Governments spend staggering sums of money subsidizing energy—in particular fossil fuels, but increasingly also other forms of energy such as renewables.  The latest global assessment, published last year by the International Energy Agency, puts the total energy subsidy at far more than US$300 billion annually.  And that figure is surely much smaller than the real total, for it excludes many subsidies that are hard to measure and also omits a large number of countries, notably the highly industrialized nations that provide a wide variety of energy subsidies.  (The United States, alone, adds US$50 billion to the world total energy subsidy according to a careful recent estimate by Doug Koplow.)

Among analysts, there is nearly universal scorn for such a high level of subsidisation.  To be sure, subsidies have a proper role in public policy, such as in nurturing promising technologies that cannot initially survive on their own in the marketplace.  But the real world of subsidies bears little relationship to the theoretical proper role for subsidy in public policy.  Worldwide, most subsidies are showered on mature fuels and technologies and subvert useful market competition.  These subsidies are troubling, in part, because they are a drain on public resources. Indeed, as the World Bank has shown, in many of the poorest countries, governments spend many times more on fuel subsidies than on health and other important public-welfare expenditures.  Most of these subsidies also cause environmental harm by rewarding consumption and insulating production decisions from the full social cost of today’s prevailing methods for delivering energy.

However, it is much easier for analysts to agree that the problem must be fixed than to devise workable solutions.  Most subsidies are not some aberration that can be removed from public policy with a well-honed scalpel.  Rather, nearly all subsidies are ingrained in a political logic that is difficult to change; understanding the political economy of energy subsidies is therefore an essential first step. 

The dominant form of subsidy varies enormously across different fuels.  Most energy subsidies apply to oil products.  And contrary to public opinion, most oil subsidies do not seem to take the form of handouts to big oil companies; instead, they are designed to provide highly visible benefits to consumers—especially those who vote or could mount political opposition that would be inconvenient for ruling elites.  It is no accident that some of the biggest subsidizers are populist democracies—such as Iran (the world’s largest energy subsidizer according to the IEA), India (#5) and Venezuela (#6). Large domestic oil production—which is often not priced in state budgets to reflect the full opportunity cost of using it at home instead of export—also helps governments muster the political support and economic wherewithal to pay for these subsidy programs.  Even non-democracies, such as Saudi Arabia and China, mostly lavish oil subsidies in the form of politically visible final products to help blunt public dissent.  None of these governments will soon abandon this practice unless their leaders are more confident in other mechanisms for securing power. 

Other fossil fuels are much less visible politically, which may help explain why they are generally less subsidized.   Coal appears to be the least subsidized of all the fossil fuels, although coal subsidies are hard to measure because they are often buried inside the accounts of state-owned coal companies.  Most take the form of support for well-organized labor.  Still other subsidies are finely tuned to benefit other well-organized groups.  Agricultural lobbies have kept massive subsidies for biofuels in place despite mounting evidence they do little to promote energy security nor preserve the environment. 

Effective solutions are urgently needed for the subsidy problem.  It will be hard for governments to get serious about energy security and global warming without getting prices of the major fuels in line with their real costs.  One solution is for governments to make the full cost of subsidy much more visible and to regulate it with hard budget constraints.  Many subsidies thrive because, by design, their full cost is hidden and shifted to less well-organized groups (e.g., taxpayers).  Another approach is to put clearer triggers into subsidies so their cost does not explode when market conditions change quickly—as happened in many countries during the run up to the peak oil prices of 2008.  Still another solution is to anchor subsidy policy into a firmer statutory base with sunset clauses that are hard to change.  The near-term politics of subsidy are nasty and difficult; debates over more distant policies can be easier to manage.

The best political recipe will vary with the circumstances, but we in the community of analysts probably need to refocus our attention on the underlying political logic of subsidy programs as much as their harm.  For too long we have focused on the latter, and thanks to that the harms of subsidies (if not their magnitude, which is still difficult to pin down) are well-documented.  The next task is to help chart viable solutions.

David G. Victor is Professor of International Relations at UC San Diego and Director of the Laboratory on International Law and Regulation, which is funded by the nonpartisan Electric Power Research Institute.