Illustration by Bloomberg View
Illustration by Bloomberg View

Fuel subsidies are the crack cocaine of global economic development: easy to get hooked on, hard to give up. And as every addict knows, there are good and bad ways to try to kick the habit.

Consider Nigeria and Iran. In Nigeria, the government’s recent decision to remove fuel subsidies and more than double the price of gasoline has led to riots and now a nationwide strike. Two years ago in Iran, an initiative to cut subsidies and almost quadruple the price of gas (as well as boost the price of food and water) provoked little unrest, lowered oil consumption and bolstered the economy and the government.

The differences between the two efforts offer valuable lessons about the best ways to eliminate fossil-fuel subsidies - - a staggering global misallocation of resources that does little to help the poor, distorts markets and pumps more greenhouse gases into our atmosphere.

In 2010, the value of all fossil-fuel subsidies, for both production and consumption, was roughly $500 billion. On the consumption side, 37 countries spent $409 billion underwriting their citizens’ fuel purchases, according to the International Energy Agency. Venezuelans, for example, enjoy the world’s cheapest gasoline: You can fill up a 32-gallon Hummer for about $3. In pre-reform Iran, the price of gasoline was 40 cents a gallon; in Nigeria, it was about $1.50.

Support Skews Development

There’s not much good to say about fuel-consumption subsidies. For starters, they encourage waste -- Venezuela has the dubious honor of having Latin America’s highest per-capita energy consumption. They also skew economic development because investment decisions are made on the basis of false market signals. And because consumption subsidies reward high-energy users, they help the middle class and the rich over the poor, who rely heavily on dung or wood and aren’t connected to the power grid.

The IEA, an independent body formed after the oil shocks of the 1970s, estimates that only 8 percent of that $409 billion went to the bottom-income quintile. Moreover, such government funding sucks up money that could be used to help the poor in other ways: Venezuela devotes at least 6 percent of its gross domestic product to fuel subsidies, about double its education budget; in Indonesia that amount is around 4 percent; the $6 billion that Nigeria has been spending to keep fuel prices low is three times its health budget.

In addition to freeing up hundreds of billions of dollars for more productive uses, unwinding all consumption subsidies by 2020 would reduce demand for energy by 4.1 percent and carbon-dioxide emissions by 4.7 percent, according to the IEA.

Here’s where Iran comes in. Whatever the conduct of President Mahmoud Ahmadinejad’s government in other realms, its fuel-subsidy reforms in late 2010 make it something of a role model. Legislative debate began almost two years before the changes went into effect; officials, academics and community leaders led an extensive public-awareness campaign that included sending households mock bills showing the true cost of their electricity. More important, the reforms included a clear benefit to Iranians: direct cash payments to more than 80 percent of the population, paid out before the changes took effect. In the case of the poorest of the poor, the sums amounted to more than half their monthly cash income, which helped to insulate the program from political criticism.

The administration of Nigerian President Goodluck Jonathan took a different path. It released its proposal a mere two months before it was to go into effect. Cash payments are to be directed only to small subsets of the poor (mainly pregnant women). Others will receive menial jobs, with pay low enough to “ensure the self-selection of only the poor.” The government says the cost savings will be recycled to the poor through building roads, railways, and irrigation projects. That doesn’t seem likely in one of the world’s most corrupt countries. No wonder Nigerians have taken to the streets.

Spurring Wasteful Consumption

The problem is hardly limited to the developing world. In 2009, the Group of 20, whose members encompass big oil exporters and importers, pledged to phase out “inefficient fossil fuel subsidies that encourage wasteful consumption.” One way to ensure that this goal is met -- and not largely at the expense of the poor -- would be for the Organization for Economic Cooperation and Development to team up with the United Nations Development Program to compile best practices from Iran and other countries, as well as from the work being done by an alphabet soup of other groups (the Organization of the Petroleum Exporting Countries, the IEA, the World Bank and its regional cousins).

The OECD has already pulled together a 350-page inventory of more than 250 ways in which 24 of its member countries subsidize the production and consumption of gasoline, diesel and other fossil fuels. But this transparency exercise looks only at budgetary support and tax breaks; it has yet to tackle the harder-to-estimate subsidies provided through things like loan guarantees. In order to speed up the process, how about turning the database into a public wiki, enabling the hive mind to exert its collective powers?

One benefit of this approach would be to highlight the contradictions indulged in by even relatively green countries, such as Norway and New Zealand, which tax fuel consumption heavily while still supporting their fossil-fuel production industries. The G-20 has so far deferred defining “inefficient” subsidies and “wasteful consumption.” We put forth a candidate: the tens of billions of dollars a year in forgone fuel taxes associated with diesel for agriculture, fisheries and other “off-road” uses, mostly as a result of exempting them from excise levies. Farmers and fishing fleets would have more reason to be energy-efficient, and we would have cleaner air and water in the bargain.

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