Should Energy be Subsidized?


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Case Details:

Case Code : ECON021
Case Length : 14 Pages
Period : 1990-2007
Pub Date : 2007
Teaching Note :Not Available
Organization : -
Industry : Energy
Countries : Worldwide

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"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.

Should Energy be Subsidized ? - Next Page>>

1] "Dutch Government to Renew Green Energy Subsidies in 2008," www.planetark.com, May 7, 2007.

2]  "End Energy Subsidies by 2025, Says Summers," www.business-standard.com, April 18, 2007.

3]  Sixth Environment Action Program, http://eur-lex.europa.eu, July 22, 2002.

4]  The Sixth Environment Action Program (EAP) is a decision of the European Parliament and Council. It sets out the framework for environmental policy-making in the EU for the period 2002-12 and outlines actions that need to be taken to achieve them.

5]  Mark Clayton, "US House Takes on Big Oil," www.csmonitor.com, January 18, 2007.

 

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