The international investment arm of ADNOC (Abu Dhabi National Oil Company), XRG, said that some of the Commission’s information requests appear irrelevant to the deal.

“Clearly, if such a decision were taken, we would be very disappointed. Some of the information requests are unreasonably broad and unrelated to this transaction. That said, we are committed to finding a constructive path forward so that the agreement can be concluded promptly,” an XRG spokesperson told Reuters, referring to the temporary halt in the EU investigation.

ADNOC’s acquisition of Covestro in October 2024 was the largest to date and marked one of the biggest foreign takeovers of an EU company by a Gulf state. Among Covestro’s products are foam chemicals used in car seats, mattresses, and building insulation.

The European Commission, which has been reviewing the deal under its foreign subsidies rules since May, conducted an in-depth investigation recently, while issuing a warning that subsidies granted by the UAE could distort the EU internal market. The probe, supposed to look into possible negative effects in the internal market resulting from the merged company’s activities once the deal is concluded, will be under the media limelight, as the Commission has set December 2 as the deadline for its decision on the deal.

Talking about Covestro, the German chemicals maker recently missed its second-quarter sales expectations, as US trade policies weighed on prices, but expressed confidence its takeover by ADNOC would be sealed by the end of 2025 despite EU hurdles.

Covestro, whose products include foam chemicals used in mattresses, car seats and insulation for buildings, said the clouds of United States higher tariffs had led to a huge oversupply of products to the market there, particularly from the Asia-Pacific region, which had then caused a big drop in prices.

The company’s revenues fell 8.4% to 3.38 billion euros (USD 3.86 billion) in April-June, missing analysts’ average estimate of 3.55 billion euros in a company-provided consensus.

“At the moment, demand is too weak to absorb the partial oversupply,” Chief Financial Officer Christian Baier told Reuters in an interview.

In July, Covestro cut its full-year earnings forecast for the second time this year. It now sees earnings before interest, taxes, depreciation and amortisation within a range of 700 million euros to 1.1 billion euros, down from a previously expected 1 billion euros to 1.4 billion euros.

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Bruce Huber, a Professor of Law at the University of Notre Dame, has studied the fossil fuel sector extensively. His work reveals the deep-rooted complexities that underpin these subsidies and the formidable challenges that governments face when attempting to reduce or eliminate them. Let’s explore the mechanisms of fossil fuel subsidies, why they persist, and what the world is trying to do to reform them.

What is a subsidy?

A subsidy is essentially a financial benefit provided by a government to a particular entity or industry. Subsidies come in many forms and can range from obvious direct cash payments or tax incentives to more nuanced mechanisms like tariff protection or relaxed regulations that favour certain industries. These benefits are provided for various reasons: to stimulate economic activity, protect nascent industries, or assist established ones during times of crisis.

While some subsidies are explicit and easy to recognise, such as publicly funded crop insurance or grants for research, others are less visible. For instance, when a government fails to charge industries for the environmental damage they cause, such as air or water pollution, this is also a form of subsidy. By not requiring companies to pay for the full cost of their environmental impact, governments indirectly subsidise their activities.

Subsidies are a widespread feature of the global economy, benefiting many industries beyond fossil fuels. However, the subsidies granted to the fossil fuel sector are uniquely impactful, not only because of their economic scale but also due to their significant consequences for the planet’s climate and environment.

How are fossil fuels subsidised?

Fossil fuel subsidies can take a wide variety of forms, from consumer price support to tax incentives for producers. In many countries, fuel prices are set by the government rather than allowing market forces to dictate them.

For instance, Saudi Arabia caps gasoline prices to make energy more affordable for its citizens. To offset the cost, the government uses revenues from oil exports, which far exceed domestic energy consumption. In the United States, oil companies are allowed to deduct a significant portion of their drilling costs from their taxes. This kind of tax break makes fossil fuel production more attractive by effectively lowering the cost of doing business. In countries like Indonesia, the government sets energy prices below market levels and then compensates state-owned energy companies for the losses they incur.

This form of support ensures that energy remains affordable, particularly for low-income citizens. Some subsidies are less direct. For example, governments often underprice permits for extracting fossil fuels or fail to collect all the taxes owed by producers. The complexity of these subsidies makes it challenging to provide a precise estimate of their total value.

According to a 2022 report by the Organisation for Economic Cooperation and Development (OECD), the annual value of global fossil fuel subsidies was estimated to be around $1.5 trillion. However, the International Monetary Fund (IMF) provided a much higher estimate, placing the value closer to $7 trillion. The discrepancy between these numbers arises from different definitions of what constitutes a subsidy.

The IMF’s definition is broader, including not only direct financial support but also the environmental and social costs that are not reflected in the price of fossil fuels. For instance, the damage caused by greenhouse gas emissions, the health impacts of local air pollution, and even the economic costs associated with traffic congestion are considered implicit subsidies. In contrast, the OECD’s narrower definition includes only direct financial support, which results in a lower estimate.

Regardless of the specific figure, it is clear that subsidies for fossil fuels have a dramatic effect on the prices paid by consumers. By artificially lowering the cost of fossil fuels, these subsidies encourage their continued use and, by extension, the emissions that contribute to climate change.

Why are these subsidies hard to eliminate?

Despite the widespread recognition that fossil fuel subsidies undermine efforts to combat climate change, eliminating them has proven exceedingly difficult. Several reasons contribute to this challenge. Subsidies are politically popular. By keeping energy prices low, governments can avoid public discontent and gain support from voters.

For instance, when energy prices rise, governments often face protests and unrest. In Nigeria, for example, the removal of gasoline subsidies in 2024 led to widespread protests and even clashes with police. Such public backlash makes policymakers reluctant to cut subsidies, even when they acknowledge the environmental benefits of doing so.

Fossil fuel subsidies have a direct impact on the cost of living. Because fossil fuels are integral to nearly every sector of the economy, reducing subsidies tends to increase prices across the board. This can lead to inflationary pressure, making goods and services more expensive. For lower-income populations, these price increases can be especially painful, as they spend a larger proportion of their income on necessities like transportation and heating. The fossil fuel industry is a powerful lobby with significant influence over government policy. Many fossil fuel companies have strong financial and political connections, making it difficult for governments to reduce or eliminate subsidies.

These companies argue that subsidies are necessary for maintaining energy security, preserving jobs, and ensuring economic stability. Energy security is another key factor that complicates subsidy reform. Governments are wary of being overly dependent on foreign energy sources, particularly in times of geopolitical tension.

By subsidising domestic fossil fuel production, countries can reduce their reliance on imported energy, thereby improving their energy security. This consideration often outweighs environmental concerns when governments make policy decisions.

The cost of inaction

The persistence of fossil fuel subsidies has serious implications for the environment and human health. Fossil fuels are the leading source of greenhouse gas emissions, which are the primary driver of global warming. By keeping fossil fuel prices artificially low, subsidies encourage overconsumption and wasteful use, which in turn exacerbates climate change.

The cost of inaction is too great to be overlooked by the global community. In addition to their climate impact, fossil fuel subsidies have significant economic costs. By diverting public funds to support fossil fuel industries, governments have less money to invest in other areas, such as education, healthcare, and renewable energy. This opportunity cost is particularly problematic in developing countries, where resources are limited and the need for public investment is high.

Redirecting funds from fossil fuel subsidies to education and health could dramatically improve the quality of life in developing countries. Currently, vast public resources are spent maintaining artificially low fuel prices, which primarily benefit wealthier consumers and industries.

By redirecting these funds to education, governments could improve literacy, increase school attendance, and equip the next generation with the skills necessary for economic growth. Investment in healthcare could ensure better access to medical services, reduce child mortality, and increase life expectancy.

These changes would create a healthier, more educated population capable of contributing to a diversified and resilient economy. Such investments would break the cycle of poverty, empowering individuals to pursue opportunities beyond survival. By addressing basic human needs, countries can move toward a more sustainable and equitable development path, improving overall well-being and prospects for millions of people.

Global efforts to reform subsidies

Recognising the need to address fossil fuel subsidies, global leaders have made several commitments to reform them. In 2009, the G20, which includes many of the world’s largest economies, pledged to “rationalise and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption.” The Asia-Pacific Economic Cooperation (APEC) forum made a similar commitment later that year.

In 2010, the Friends of Fossil Fuel Subsidy Reform group was formed by 10 countries, including the Netherlands and New Zealand. The group’s goal is to build political consensus on the importance of fossil fuel subsidy reform. Despite these pledges, progress has been limited. A major study of 157 countries found that between 2003 and 2015, governments made little or no progress toward reducing subsidies.

The recent spike in fossil fuel subsidies in 2021 and 2022 highlights the challenges of reform. Following Russia’s invasion of Ukraine, energy prices surged throughout Europe. In response, European governments provided substantial financial support to offset the impact on consumers. This led to the largest fossil fuel subsidies in Europe’s history, as leaders prioritised affordable energy over climate goals.

Economists argue that increasing the price of fossil fuels can lower demand, thereby reducing emissions and mitigating the impacts of climate change. This principle was evident during the recent energy price surge: higher prices led to reduced consumption and a temporary decline in emissions.

The IMF has suggested that periods of high energy prices provide an ideal opportunity for reform. When energy prices are already elevated, governments can phase out subsidies without causing additional price shocks for consumers. By locking in higher prices, governments can encourage the adoption of cleaner energy sources and reduce their reliance on fossil fuels.

Another potential avenue for reform is the use of targeted subsidies to support low-income households during the transition. By providing direct financial assistance to those who are most affected by rising energy prices, governments can mitigate the regressive impacts of subsidy reform. This approach can help build public support for reform while ensuring that vulnerable populations are protected.

There is no doubt that by continuing to subsidise fossil fuels, governments are not only undermining efforts to combat climate change but also missing out on opportunities to invest in cleaner, more sustainable energy sources.

While the path to reform is challenging, it is not impossible. With the right combination of political will, public support, and targeted assistance, it is possible to phase out fossil fuel subsidies and pave the way for a cleaner, more sustainable future.

The recent surge in energy prices offers a unique opportunity to make meaningful progress on subsidy reform. By taking advantage of this moment, governments can reduce their reliance on fossil fuels, support the transition to renewable energy, and help mitigate the impacts of climate change. The stakes are high, but the potential rewards—for the environment, the economy, and future generations—are even higher.

The post Why do countries still subsidise fossil fuels? appeared first on International Finance.

In an interview with Bloomberg TV, Aliko Dangote supported Nigeria’s decision to remove its fuel subsidies, calling it a timely move in line with international trends.

He claims that it defies logic that gasoline costs in Nigeria are roughly 40% less than in Saudi Arabia, another nation that produces oil.

Noting that all other nations have done away with fuel subsidies, Aliko Dangote clarified that the Nigerian government could no longer afford the burden of subsidies.

Additionally, he revealed that the cost of fuel in Nigeria is roughly 60% less than that of its neighbouring countries.

“I think it is because all countries have actually gotten rid of subsidies. Let me give you an example: Saudi Arabia used to give what Saudis, the citizens, believe that oil is a God-given gift. So the government shouldn’t charge us for it. The government was selling it at a very low price, but today, as we speak, gasoline is about 40% cheaper in Nigeria than in Saudi Arabia, which I think doesn’t make sense. That is one. Number two: our price of gasoline is about 60% of the price of our neighbouring countries, and we have very porous borders, so it is not sustainable. The amount of subsidy that we were paying, the government cannot afford,” he said, as reported by Zawya.

“We have a choice: either when we produce, we export, or when we produce, we sell locally. But we are a private company. Yes, it is true, we have to make a profit. We built something worth USD 20 billion, so definitely, we have to make money. The removal of subsidy is totally on the government, not us. We cannot change the price, but I think the government has to give up something for something. I think, at the end of the day, the subsidy will have to go,” he added.

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Kenyans are demanding more accountability from the Ruto government, despite the latter agreeing to withdraw his tax reforms. These were intended to help reduce the African country’s large debts but protesters insisted the government should first cut spending, saying there was too much waste. Ruto has already announced several austerity measures, including a freeze in proposed pay rises for the Parliament. However, the protesters are determined to see Ruto go.

Tracing the reason

During his 2022 presidential election campaign, Ruto promised to improve living conditions for low earners by tackling corruption within Kenya’s institutions, reducing government waste, and eliminating the country’s $82 billion debt.

“However, Ruto’s detractors say he has not delivered on those claims. What have irked many in particular, they say, are the frequent hikes in taxes with no corresponding improvements in social amenities. Already, a 2023 law doubled taxes on fuel, and the initial draft of this year’s finance bill was set to further raise that fuel tax,” Aljazeera reported.

The value of the shilling has dropped by 22% against the US dollar since 2022, causing prices to soar, while incomes have largely stayed the same. Ruto initially justified the tax increases, saying they were necessary for Kenya’s debts. His government took office amid a punishing drought in 2022 and after the Russia-Ukraine war disrupted food imports.

However, critics have long said massive waste in public spending could offset the debts. In April 2024, the IMF said there was a significant shortfall in tax collection that would keep Kenya’s domestic borrowing needs up, although it also stressed the need to cut government waste.

Ruto’s now-withdrawn tax hikes as well as similar legislation passed in 2023 are both linked to IMF loans as Kenya staggers under the weight of a heavy debt crisis. When he entered the President’s office in August 2022, Kenya was already in a crisis. Its external debt was about $62 billion, or 67% of its GDP.

Former President Uhuru Kenyatta had borrowed heavily from commercial lenders and countries like China to finance huge infrastructure projects, including a rail line that links Nairobi to the port city of Mombasa and 11,000km (nearly 7,000 miles) of tarmacked roads. Most of those loans were commercial, meaning they had high interest rates. Meanwhile, the infrastructure efforts failed to generate the expected revenue.

COVID-related disruptions and the inflation pressures also weighed heavily upon the African country. Added to that were the supply chain disruptions in agriculture in Kenya that followed Russia’s invasion of Ukraine. All these combined meant food and the general cost of living were soaring in 2022 and so were Kenya’s debts as interests accumulated.

As of July 2024, the nation’s debt has reached $82 billion, including domestic borrowing. More than half of government revenue goes towards debt repayments. In April 2021, Kenya under Kenyatta and then-Vice President Ruto entered into an agreement with the IMF for relief.

The package came in the form of a 38-month programme the international lender said would help Kenya manage its debt and create a conducive economic environment for needed private-sector investment. Under the programmes, Kenya is set to unlock $3.9 billion in funding. A separate climate fund was also approved at $542 million.

Can IMF be blamed here?

The IMF conditioned the loans on hiking taxes, reducing subsidies and cutting government waste, measures it said would increase government revenue while reducing spending. Those measures kicked off in 2023. Ruto since 2022 has made the IMF relief programme a priority, as disbursements under the programme come based on periodic reviews of how well the government has pushed through some of the reforms. The last review in January unlocked $941 million.

After taking over the country’s reign, Ruto suspended subsidies on fuel and fertilisers as part of the programme. Fuel subsidies were reinstated in 2023 after protests broke out. The Finance Bill 2023 was also backed by the IMF. The bill, which passed in June 2023, introduced a 2.5% housing levy for employed people and raised the VAT on fuel from 8% to 16%.

The now-withdrawn Finance Bill 2024 with its tax hikes was backed by the IMF. It was set to generate $2.7 billion to fund a budget deficit and fund development programmes. Analysts said Kenya still needs to fill that gap to meet some targets under the IMF programme.

The IMF loans helped Kenya avoid defaulting on a $2 billion Eurobond that matured in June 2024. The country does not have any pressing repayments in the short term.

As per Martin Muhleisen, a non-resident senior fellow at the Atlantic Council’s GeoEconomics Centre and a former IMF official, Kenya’s decline into fiscal trouble has been entirely predictable, “led by the ambitions of past leaders who followed the path of easy money.”

“During the mid-2010s, under President Uhuru Kenyatta, Kenya was looking for ways to leverage its frontier market status into higher growth via debt-financed investments and infrastructure projects. As a result, within a decade, Kenya’s public debt ratio almost doubled from 41% of gross domestic product (GDP) in 2014 to a projected 78% of GDP in 2024,” Martin remarked.

One prominent creditor has been China’s Export-Import Bank, which provided Kenya with $3.2 billion to build a Standard Gauge Railway (SGR) between Nairobi and the port of Mombasa—a project that has been criticised because of its weak governance and high cost but, as per the recent reports, will be extended to Kenya’s western border with Uganda.

“Although public investment does have an important role in raising a country’s economic fortunes, Kenyans are still waiting to see the social returns of the debt-financed investment spree. GDP growth has hovered around 5% since the mid-2000s, real GDP per capita has stagnated in recent years, and the poverty rate (at just below 40%) remains above pre-COVID-19 levels. It is no wonder that the fiscal belt-tightening now required to arrest a further run-up of public debt has met with resistance, amid legitimate questions about who benefited from the loans that ordinary Kenyans now have to repay,” Martin added.

However, the former IMF official also mentioned that after turning to the IMF, Ruto’s administration was doing reasonably well, in terms of predicting a steady pace of fiscal adjustment (at about 1% point of GDP per year over five years) and allowing for measures to absorb its social impact.

Both the primary fiscal deficit and the trade balance improved, and the shilling unwound much of its decline against the dollar as Kenya surprised markets by repaying a two-billion-dollar Eurobond in June 2024. Moreover, the IMF programme unlocked a considerable amount of concessional multilateral financing, including from the World Bank.

“But the country remains in a financial hole from which it will be very difficult to climb out. One problem is that higher interest rates keep adding to Kenya’s debt dynamics, as illustrated by the hefty 10% interest rate on a smaller Eurobond that Kenya issued in February to meet its June payment. Therefore, despite an improvement of the primary deficit broadly in line with programme targets, Kenya’s public debt is still projected to increase this year,” Martin commented.

Is there any way out?

With interest payments accounting for more than a quarter of total revenue, the Kenyan government may decide to seek a debt restructuring. As per Martin, this is not something the IMF could impose on Kenya, unless it judged that public debt was unsustainable.

However, the government went to great lengths in the past to service its debt and retain access to financial markets. It would have been cynical on the part of IMF shareholders to force Kenya into an unwanted debt operation, as long as there was still a realistic chance of avoiding it. This now looks less assured, and it may be the only avenue left for Ruto.

As per Martin, the IMF and other multilateral institutions have raised funds and mobilised special drawing rights (SDRs) to subsidise interest rates paid by poorer member countries, and Kenya is already benefiting from this effort. However, there are limits to this approach. Subsidies have to be either financed from donor countries’ budgets (with dwindling political support) or they are generated from richer countries’ SDR holdings.

“SDR-based lending works only to a limited extent. SDRs derive their value from their status as foreign exchange reserves and being exchangeable for dollars and other hard currencies held by central banks in wealthy countries. Any overuse or exposure to default risk (for example, from rising public debt in recipient countries) could compromise their reserve-asset status, which would impact both the IMF’s financing model and its capacity to lend to countries in distress,” he noted.

Could the IMF and World Bank provide larger loans? The two institutions regularly review the amounts that countries can access under various conditions. Ceilings have gone up over time, but shareholders require that larger loans come with stricter macroeconomic conditionality, an approach that would presumably have triggered a similar outcome for Kenya. Also, multilateral loans already account for more than a quarter of Kenya’s public debt.

Since these loans cannot be restructured, private creditors might be more hesitant to invest in the African country, because any future debt operation might need to be deeper than in similar countries with a smaller share of multilateral debt.

Going by Martin’s analysis, Kenya’s ongoing economic mess is largely homemade, albeit with help from willing external lenders. The COVID crisis exacerbated a lack of fiscal discipline, eventually forcing the country to adopt a stabilisation programme.

“While meeting with some initial success, recent events have made it clear that the government’s adjustment strategy needs to change, putting a possible debt operation on the table. The IMF did its best to support an initially credible effort by the government, but it must also ask itself what could have been done to prevent the sharp increase in public debt that is at the heart of Kenya’s problems today,” he concluded.

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Suparna Goswami Bhattacharya

January 11, 2016: China has begun a new journey. The journey towards a greener future. And it is not surprising given the fact that the country emits 23.42% of global CO² emissions as per a report by GermanWatch, a non-profit organisation based in Germany.

As part of a scheme to shift towards renewables, China — already one of the largest producers of wind power — plans further massive increases. It has set a target of 200GW by 2020, up from the current cumulative installation of 115GW. By contrast, the European Union countries together have just over 90GW of installed wind capacity.

A report by GlobalData, a research and consulting firm, stated that China’s installed wind capacity will increase from 115.6GW in 2014 to 347.2GW by 2025. Unlike other wind power giants like the UK, China’s capacity will be dominated by onshore wind, which is expected to account for over 96% of all installations or around 334.7GW in 2025.

Haibing Ma, China Program Manager at the Worldwatch Institute, an environmental research organisation based in Washington DC, says, “Being the largest energy user and GHG (Greenhouse Gas) emitter in the world, China is dedicated to transit its energy system towards sustainability. Among all the clean energy sources, wind seems to have the best potential.”

The government has set renewable energy as a strategic priority and supports the push for wind through a system of subsidies. The crisis of air pollution in many cities has added further impetus to the push for renewable energy beyond the aims of energy security and lower carbon emissions.

According to Ma, as of 2014, China ranks No. 2 in the world after the United States in terms of annual electricity generated from wind source.

Apart from green commitments, there are economic factors that justify China’s interest in wind energy vis-a-vis other forms of renewable energy. Though China is building a third of the world’s nuclear reactors, which are under construction, it is also fast expanding its wind power capacity mainly because the government is aware of the safety measures that need to be taken into account in the case of nuclear power. In fact, governments around the world have been extra cautious ever since the Fukushima Daiichi Nuclear Disaster in 2011.

Cost-wise, though nuclear looks cheaper (0.43 RMB/KWh) compared to wind (0.47-0.6 RMB/KWh), the price difference is narrowing as economics of scale build up.

Liming Qiao, China director of Global Wind Energy Council (GWEC), says, “Wind and other renewables are among the industries that were supported by the government. Wind is more mature, market ready and competitive than any other renewable energy.” According to Liming, China is already No 1 in the wind sector in terms of both cumulative and annual installation.

A top official from a wind energy company in China said that wind is benefitting big time thanks to the safety challenges posed by nuclear energy. “Though our government is concentrating on all forms of renewable energy, wind and solar hold a special place mainly because they are hassle free,” the official explained.

On its part, the government provides tax rebates to state-owned wind turbine manufacturers. Additionally, renewable energy law grants renewable energy providers 10-year contracts and guaranteed subsidies.

According to data by the International Renewable Energy Agency (IRENA), employment in the wind energy sector crossed the 1 million jobs milestone in 2014, up from 834,000 in 2013 – a 23% increase. The growth was led by China with more than 500,000 jobs, followed by the US and Brazil.

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