU’s Common Agricultural Policy (CAP) is one of the most extensive agricultural subsidies worldwide. In essence, it’s a system of subsidies aimed at promoting agricultural development, sustainability, and rural livelihoods within the member states, especially when the market is disrupted.
In recent years, the total allocation for the CAP was €386.6 billion, which was split between two funds:
- The European Agricultural Guarantee Fund (EAGF): This consists of €291.1 billion, up to 270 billion of which will be direct towards income support schemes, while the rest will be used to support agricultural markets.
- The European Agricultural Fund for Rural Development (EAFRD): The €95.5 billon assigned to this fund was designed to overcome difficulties caused by the pandemic.
2023 Reforms to the EU Common Agricultural Policy
On 26th June, a proposal of a new €330 million agricultural support package was announced, and €100 million was approved for the first round which was proposed in May. These funds are designed to assist EU farmers to cope with droughts and other adverse climatic conditions, as well as the effects of the war in Ukraine.
It is also said that the new CAP will assist with the transition to sustainability in accordance with the European Green Deal, its strategic plan ensuring that funds are used to work towards the environmental and climate objectives therein. How will each member state be held accountable?
Each state has to ensure that their strategic plan for the use of CAP funds has a “greater overall ambition on environment and climate compared to the previous programming period”.
In addition, current plans will need to be reviewed to ensure consistency with amended EU climate and environment legislation and they will have to be updated if they do not meet the requirements.
Stricter Conditions for Green Payments
Beneficiaries of the existing CAP receive so-called “direct green payments” for implementing crop diversification, dedicating land to ecological focus areas, and maintaining permanent grassland. From now on, however, the conditions they need to meet will be stricter:
- All farms of 10 hectares or more will have to implement crop rotation (with some exceptions, including organic farms).
- 4% of land will have to be reserved for non-productive purposes – a greater amount than is currently required.
- 25% of payments will go to eco-schemes, which include activities such as organic farming, carbon farming, animal welfare improvements, and agroforestry. These schemes will be annual or multiannual.
These are just a few examples of how farmers will be incentivised to greenify their practices. The EU has to include these conditions in their plans but individual farms may choose whether to comply or not – however, if they want to continue receiving payments, they will have to.
How Might the Model Apply to the Energy Sector?
Adopting a similar model in the energy sector could potentially incentivise cleaner and more sustainable practices. Redirecting some of the subsidies away from carbon-intensive activities and incentivising the adoption of renewable energy sources, energy efficiency initiatives, and other climate-friendly alternatives may help promote the transition to a low-carbon economy.
Some other aspects of agricultural subsidy models that could be relevant to fuel subsidies are discussed below.
Incentivising Innovation and Research
Agricultural subsidies often support research and development initiatives that aim to improve crop yields and reduce environmental impacts. Similarly, fuel subsidies could be channelled into research and development efforts for cleaner energy technologies, energy storage solutions, and carbon capture and storage (CCS) technologies, helping to accelerate the transition to a greener energy landscape and facilitate the deployment of innovative solutions.
Support for Small-Scale Producers
Agricultural subsidies often include provisions to assist small-scale farmers and promote inclusive growth in rural areas. For example, the CAP reforms are set to address the needs of small and medium-sized family farms more than before.
In the energy sector, subsidies could be designed to support decentralised renewable energy projects, empowering communities to generate their own clean energy and reduce reliance on centralised fossil fuel-based power plants.
Monitoring and Accountability
Successful agricultural subsidy models involve regular monitoring and evaluation of the impact of subsidies on various factors, including environmental outcomes. Similarly, fuel subsidies with a focus on sustainability would require careful assessment to ensure they are effectively promoting cleaner practices and contributing to emission reductions.
Gradual Phase-Out of Subsidies
In the agricultural sector, some subsidies are designed to gradually decrease over time, allowing farmers to adapt to changing market conditions and adopt more sustainable practices.
A similar approach could be applied to fuel subsidies by gradually reducing support for fossil fuels while increasing support for renewable energy sources. This would address the issue with the staggering levels of funding spent on carbon studies and provide a smoother transition.
Conclusion
The overwhelming increase in carbon subsidies underscores the significant financial backing received by the fossil fuel industry, which the IEA considers to be a major obstacle to achieving a sustainable future.
In light of this, the EU’s Common Agricultural Policy (CAP) presents an interesting model that could be explored for potential application in the energy sector. The recent reforms to the CAP include stricter conditions for green payments and a focus on eco-schemes, encouraging farmers to adopt greener practices.
Applying a similar model to the energy sector could offer several advantages, in terms of incentivising and ensuring that plans for the use of funds are in alignment with climate legislation.
Ultimately, it’s best for funds to be spent on tactics that reduce fossil fuel demand instead of subsidising heavily when a crisis occurs – and sometimes, this means cutting off one’s supply of funding unless stricter requirements are met.
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