In developed countries such as the United States, energy subsidies are usually discussed in terms of tax preferences for renewable or fossil energy sources, or energy efficiency. In other parts of the world, led by Uzbekistan (mentioned below), subsidies take the form of government-funded reductions in retail prices for fossil fuels.
Looking at the U.S., the Congressional Budget Office (CBO) reports (March 2012) that “Tax preferences for energy were first established in 1916, and until 2005 they were primarily intended to stimulate domestic production of oil and natural gas.” Tax preferences for energy efficiency and renewable energy have expanded since the 1970s. In 2011 CBO estimated that the U.S. provided about $20 billion in energy related tax preferences, primarily for energy efficiency (10 percent) and renewable energy (68 percent). The current value of renewable energy tax preferences is significantly lower because the Production Tax Credit has expired.
Dueling statisticians report that currently fossil fuels receive more total dollars in tax preferences, but renewable energy receives larger subsidies per unit of energy generated.
Another form of energy subsidy is research spending by the U.S. Department of Energy–currently about $3.7 billion. About 50 percent goes to energy efficiency and renewable energy and about 20 percent goes to fossil energy, primarily for emissions reduction technology for coal-fired power plants.
Together these tax and research subsidies represent about 0.14 percent of the U.S. gross domestic product (GDP).
Many of the second type of fuel subsidies are more common in the developing world and operate on a completely different scale: fossil fuel subsidies consume 25 percent of Uzbekistan’s GDP. Yemen spends 6 percent and Egypt 10 percent of their GDP on fossil fuel subsidies. A World Bank 2012 report states that global governments spent about one-half trillion dollars on fossil fuel subsidies. That represents eight percent of all government revenues.
Subsidies are intended to protect consumers by keeping prices low. However, a 2010 study by the International Monetary Fund showed that in the developing world the subsidies benefit the wealthy more than the poor–opposite of their supposed purpose. Specifically, the top quintile derives 43 percent of fossil fuel subsidies, and the bottom quintile receives 7 percent of the subsidy. Organizations such as the International Monetary Fund and the World Bank are successfully encouraging countries to reform their fossil fuel subsidies–governments can reduce their expenditures and increase their support for the poor using direct assistance.
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