Affordable fossil fuel: a human right?

Published online 22 June 2012

While fossil fuel subsidies in Egypt are now making energy affordable to people, the large expenditure cost makes them unsustainable, and it is time for them to go, argues Lama El Hatow. The Egyptian government does not need to look afar for examples on how best to do it.

Lama El-Hatow

The debate on government plans to remove fossil fuel subsidies is intensifying as opposing groups argue about the equity of energy supply. Fossil fuel subsidies were introduced to ensure affordable fuel services to lower-income households and stabilize food prices. Subsidies were later widened to support all sectors of society and industry. Now, they no longer work as originally intended, but rather serve the rich: approximately 80% of subsidies benefit the richest 40% of Egyptian population in urban areas.

The subsidies have increased demand on an energy source that has fallen well below its open market value. Petroleum products continue to pollute the environment without any sanctions on the polluter. Consumption is still on the rise worldwide, as people have grown accustomed to a lifestyle that exploits a limited natural resource which damages a fragile environment. Removing fuel subsidies forces users to consider the cost of consumption patterns and their polluting practices.

Fuel subsidies also discourage the development of renewable energies as currently there is no renewable energy source as cheap as subsidized fossil fuels. In order to assure future fuel security, researchers must be encouraged to bring new renewable energies to market.

With the theme of 'green' economies, the Rio+20 Earth Summit aims to promote sustainable, renewable energy supplies. As world leaders meet in Rio today, they are charged with sorting some of the world's most contentious issues in economic development. In a poll conducted over the past fortnight by summit organizers, participants were asked to vote on the top priorities for leaders to tackle – their priority was fossil fuel subsidies.

As delegates hastily try to delete commitments on fossil fuel subsidies in any deal, one can't help hoping that Rio+20 is not another Copenhagen COP15 disaster in the making, with the Brazilians making the same mistakes as their Danish counterparts did three years ago. To do so would be to further disappoint and frustrate the millions of people around the world hoping their governments take action. If the political processes have failed again, then it may be time we push our local governments to begin to tackle these issues for the betterment of our future.

The Egyptian context

Fuel subsidies discourage the development of renewable energies as currently there is no renewable energy source as cheap as subsidized fossil fuels.

The pillars of the Egyptian revolution form the basis of the issue of fossil fuel subsidies. The popular chant of "bread, freedom, and social justice" means something to Egyptians since 25 January 2011. , It is these subsidies, not their removal, that risk tearing the fabric of Egyptian society apart.

Fuel subsidies support the energy intensive industries such as cement, steel and fertilizers, whose commodities have been exported to foreign markets for premium prices. So not only are we subsidizing profitable businesses, but in return also subsidizing commodities for overseas use.

Citizens have come to believe that subsidies for petroleum are a birthright. Egypt spends between 10-20% of government outgoings on subsidies, accounting for approximately 80-100 billion EGP/year. The incoming president will have the thorny task of dealing with this paramount issue. Historically, among the main reasons Egyptians have taken to the streets have been increasing food prices and lack of social equity and welfare. Across the globe, the mere mention of lifting fuel subsidies has caused riots in major cities. Now, as the next president takes office, raising the price of bread and fuel will naturally lose him favour. With petrol queues getting longer in major cities and frustration growing, the Egyptian people are impatient for visible change.

The Egyptian government last week put forth a budget to cut fuel subsidies by 27% and end subsidies for the industrial sector by the fiscal year 2012/2013. It also plans to introduce a coupon system to ensure that subsidies reach those who need them the most. Considering the growing tension in the country recently: are some of these strategies on target, or do we need to look elsewhere for guidance?

An Iranian model of success

Such money would truly be able to set the Egyptian economy on a path forward.

Nigeria, Georgia, and Ukraine have seen riots in response to recent petrol price rises. Iran, however, is a different story. It is one state that has been able to play it very smart.

Iran instigated a cash compensation mechanism for citizens before removing the subsidies completely. So for instance in a. state like Egypt, let's assume that government spending on subsidies is around 85 billion EGP/yr. Divide that among the 85 million citizens and each would receive 1,000 EGP per year. Instead of this subsidy for fuel, the government could pay out this dividend.

The first cash compensation would be a lump sum of three months to incentivise citizens to accept subsidies removal. The government should insist all citizens wishing to receive the cash compensation must open bank accounts whereby the money will be transferred directly into their accounts every month. This not only enhances the financial sector and the banks, but also forces every interested motorist to register for a national ID card in order to get a bank account. This way the government could ensure accurate accounting of the population through efficient and traceable methods in each governorate. Then it could tie the cash compensation to some form of social welfare enhancement. For instance restricting the cash compensation unless citizens get medical health checks and testing every year, or enroll their children in schools. In order to ensure that you get widespread buy-in by the people, the government must demonstrate that the money saved from the removal of fossil fuel subsidies goes to service the citizens with an immediate and visible results. A good example is a national infrastructure project that is visible to all and impacts people directly. Such projects could include a new subway system, or road project.

The government should roll out a saturating media campaign at least six months prior to the removal of the subsidies to educate people on the ways in which it will benefit them. A massive PR effort was one of the key components to Iran's success.

Once the government has a massive buy-in to the policy, it should ask the upper 20% of the population to relinquish their rights to the cash compensation to better service the national infrastructure project. In Iran the majority of the upper percentile was willing to do so. Such efforts in Iran were extremely successful and allowed them to remove fossil fuel subsidies in one shot, not gradually as most states are attempting to do. Iran had a real strategy which led to an enhancement of the livelihoods of the citizens.

The Egyptian playground has a very different dynamic than that of Iran, but the main factors and strategies persist and could prove successful if done appropriately. Such money would truly be able to set the Egyptian economy on a path forward.