http://ap.google.com/article/ALeqM5gV7z6TGMMJP4J2L4KWix9DADnEiAD92Q55801

It might sound like a lesson plan for an Intro to Macroeconomics course; the conclusion that subsidies can cause fiscal havoc in the markets. But in addition, popular energy subsidies are a growing threat to preventing global warming. According to a new U.N. report, governments around the world are ignoring basic economic theories and environmental hazards that result from the presence of these subsidies. The report, just released by the United Nations Environmental Programme (UNEP), details the impacts that have occurred due to the establishment of numerous energy subsidies by countries including Russia, Iran, China, Saudi Arabia, and India. By serving as an incentive for the continued use of fuel by consumers and the current methods of producers, the subsidies are discouraging energy conservation and efficiency. They also hamper the implementation of renewable energy development by protecting the status quo.

 "In the final analysis, many fossil fuel subsidies are introduced for political reasons but are simply propping up and perpetuating inefficiencies in the global economy," said UNEP director Achim Steiner, who also is a U.N. undersecretary general.

In a statement released with the report, Steiner advised governments to "urgently review their energy subsidies and begin phasing out the harmful ones."

Several countries have felt the consequences of cutting subsidies. Last year, riots erupted In Myanmar when cash-strapped authorities raised fuel prices as much as 500 percent. In the last few months, India, China, and Indonesia have all trimmed their fuel subsidies, unable to keep pace with the rapid rise in oil prices.

The U.N. report said money could be redirected into programs that support low income families more directly and should be targeted to promote green energy, such as wind or solar.

Cutting off the subsidies would be good for the environment as it would reduce carbon emissions by as much as 6 percent, said Zahedi.

Free market advocates and environmentalists agree that these subsidies for modern energy use are hurtful, based on the detrimental effect the subsidies have on economic equilibrium and environmental preservation that both groups desire most. But since there are numerous types of subsidies and different approaches to providing energy, it is hard to determine what should be done. Creating new subsidies that are directed at renewable energy practices is a promising solution, although economists will stress the importance to preserving quality market conditions as well.

The Associated Press; August 27, 2008

Submitted by K. Rutherford