Energy Affordability - Tariffs and Subsidies

Are Tariffs and Subsidies All Good?

Contents

1. Introduction

2. Subsidies

3. Tariffs

4. Is More Better?

5. Concluding Remarks

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Bitesize Edition

• In the energy sector, subsidies are working to increase the speed at which projects are constructed. On the surface, this sounds great. But are subsidies all they are painted to be?

• Subsidies for projects not making enough positive progress and innovation can lead to inefficiencies in production that are maintained much longer than typical market conditions would allow.

• If we aren’t building energy projects suitable to our individual environments, and considering efficiency and affordability metrics, for example, we’re allowing for further inefficiencies to plague our energy transitions.

• Then we see tariffs take a more prominent position on the global stage, and countries are seeking to limit the capabilities of other countries to undergo an energy transition. It’s not all rainbows when discussing subsidies, and it certainly isn’t with tariffs. Find out more below.

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Introduction

Over the last month, I’ve been analysing different metrics we can use to assess the affordability of energy projects. In the pursuit of a cleaner energy world, many developed countries are putting huge financial efforts into transforming their energy sectors, many efforts through subsidies and occasionally, tariffs on other countries to boost domestic production. Do subsidies help more than they hurt? How are tariffs being utilized as a geopolitical weapon? Find out more below!

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Subsidies

In 2022, global subsidies for fossil fuels breached $1T for the first time.

Subsidies are often seen as the fuel to get new energy projects off the ground. The encouragement of subsidies can spark further investment, contribute to lower costs, and aid in accelerating innovation. This paints a great picture. I usually embody the mindset of an optimist, but the pessimist within me asked a question: Money is being spent, and whenever money is spent, somebody is paying a cost. When it comes to subsidies, who pays the cost?

Funding for government budgets is often paid by taxpayers. Government deficits from high spending lead to cuts in other areas or greater borrowing. In the UK, where towns are witnessing buildings left derelict and bordered up, we are seeing a decline in public services, especially represented in the North-South divide.

Photo by Max van den Oetelaar on Unsplash

However, if we are to transform our energy sector, subsidies are important. Opportunity cost must be considered. The funds used in energy projects could have been used elsewhere, but energy equals life. It’s likely the use of subsidies in energy projects is likely a good utilization of subsidies.

We do need to consider though if other financial instruments or methods of funding exist that could see more success. China’s centralized state-level model versus the market-driven economy of many Western countries is one such difference in societal structure we see in the world regarding government policy and spending. In the West, projects are supposed to be chosen based on market demand and profitability. So why have we recently seen projects such as Vogtle Units 3 and 4, and Hinkley Point C so heavily overscheduled and over budget? In comparison, China is building nuclear power plants in 5-10 years, and exploring innovative new technologies within the nuclear sector. Why is there such a gap in innovation and infrastructure project buildout in the West and China?