Anyone who has traveled through Mexico City, Bogotá, Santiago, Lima, or for that matter, almost any city in Latin America, will have seen the enormous inequalities that exist between rich neighborhoods and poor neighborhoods. These differences range from the size and luxury of the houses, access to basic services, the existence of green and recreational spaces and the way of transportation to the safety of the surroundings.
Today we want to talk to you about a much less obvious and somewhat obscure form of inequality: governments subsidize the rich so that they pollute the planet. In Latin America, between 2020 and 2022, fossil fuel subsidies – well known as the main drivers of change – increased from $35 billion to $57 billion. That is, our governments are spending large amounts of public funds to finance the consumption or production of fossil fuels such as gasoline or diesel.
These benefits are not distributed equitably in the population. The sectors with the greatest purchasing power are those that consume the most energy and, therefore, those that benefit the most from aid for their consumption. It is the households that have a car (many times more than one!) who need gasoline the most and those who consume the most products, who benefit most indirectly from diesel subsidies for transportation. Therefore, these are socially regressive, with greater benefits for those with greater purchasing power.
This in numbers looks like this: in Mexico, the country that subsidizes fossil fuels the most in the Latin American region, the poorest half of families receive only 20% of the support for gasoline, while the richest half receives the remaining 80%.
In theory, subsidies are implemented with the goal of supporting marginalized populations, for example, to reduce poverty. It could also be thought that they are aimed at eradicating energy poverty, making energy more accessible for mobility, work and homes, or as a mechanism to promote economic development. However, with such an unequal distribution of benefits, this is not the case.
Let’s be clear: fossil fuel subsidies are a government policy that accelerates climate change, distributes public funds unequally, discourages the search for more efficient economic alternatives to fossil fuels, and generates harmful health effects.
What to do then? We have seen several attempts to eliminate or reduce subsidies for fossil fuels, electricity or public transportation that have caused strong rejection by the population with negative consequences for the social and political processes in our region. The caracazo in Venezuela in 1998, the Chilean social outbreak in 2019, the riots over the gasoline in Mexico in 2017 or the protests against the price in Argentina in 2016, to mention a few. It is clear that eliminating subsidies is not a viable policy on its own.
The point we want to get to is that Governments look for more efficient ways to achieve their social and economic development objectives, also taking into account the externalities of the environmental problems derived from the use of these fuels. This can be promoted with reforms to subsidy schemes that take into consideration the social and political agreements of social protection and economic institutions that the population feels is tied to a sense of justice.
That is, Latin American (and world) governments today have an immense opportunity to reinvest significant amounts of public funds creating social protection and compensation programs for the most vulnerable households, workers and companies that could be negatively affected, complying more efficiently with your development objectives.
In Venezuela, it is estimated that in 2022, the Government spent close to $8 billion on subsidies for the consumption of petroleum products. This could be equivalent to 34 dollars per month per person if distributed directly to the 19.6 million people in extreme poverty in the country, covering 30% of the basic basket of a household of five people.
In a context of climate emergency and social inequality, it is ethically unacceptable to subsidize pollution and put more money into the pockets of the rich. Rather, it is time to rethink our social contract towards a fair distribution of public resources. A well-executed reform can be an opportunity to strengthen trust between the State and the population, if the governments of the region can demonstrate that the energy transition can not only be fair, but also offers many benefits.
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