Has The End of Fuel Subsidies Begun?
And why those related to long-distance fishing fleets might be next
The economic drain of fuel subsidies is about to get a second, arguably more visible repeal. The election of long-shot outsider Javier Milei as president of Argentina has the world watching for what “taking a chainsaw” to bloated and unsustainable public finances might look like.
Just this week, Argentina’s new administration took aim at the two-tiered exchange rate system and all of the economic distortions it creates. Milei promised the next cuts would target “energy and transport subsidies.”
+Argentina’s new government halves peso’s value and cuts spending to jolt economy - FT
Last year, energy-related subsidies in Argentina were estimated to be over $12 billion, or 2% of GDP. The cost to the government has already been $8 billion through September of this year.
+Argentina’s presidential candidates face $12 billion energy subsidy conundrum - Reuters
The fuel subsidy is low-hanging fruit for a country with no money in the bank or access to international financial markets. Yet it is a sticky one that an administration needs both the political will and public support to pull off.
The Nigerian Example
However, there is a recent example of the immediate impact of these cuts and the unbelievable cost they impose on a government.
In February 2023, Nigeria elected a new president who ran on a similar platform, although with much less fanfare than Milei received. The new president, Bola Tinubu, came through on campaign promises by scrapping the country’s fuel subsidy within a couple of months.
The effects were immediate.
“Nigeria has saved over 1 trillion naira ($1.32 billion) in just over two months by scrapping a popular but costly subsidy on petrol.”
+Nigeria's Tinubu says scrapping fuel subsidy has saved $1.32 billion - Reuters
Ending the subsidy does not just affect cash flows.
Allowing the market economics to rebalance means demand reacts to the rise in price. In Nigeria’s case, the fuel subsidy was stopped in May. By July, daily fuel consumption had declined by 28%.
+Nigeria's petrol use down 28% after subsidy scrapped, regulator says - Reuters
Attacking Supply Without Discouraging Demand
Climate activists generally make headlines for attacking carbon-intensive sources of energy supply. However, the Russian invasion of Ukraine and the subsequent halt of natural gas imports exposed a critical flaw in this strategy.
With natural gas supplies cut off to Germany and the rest of Europe, coal consumption skyrocketed to fill the gap. Germany was particularly exposed to this weakness in the supply chain due to the decommissioning of its nuclear plants over the last decade (forced by the Green Party).
Europe was saved by a mild winter last year. But there’s no guarantee of that going forward.
Our world - whether political administrations, economies, or the people themselves - generally has no desire to go without energy. Nor should it. But we should treat it as the precious resource it is.
Attacking distortions in demand is far more effective, mainly because removing these distortions also tends to make such economic sense. Additionally, these moves are policy-based and can be implemented overnight. They aren’t contingent on building the new infrastructure a new energy system requires.
Source: BNEF Electric Vehicle Outlook
Just look at the cost and impact of e-bikes and scooters versus electric cars. One requires little-to-no infrastructure and has barely been encouraged by government. One is massively subsidized and is reliant on a global re-think in infrastructure.
+The world’s 280 million electric bikes and mopeds are cutting demand for oil far more than electric cars - The Conversation
So, what does any of this have to do with the blue economy?
The global fishing fleet is rife with fuel subsidies.
According to the Outlaw Ocean Project:
“The Chinese government says it has roughly 2,600 distant-water fishing vessels, which, according to a recent report by the Stimson Center, a security research group, makes it three times larger than the fleets of the next top four countries—Taiwan, Japan, South Korea, and Spain—combined.”
“Without its massive subsidy schemes, China’s distant water fishing fleet would be a fraction of its current size, and most of its South China Sea fleet wouldn’t exist at all,”
“In 2018, total global fisheries subsidies were estimated to be $35.4 billion, with China accounting for $7.2 billion of it. The vast majority of that amount went toward what Mallory calls “harmful” subsidies, because they expand rather than contract the size of fishing fleets. This includes those for fuel and for new boats that increase the size of the fleet.”
+Subsidizing China’s Fishing Fleet - Outlaw Ocean Project
And China, while the largest and most extreme example, is hardly the only one.
“Chinese Taipei (Taiwan) provides some of the highest rates of fleet subsidies (e.g., for fuel, vessel, and fleet support), and this, combined with a preferential agreement for access to the Falkland/Malvinas Islands EEZ squid fishing grounds, creates substantial institutional and economic incentives for long-distance fishing”
+Fisheries subsidies reform in China - PNAS
In the case of fishing, subsidies and distant water fishing fleets complicate conservation efforts. These fleets from the other side of the world, necessitated by overfished local waters, have no connection to these far-off places.
They completely lack the “self-interested, conserving feedback that comes from attachment to place.”
“…where fishing is conducted by actors and in locations that facilitate attachment, stewardship, and resource conservation will follow.”
+Fishing through the cracks: The unregulated nature of global squid fisheries - Science
Without fuel subsidies, the distant water fishing fleet would become largely uneconomical.
Of course, there are other forces at play beyond profits here. Food security issues and fishing fleets as a proxy for military presence often preclude profits.
The New Lever to Pull On Subsidies
In June 2022, the World Trade Organization (WTO) members reached an agreement on fisheries subsidies after over 20 years of negotiations. The U.S. formally accepted the Agreement almost immediately, while China came around within a year.
The new disciplines will have important, positive effects on the sustainability of marine fish stocks and fisheries.
- By curbing subsidies to illegal, unreported and unregulated fishing, the Agreement creates a powerful new weapon in the global fight against such fishing.
- By prohibiting subsidies to fishing on overfished stocks, the Agreement puts important protections in place where management measures are ineffective.
- By prohibiting subsidies to fishing on the unregulated high seas, the Agreement also puts important protections in place where management measures do not exist.
+Factsheet: The WTO Agreement on Fisheries Subsidies
While the importance of this agreement can’t be overstated, it’s hard to imagine China containing its fishing fleet due to concerns raised by countries through the WTO mechanism.
China uses its global fishing presence as an extension of its military, so it doesn’t have to make economic sense for them.
+False Promises II: The Continuing Gap Between China’s WTO Commitments and Its Practices - ITIF.org
But Argentina and China represent two polar ends of the spectrum. There are plenty of players in between. And the U.S. certainly isn’t immune:
“…government support to the U. S. fishing industry averaged $713 million per year (2009), largely dominated by fuel subsidies.”
+Subsidies to U.S. Fisheries - Lenfest Ocean Program
It shouldn’t take too long for the first complaint to be filed under the WTO mechanism.
What About COP? (Don’t laugh)
For all of the talk of transitioning from fossil fuels at the recent COP 28, there was practically no talk about fuel consumption subsidies.
What little conversation there is continues to take a broad, bundled approach to those that affect both supply and demand, ensuring that more straightforward issues like fuel subsidies remain entangled with strategically essential issues like energy security.
“Differences between efficient prices and retail fuel prices are large and pervasive”
+COP absent on fuel subsidies - FT
The Economics of Non-Zero Interest Rates
There’s nothing like cold, hard economics to push a country towards examining all the places where they are bleeding cash.
Sure a $7 billion subsidy for China is different than for Argentina and Nigeria, but any further economic deterioration in that country might prompt a more comprehensive re-evaluation of spending.
There needs to be appetite and motivation for change. And sometimes an administration just needs a scapegoat.
“Right now is a time in which there’s a potential for the train to change direction to a new model, and I think there’s appetite to do that, but at the same time there’s a great fear of the short-term political and social risk, especially of provoking an economic crisis.”
+Part of China’s economic miracle was a mirage. Reality check is next - Reuters
And in a world of elevated interest rates, governments are coming under pressure to cut costs and address debt loads. Examples of the savings achieved by reining in fuel subsidies will become more common, making it more politically tolerable.
Perhaps those subsidies that specifically encourage harm to our oceans will fall under the ax as well.