A Renewable Crisis

The last time there was a major push for renewable energy alternatives to polluting fossil fuels was in the aftermath of 1970s oil shock. And then, everyone conveniently relegated the issue to the back burner. With oil prices spiralling through the roof in September, the prospect of clean energy technologies have brightened again, raising hopes of a concerted effort against climate change. Is there an end to the world's dependence on oil? Or will Europe buckle under the pressure of transport strikes, backtracking on policy to tax fossil fuels? Will the Indian government keep playing to the gallery? Some questions and their answers

Published: Sunday 15 October 2000

A Renewable Crisis

-- (Credit: Christof Stache / AP Photo)It has shaken the confidence of the new Europe. Oil crisesfuel shortagesstreet blockades and protests that had become commonplace during the 1970s oil shortagehave come back to haunt Europe once again. Over the past few weeksas the price of oil touched a 10-year high of us $35 a barrel -- the highest since Iraq's invasion of Kuwait -- truck and taxi drivers brought European capitals to a standstill. Truckers also blocked fuel refineries and depots. Fuel shortages immobilised the ukwith 90 per cent of Britain's petrol stations running out of supplies. Farmers joined in the protests by picketing refineries in Germany and Britain. All of them were demanding total exemptions from fuel taxeswhich account for more than half the price of petrol in Europe.

The French government was the first to give in to the protests and on September 9it offered a cut of us $400 million in fuel taxes over the next two years. Belgium and Italy have conceded temporary freezes in fuel taxes. British Prime Minister Tony Blairwho stood firm despite the raging protestsinsisted that the high price of oil was good for combating global warming. He stated that giving in to troublemakers was "not the way to make policy in Britainand as far as he was concernedwould never be". But there have been indications that he may be forced to comply with the protesters' demands. Other European Union ( eu ) governments have also announced their resolve not to reduce taxesciting political and environmental reasons. As increased fuel taxes have been accompanied by reductions in other taxes in most European countriesgovernment budgets are increasingly dependent on revenues from fuel.

In Indiaon the other handthe nation's budget suffers from huge subsidies on fossil fuels. Currentlythe government subsidy on oil is us $12-13 per barrelresulting in a budgetary deficit of Rs 90crore. With the current colossal mismanagement of Indian oil and fossil fuel resourcesfurther upheavals can be expected in the future. Says Bibek Debroydirector-researchRajiv Gandhi FoundationNew Delhi: "If immediate steps are not taken by the governmentthe oil pool account deficit will touch record levels of Rs 200crore by the end of this financial year." Some estimates say that this figure could reach even Rs 240crore ( see section: India: On slippery ground ).

Fuel shortage
The European crisis is largely the result of creeping increases in oil prices over the last six months topped by the market panicking over record low stocks of heating fuel in usa . With the coming of winter in the Northern hemispherethere are fears that refineries will not be able to meet the demand for heating fuel. If the winter turns out to be severesome analysts believe that the price of oil will touch a new high of above us $40 a barrel. Rising economic growth is also said to be responsible for pushing prices alarmingly high. In June this yearmany developed nations asked the Organisation of Petroleum Exporting Countries ( opec ) 'cartel'to intervene and increase oil supply. Subsequentlyopec increased output by 8000barrels a daybut this has had little effect in bringing down prices.

opec has been branded the 'villain' of the crisis. The us secretary for energy Bill Richardson put the pressure on opec leaders to deliver an increase in oil supply saying that the us was ready to "exercise all options" to make opec comply. But whatever the opec doesit is always seen as a 'villain' in the eyes of the industrialised world. In times of 'peace'it is blamed for keeping the world in the oil trap and hampering the development of renewable forms of energy. The fault lies not with opecbut rather with large industrialised economies such as usawho keep fossil fuel prices low and unsustainable for political reasons.

While Europeans are demanding cheaper fuelirony has it that governments from around the world met in LyonFrancerecently to negotiate how to reduce the world's consumption of fossil fuelsreduce carbon dioxide emissionsand hence avert the dangers of global warming. This was a week-long meeting of the subsidiary bodies to the un Framework Convention on Climate Change ( unfccc )and its Kyoto Protocolunder which industrialised country governments have agreed to reduce their greenhouse gas emissionssuch as carbon dioxideby 5.2 per cent compared to their 1990 levels.

Ironicallyopec has often been blamed in the past for hampering any move to reduce fossil fuel consumption. Some analysts feel that this blame is unwarranted. A recent editorial in The Economist says that the group should be congratulated for risking its own business interest by increasing oil prices that dissuades people from using petrolinstead of being branded the "villains of the piece".

Encouraging oil-ternatives
"The Stone Age came to an end not for a lack of stones and the oil age will endbut not for a lack of oil" says Sheikh Ahmed Zaki Yamaniformer Saudi oil minister. This prophecy has been backed by recent research by the us -based Worldwatch Institutewhich predicts a 'micropower' revolution using more environment-friendly fuel cells and gas turbinesevery bit as dramatic as the revolution that hit the world's telecommunications industry in the 1980s. But this revolution can be seriously slowed down by subsidies and distorted taxes on energywhich act as perverse incentives to carbon-based energy.

But global warming and local air pollution are two of many reasons why the world should stop depending on fossil fuels and focus on a transition to renewable technologiesrather than following the us example of extremely low fossil fuel prices. Currentlythe price of fossil fuel is kept artificially low in many parts of the worldincluding the usbecause large amounts of taxpayer's money are used to subsidise coaloil and gas. But low fossil fuel prices do not take into account the non-renewable nature of the resourceor the health and environmental costs associated with its use. Cutting subsidies and levying taxes on fossil fuel are the two most direct ways of making economic growth environmentally sustainable.

High fuel taxes were the response to the oil crisis of the early 1970swhen they were seen as necessary to promote fuel efficiency and relieve congestion. Todaythe case for high taxes is stronger than in the past because the problems related to global warming and air pollution have increased. The rationale given for the continuous increases in road fuel costs since 1993 in the ukfor instancewas to bring down carbon dioxide emissions. This strategy seems to have worked. Compared to rising incomes and the fact that motoring costs have stagnated despite the fuel taxestraffic growth has only gone up by 1 per cent over the last two years.

Subsidies and low taxes on fossil fuels also make renewable technologies such as solar and wind power seem relatively more expensive and non-viableeven though their prices of these technologies have fallen in the past few yearsand they have made remarkable technological advances. The three oil shocks in the early and late 1970s and 1990swhen oil prices tripled over a short whileresulted in increased Research and Development ( r&d ) investments in industrialised countries for non-carbon technologies (see graph: Waking up to a crisis ). In the 1970sfor instancethe r&d budget for renewable forms of energy in industrialised countries increased tenfold.

Europe's green tax strategy
The European strategy of high taxation is therefore a good oneand particularly so if the revenues from these taxes were ploughed back into research and development of non-carbon technologiesto reduce dependence on oil. Giving in to protesters' demands and slashing fuel taxes nowon the other handwould rob credibility out of the new European Union ( eu) momentum of high-energy taxation. Spanish economy minister Rodrigo Rato has warned that the eu must not be tempted to bring down fuel taxes because it is important to stick to the long-term goal of reducing economic dependence on oil.

Since the early 1990snine out of the 15 eu members have adopted high taxes on the consumption of energy produced by fossil fuel. The last decade has seen a new trend in energy taxation in Europewhich is to reduce taxes on labour -- income tax or social security contributions -- while increasing taxes on pollution. This green tax reform has swept through Europe from Scandinavia to The Netherlands and Denmark and since 1998to Germany and Italywhile similar taxes are on the anvil in Britain and France. Todayenergy taxes account for about 11 per cent of total eu taxes as compared to 5.2 per cent in 1993. They are expected to help reduce greenhouse gas ( ghg ) emissions.

Germany has been on the forefront with green tax reforms starting in 1999. It aims to take away 2.3 per cent of the burden of social security contributions and increase taxes of dieselheating oilgas and electricity by the same amountso that the tax burden of the business sector will remain unchanged. The price of heating oil is estimated to rise by 10 per centelectricityby 7-8 per cent and gasby 6-7 per cent.

The green tax reform serves to shed the tax burden from the corporate sector and the labour forcewhich many see as essential to encourage eu business to grow and catch up with competitiveness in the us . The overall German tax burden will decrease by 1 per cent of the German gross domestic product as of next year. Five years from nowthe German corporate tax rate is planned to decrease to 25 per centwell below usa 's 41 per cent. SimilarlyFrance has pledged ready to cut the corporate tax rate by 10 per centand cut income tax especially for low earnersto encourage higher employment.

By increasing energy taxes while decreasing labour and corporate taxeseu finance ministers have locked the cause of the environment together with the aim of maintaining a balanced budget. In other wordswhile taxes on labour are cut to boost competitivenesshigh-energy taxes serve to bring new revenue into the budget. This is the economic rationale behind eu minister's stiff refusal to concede cuts in the fuel tax. Protesters in Germany had it spelt out that fuel tax will stay for budgetary reasons. "There's no more (tax relief). Germany is not going back into the debt trap" said Hans Eichelfinance minister.

Taxing on the climate
Judging by the increasing use of the terms 'climate change''environmental tax' in policy statements it seems that the environment and climate change in particular are moving up on the eu agenda. For the first time in 1998a "statement of intent for environmental taxation" accompanied the uk budget proposal for 1998. The uk Fuel Levyto be introduced in April 2001has been renamed as the Climate Change Levy. The French tax reform aims to bring emissions of carbon dioxide down to 1990 levels by 2008. And the Italian energy taxesscheduled to take effect in 1999were intended to reduce carbon dioxide emissions.

Howevera striking omission of the green tax reforms across eu is that there is no information on what are the levels of taxes that would produce the needed reductions in ghg s. What most countries arein factstaging are trial and error experiments of increasing pollution taxes to what is felt to be the politically acceptable ceiling. None of the countriesapart from Denmark and Franceare attempting to calculate the effect of the carbon tax on the levels of carbon dioxide. Denmark aimed to decrease its ghg emissions by 5 per cent through a tax that moved 2.5 per cent of tax revenue from labour taxes to energy taxes. The French tax reform is estimated to reduce carbon dioxide to 1990 levels by 2008. The reform has grouped all environmental taxes under one umbrella tax called the general tax on polluting activities. The tax base is to be broadened and rates are to be increased from 2001 onwards. The burden of the tax will be offset by a reduction in payroll taxes and the revenue will be used to subsidise a 35-hour week.

Holes in the strategy
Howeverin order to make taxes work as a ghg reduction strategythe industry will have to be brought into the carbon tax net. The biggest problem of the European energy taxesapart from the ukis that industry is exempt from the tax for political reasons. The biggest fish in the tax base are exempted of 80 per cent of the energy tax on averageaccording a French ministry study.

The result is a striking failure of the tax strategy to curb industrial ghg emissions. In Swedenthe industry actually increased its fuel consumption by 20 per cent in one of the years following the introduction of a carbon dioxide tax because it was exempted from paying the tax. The Netherlands refused to tax the industryfearing that business would just shift to neighbouring countries. Even has restructured its carbon dioxide tax since 1996 so that the heavier the use of energythe lighter the tax rate.

The uk green tax reform stands out for being the only one that targets the energy intensive industry and does not impose any energy tax on households. The uk climate change levy is planned to take effect in April 2001. Most of the tax levied on the use of energy by businesses will be recycled back to them through a cut in employers' national insurance contributions. In negotiating the tax with the industrial lobby the uk government had to come up with a reduction of 40 per cent on the original tax level accompanied by a complex package of concessions. It is likely that the political difficulty of introducing environmental taxes will make such complex packages more common in the future.

The industry's main argument against an energy tax is that the loss to the economy from high energy prices would be detrimental. Howeverstudies of the effects of energy taxes on competitiveness do not show that recessions and unemployment would necessarily rise with high energy taxes. Dismantling the fossil fuel sector would like any other economic restructuring harm some and benefit others. Areas with concentrations of industries relying on fossil fuel such as The Ruhr in Germany or Manchester and Liverpool in Britain would suffer. Howeverother studies predict that economic growth would continue to increase jobs following the introduction of green tax reform. One such study predicts the creation of 750new jobs in Germany following the 1999 tax reforms. The Danish tax reform was estimated to have left the job market unchanged if not slightly better off.

The task of an eu energy tax to combat climate change would be lop-sided if the eu continues to shower the fossil fuel sector with enormous subsidies. Dismantling subsidies is easier said than doneespecially since they are high in usa and Japan -- eu 's large trade partners -- but unless they are cut any green tax reform will only be giving with the right hand to steal it with the left. A 1997 study by the Free University of Amsterdam calculated the total subsidies to the fossil fuel sector in the eu to be in the order of us $ 10 billionalmost all of which are for coal -- the most polluting among oil and gas. By comparisonrenewable energy only receives us $ 1.5 billion per yearwhich is about 10 per cent of the subsidies for coaloil and gas.

Taxing dirty fuels
Although the oil crisis has everyone tied down temporarilythe eu has a great chance of passing a common energy tax. A proposal to extend the existing minimum excise rates on oil products to all energy products across the euhas now won over 14 of the 15 member states. The Monti proposalas it is knownwas introduced by the European Commission in 1997 and intends to increase the energy taxes gradually in the future. The eu thereforehas a unique opportunity to set a new trend in the global energy policy to combat the greenhouse effect and help phase in renewable forms of energy. If it abandons this proposal because of the street protestsopec will have to be counted on in the future to deliver the message more clearly.

Oil and fossil fuel are unsustainablewhether one is thinking of air pollution and its high health coststhe damage to the ecosystem and the inevitable stock depletion. Consumers must learn to live with these harsh facts and the surest way to deliver the message is to keep the final price of fossil fuel highby abolishing subsidies and raising taxes on the energy produced by fossil fuel.

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