Should Energy be Subsidized?
|
Case Code: ECON021 Case Length: 14 Pages Period: 1990-2007 Pub Date: 2007 Teaching Note: Not Available |
Price: Rs.300 Organization : - Industry : Energy Countries : Global Themes: Economics |
Abstract Case Intro 1 Case Intro 2 Excerpts
"The Dutch government will renew subsidies for green energy next year but only for producers that can prove their energy is really green and does not deprive people of food."
- Jacqueline Cramer, the Environment Minister of Netherlands, in May, 2007.
"Not only should global economies end energy subsidies which encourage excessive use of energy, they should also agree on a common higher price for energy."
- Lawrence H Summers, Former US Treasury Secretary, in April, 2007.
"Encouraging reforms of subsidies that have considerable negative effects on the environment and are incompatible with sustainable development, inter alia by establishing a list of criteria allowing such environmentally negative subsidies to be recorded, with a view to gradually eliminating them."
- An action suggested in the Sixth Environment Action Program , in July, 2002.
Introduction
In January 2007, the US House of Representatives passed legislation seeking to cut US$ 14 billion in oil and gas subsidies over the next ten years and instead to pass on the amount to companies engaged in the development of renewable energy technology and the production of renewable energy. However, as of June 2007, the bill was still languishing in the US Senate, with lobbyists working hard to ensure that it did not become law. If the bill did become law, it was expected to give a boost to the renewable energy industry. Some analysts were, however, apprehensive that this step might have a negative impact on the domestic oil industry in the US.
A reduction in oil subsidies was expected to lead to an increase in the domestic price of oil, forcing the government to increase oil imports. Analysts also argued that in order to maintain their competitiveness, US oil companies would look to cut costs, including through layoffs, and this would have a negative impact on employment in the oil sector. The increase in international energy prices in 2006-07 brought energy subsidies into focus. According to economists, energy subsidies resulted in inefficient use and over-consumption of energy in addition to being a drain on the exchequer. They felt that while it was true that subsidies allowed the poor access to energy, the government would have to keep in mind the long-term impact of extending these subsidies on the economy and on the environment.
Even so, around the world, there were many countries that continued with subsidies which promoted the indiscriminate use of non-renewable energy. This not only affected the finances of these countries but also caused harm to the environment. In this context, proposals to shift subsidies from the non-renewable energy sector to the renewable energy sector were gaining currency. Some analysts were of the view that giving subsidies to develop energy from renewable sources would not only help save the environment but also improve the finances of many oil-importing countries, besides providing energy security.
However, others felt that diverting subsidies from the non-renewable energy sector (especially fossil fuels) was not a good idea as it would lead to sudden increases in the price of fuel. Considering that the per unit cost of generating energy from renewable sources was higher than the cost of generation from non-renewable sources, the social cost of removing energy subsidies would be high, with reduced access to energy for the poor and increase in unemployment, they said. On the other hand, with climate change becoming an important issue, analysts felt that there was an urgent need to control greenhouse gas (GHG) emissions.
It was argued that the money that was being used to subsidize non-renewable energy could now be effectively used to develop more efficient forms of renewable energy (Refer Exhibit I for a brief note on renewable energy). However, even as of 2007, renewable energy continued to be expensive vis-à-vis fossil fuels. Also, there were experts who felt that renewable energy too had certain drawbacks and could not be branded as fully eco-friendly.
Buy this case study (Please select any one of the payment options)
| Price: Rs.300 |
Price: Rs.300 | PayPal (7 USD) |
