From Sheriffah Noor Khamseah Syed Ahmad Idid
Fossil fuel subsidies are in the spotlight in Malaysia and several other countries around the world, a testimony of the public and political debate on the subject on social media.
In Malaysia, this culminated in an organised demonstration today by a group of Malaysians to highlight their anger and frustration at Putrajaya’s decision to implement targeted fuel subsidies.
Nearly every country has some fossil fuel subsidies, according to the Organisation for Economic Co-operation and Development. Many countries subsidise fossil fuels for socio-political reasons.
In February 2022, Russia invaded Ukraine, causing oil and gas prices to spike worldwide. To protect consumers from the shock, governments responded in various ways, according to the International Energy Agency.
Fuel subsidies ballooned to US$1 trillion in 2022
The International Monetary Fund had reported that fossil fuel subsidies escalated to US$7 trillion in 2022, equivalent to 7.1% of global gross domestic product.
The IEA reported that global spending on fossil fuel consumption subsidies had doubled to a record US$1 trillion in 2022 and the geopolitical tension between Russia and Ukraine sent oil prices skyrocketing, crippling many economies.
According to fDi Intelligence, nearly half of global fuel subsidies in 2022 were extended in East Asia and the Pacific, with China contributing by far the most to global fuel subsidies, amounting to US$2.2 trillion followed by the United States with US$757 billion and Russia US$421 billion.
A Reuters report in July last year said that Senegal’s fuel and electricity supports had gobbled up 4% of GDP, while Nigeria spent US$10 billion capping the price of petrol.
Senegal, like Nigeria and Angola, is removing costly fossil fuel subsidies – a move once considered politically unthinkable but which has become a necessity due to crushing debt, a spike in borrowing costs and high fuel prices.
The surge in fossil fuel subsidies occurred even as governments worldwide had pledged to transition away from polluting fossil fuels to cleaner energy in the global mission to avert climate catastrophe.
Recent reports of more than 500 haj pilgrims who had perished while in Saudi Arabia due to scorching heat in Mecca, where temperatures have at times exceeded 51°C, is a grave reminder that the world must adhere to the goals of the Paris Agreement to keep the global temperature rise to no more than 1.5 °C.
Thus, among the key strategies to move in this direction is to discourage increased usage of fossil fuels and moving towards renewable energies as well as nuclear energy and removing subsidies.
The European experience
Climate Action Network Europe reported that, however, these commitments are still falling short on implementation, as the EU and its member states are failing to walk the talk.
Instead of a gradual decline of fossil fuel subsidies, it is in fact on the rise, putting in jeopardy the goal of hitting the 2025 deadline for climate change.
The European Environmental Agency had reported that most EU member states have no concrete plans on how and when they will phase out these subsidies. Thus, it is unlikely the EU will make much progress towards phasing out fossil fuel subsidies by 2030.
Impact of subsidy reforms
The IMF said that raising fuel prices to their fully efficient levels reduces projected global fossil fuel carbon dioxide emissions 43% below baseline levels in 2030 – or 34% below 2019 emissions.
This reduction is in line with the 25-50% reduction in global GHGs below 2019 levels needed by 2030 to be on track with containing global warming to the Paris goal of 1.5-2°C.
Globally, around 60% of the carbon dioxide reduction comes from reduced use of coal, while 30% and 10% are from reductions in consumption of petroleum and natural gas respectively.
Subsidies are for the poor but not the wealthy
The Conversation.com had outlined that critics have argued that the subsidies benefited mainly the elites even though they could afford to buy fuel at market prices.
Luc Eyraud, director of studies in the IMF’s Africa Department, said that these subsidies often cost several points of GDP to the detriment of other spending.
While the subsidies benefit everyone, they often disproportionately benefit the wealthiest.
Public reaction to cutting out fossil fuel subsidy
This escalation in the price of fossil fuel is anticipated to be passed on to the cost of transport, food and electricity which are major items of expenditure of the population as a whole.
The IMF had highlighted that the absence of public support for subsidy reform is in part due to a lack of confidence in governments’ ability to compensate the poor and middle class for the higher energy prices they face.
In Nigeria, the fossil fuel subsidies are considered to be a drain on public finances, costing their government US$10 billion in 2022, 40% of the country’s revenue.
Le Monde had reported that Nigerian president Bola Ahmed Tinubu managed to defuse a nationwide strike call by announcing cheaper public transport and a temporary rise of the minimum wage for the lowest-paid workers.
Zambia cut subsidies in 2020 with subsidy spending reduced from 2.4% of GDP in 2021 to 0.4% in 2022, enabling a proportional rise in funding for education, health and social protection. Supporting vulnerable households “more or less immediately” is essential.
Angola said it would remove subsidies in phases, and the savings would go towards cash transfers to poor citizens and to support agriculture, fishing and public transit.
Sustainable advantages
Countering fossil fuel subsidies, according to the IMF, would not only offer a chance to put humanity back on track to meet its climate goals, but could also prevent 1.6 million premature deaths per year and increase government revenues by USD$4.4 trillion.
To assuage public fury, it is recommended that Putrajaya carry out the following recommendations by IMF:
Develop transparent, extensive, and clear communication and consultation with stakeholders, including information on the size of subsidies and how they affect the government’s budget.
Highlight and report on measures to protect and support the poor through targeted cash or near-cash transfers or, if this option is not feasible, a focus on existing targeted programmes that can be expanded quickly.
Assure the public that the fossil fuel subsidy removed is being redirected to better use; for the poor and for key sectors, including agriculture, fishing, education, health, transportation and infrastructure.
Bringing Malaysians on board the country’s energy transition path is crucial for them to understand that this government decision is part of Malaysia’s global pledge to shift from fossil fuels to cleaner energy. This effort is a key component of our global game plan to achieve net zero emissions by 2050.
By explaining clearly to the rakyat, we hope that this decision will not create tension or political and public unrest, but instead maintain peace and harmony in our country.
We aim for all Malaysians to collectively support and contribute towards averting climate catastrophe and creating a livable world for everyone. - FMT
Sheriffah Noor Khamseah Syed Ahmad Idid is a concerned member of the rakyat.
The views expressed are those of the writer and do not necessarily reflect those of MMKtT.
