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Why fuel subsidies should be removed – IEA

The International Energy Agency has cautioned against fuel subsidies, especially in developing nations like Nigeria where the use of energy resources is significant.

According to the IEA’s October 2022 World Energy Outlook, wasteful fossil fuel subsidies are a major roadblock to a more sustainable future.

Even while it is morally right to protect society’s most defenceless citizens, the report noted that one of the most obvious drawbacks of fossil fuel consumption subsidies is the financial strain it places on countries.

Therefore, in order to ensure their energy transition, countries must stop giving away unnecessary fuel subsidies. Following a significant fall in 2020, fuel subsidy payments rose between 2021 and 2022.

The value of fossil fuel consumption subsidies reached a historic low of roughly USD 180 billion in 2020, down 40% from levels in 2019, thanks to the decline in fossil fuel prices and overall energy usage. Since we began keeping track of these subsidies in 2007, this is the lowest yearly sum.

However, since energy costs and consumption rose and policymakers were reluctant to continue changing subsidy programs amid such a shaky economic recovery, subsidies sprung back to $440 billion in 2021, almost to 2018 levels.

Following the fact that they distort markets, send users the wrong pricing signals, exacerbate budget deficits in developing nations, and deter the adoption of cleaner renewable energy sources, the IEA has long argued for eliminating or at least decreasing fossil fuel subsidies.

Their growth worries me the most since we should be stepping up our efforts to reduce excessive consumption and hasten the transition to clean energy.

Governments, according to the IEA, must utilize the vast market resources and promote participation from private actors. Governments must create stable, predictable, long-term market structures that support their goals.

Increased consumer protection measures during the energy crisis and high fossil fuel prices, according to the IEA, may lead to a further sharp increase in fossil fuel subsidies in 2022.

“Subsidies are not a specific budget item but rather the potential cost of lost revenue in nations that export gasoline. The less obvious costs are seen in the way government subsidies promote excessive fossil fuel usage and the warped investment incentives they create.”

To protect the energy transition of resource-dependent nations like Nigeria, the IEA encouraged the government to invest in clean energy technology innovation and early-stage deployment.

Different Nigerian governments have fought to abolish the nation’s fuel subsidy, particularly during times of high and fluctuating fuel prices.

Minister of Finance, Budget, and National Planning, Zainab Ahmed, said the federal government pays out more than N18.39 billion in fuel subsidies every day.

Although President Muhammadu Buhari had stated that petroleum subsidy payments will end after HI/2023, when he leaves office as president, the proposed budget breakdown included N3.6 trillion for fuel subsidy payments for the first half of 2023.

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