India enters brave new world

As protests on the subcontinent showed, people are not going to give up cheap petrol without a fight. But subsidies on fossil fuels are giving the market a bias against the crucial introduction of renewable energy.

Cheap petrol is worth fighting for, according to Indian protesters who last week shut down public transport and businesses in Mumbai, Bangalore and other major centres to oppose government cuts to energy subsidies.

By scrapping price caps on petrol and loosening them for diesel, opposition parties charged, the government was threatening the lifeblood of hundreds of millions of poor Indians. "The government claims it is working for the common man but it clearly doesn't care for them," said D Raja, the leader of the Communist Party of India. But government ministers said they would hold their ground to correct a distorted market, a stance experts agreed was necessary if alternatives to fossil fuels were ever going to take off in major emerging markets across the world.

The India protests will be repeated in a number of developing states that say they are moving to dismantle laws that hold prices for petrol, natural gas and other energy products far below international market rates. At the same time, more subtle forms of subsidies to fossil fuel companies in the US and other industrialised countries are under new scrutiny after the BP oil spill in the Gulf of Mexico.

The Group of 20 (G20) leading and emerging economies, along with OPEC and the International Energy Agency (IEA), agree artificially low prices for most energy sources encourage waste, and ending them would be one of the cheapest ways to conserve fossil fuel reserves and lower emissions of carbon dioxide blamed for global warming. Subsidy reform would also significantly reduce government budget deficits.

"The price signal from subsidy phase-out would provide an incentive to use energy more efficiently and trigger switching from fossil fuels to other fuels that emit less greenhouse gases," said the IEA, the group based in Paris that represents the interests of oil-importing countries. The reform would reduce global oil consumption by 6.5 million barrels per day (bpd), the IEA's estimates show, and cut emissions by 6.9 per cent.

That would be equal to the combined total emissions of the UK, France, Spain, Italy and Germany today. The issue is particularly pertinent to the UAE and other OPEC members, which maintain some of the highest rates of energy subsidies in the world. The UAE ranked 13th for subsidies, with about US$15 billion (Dh55.09bn) handed out by the Government in 2008, the IEA said - a figure that made up about 8 per cent of GDP.

Most of the UAE's subsidies cover the cost of supplying natural gas to power stations, which keep electricity prices low for consumers. Iran ranked first, followed by Russia, Saudi Arabia and India in fourth place. To the average consumer, the subsidies come in the form of low prices for petrol, diesel, electricity and even cooking gas. Some price caps merely limit the profits of producing companies, while others cause losses that need to be compensated by government.

These subsidies need to be dismantled and redirected to renewable energy if the GCC clean energy sector is to be anything more than "a showcase", said Dr Nasser Saidi, the chief economist of the Dubai International Financial Centre. Renewable energy sources cost more to develop than international rates for fossil fuels, meaning they require their own form of subsidy. But subsidising the fossil fuels that are cost-effective to develop at market rates puts renewables even further out of reach, Dr Saidi told a Dubai conference last month.

"We have high levels of subsidies, rising levels of subsidies, and it's inequitable," he said. "The idea behind the subsidies was 'maybe this is helping the poor', but that's not true ? most of the benefits of the subsidies actually go to richer households." Although developing countries have received the most attention from international organisations such as the IEA and OPEC, critics are also pushing for a roll-back of subsidies for fossil fuels in industrialised countries.

Barack Obama, the US president, has called for an end to the billions of dollars worth of tax breaks for oil and gas companies. US tax rules allow oil companies generous tax deductions for capital investments and royalties the companies pay to overseas governments, and charge the companies a 9 per cent tax on certain types of capital investments, compared with the 25 per cent tax paid by most other businesses.

Members of both houses of Congress have introduced proposals to curb the tax benefits. The oil industry and political supporters say the tax breaks serve a strategic purpose by encouraging greater US domestic production to reduce reliance on imports. But the tax breaks and other governmental benefits to conventional energy industries bias the market against renewable energy sources, said Peter Rae, the vice chairman of the Renewable Energy Policy Network for the 21st Century, and the senior vice president of the World Wind Energy Association.

"What we need is something that's an objective inquiry into the real cost of all the externalities," Mr Rae said. "I have the impression that if that is done, renewable energy will come out looking more attractive." He said he was hoping an inquiry by the IEA this year would successfully represent the full cost to private companies and the government of supplying electricity from fossil fuels and nuclear reactors, and highlight some of the "biases" against renewables.

Mr Rae said most estimates on the price of renewable energy today, for example, included the cost of connecting the solar panels or wind turbines to the grid but failed to note many conventional power stations had the cost of transmission covered by government utilities. Critics of the renewable energy industry frequently exaggerate the cost of government subsidies to solar and wind farms by using obsolete data on the cost of production, he said. "The problem of disinformation is a big one for the renewable energy industry."

Significant changes to the world's supply of energy will require a number of big changes to government policy that could prove much more difficult than ending subsidies. Those changes would include an international agreement on climate change that creates an impetus to reduce emissions. But eliminating incentives to produce and consume more fossil fuels than necessary would be the logical first step.

G20 ministers signalled their approval at their summit last month in Toronto, noting the goal of "rationalisation and phase-out over the medium term of inefficient fossil-fuel subsidies that encourage wasteful consumption". India has made the first move. Watching the images of street protests and an angry public, the question is, which country will be next?