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What's wrong with fossil fuel subsidies?
Subsidies for fossil fuel consumption and production create trade and investment distortions. Making greenhouse gas emitting fuels cheaper to produce or buy is an incentive to use more and discourages investment in renewable energy. Subsidising fossil fuels also uses money that governments could spend on health, education, development, and climate adaptation.
The scale of subsidies for fossil fuels is growing. The OECD and International Energy Agency (IEA) report the fiscal cost of government support for the production and consumption of fossil fuels almost doubled in 2022 to reach more than USD 1.4 trillion(external link), as governments across the globe introduced incentives to mitigate high energy costs. In contrast, global investment in renewable energy was $495 billion in 2022(external link) – half of what was spent subsidising fossil fuels.
Research shows reforming fossil fuel subsidies would lead to significant reduction in emissions. The Intergovernmental Panel on Climate Change (IPCC)(external link) note that the removal of fossil fuel subsidies would reduce global CO2 emissions by 1-4 percent, and greenhouse gas emissions by up to 10 percent by 2030. Furthermore, the International Institute for Sustainable Development (IISD) (external link)estimates a further 3 percent reduction in CO2 could be achieved by reinvesting a third of savings from money currently spent on fossil fuel subsidies into energy efficiency and renewable energy.
New Zealand’s efforts to advocate for Fossil Fuel Subsidy Reform
New Zealand is a leading advocate for the reduction and elimination of fossil fuel subsidies internationally. Our long-standing objective is to achieve multilateral trade rules on fossil fuel subsidies.
To date, we have been focussing our effort on advancing discussion on fossil fuel subsidy reform at international forums, in particular the World Trade Organisation (WTO); and seeking commitments on fossil fuel subsidies in our free trade agreements.
WTO Fossil Fuel Subsidy Reform Initiative
New Zealand coordinates the Fossil Fuel Subsidy Reform (FFSR) Initiative at the WTO. The FFSR Initiative seeks to rationalise and phase out fossil fuel subsidies that encourage wasteful consumption and persuade WTO members to share information and experiences on how to eliminate fossil fuel subsidies.
At the 13th Ministerial Conference in February 2024, 48 co-sponsors of the FFSR Initiative presented a comprehensive plan to advance work towards rationalisation, phase-out or elimination of harmful fossil fuel subsidies was presented. This includes;
- A Joint Ministerial Statement(external link) on Fossil Fuel Subsidies
- A work programme for 2024/25(external link) mapping out in-depth action steps under three pillars;
- List of sample questions(external link) for use in Trade Policy Reviews
Friends of Fossil Fuel Subsidy Reform
Our commitment to fossil fuel subsidy reform dates back to the launch of the Friends of Fossil Fuel Subsidy Reform(external link) in 2010, and the Fossil Fuel Communiqué led by then-Prime Minister Key in 2015.
The Friends of Fossil Fuel Subsidy Reform are an informal group of non G20 countries comprising of Costa Rica, Denmark, Ethiopia, Finland, Norway, Sweden, Switzerland, Uruguay, and the Netherlands.
The Friends work internationally to raise awareness around fossil fuel subsidies and promote the environmental, energy security, social development, and trade benefits of reform. The Friends use several international forums to spread the message, including APEC, the OECD, COP, and major economies forums such as the G20.
Free Trade Agreements
New Zealand seeks environmental and climate outcomes in our free trade agreements. Our Free Trade Agreements with the United Kingdom and European Union include provisions on fossil fuel subsidy reform, including commitments to strengthen cooperation on reform policies and take steps to eliminate harmful fossil fuel subsidies.
New Zealand has concluded negotiations on the Agreement on Climate Change, Trade and Sustainability (ACCTS), alongside Costa Rica, Iceland, and Switzerland. ACCTs is open to new members with Norway already considering whether to become a signatory(external link). The ACCTs includes a new framework to discipline and eliminate harmful fossil fuel subsidies. This includes a meaningful definition on fossil fuel subsidies alongside clear prohibitions and a limited set of exceptions to safeguard fundamental policy goals, including for energy security and disaster resilience.
International action on Fossil Fuel Subsidy Reform
New Zealand, alongside the Friends, advocate for Fossil Fuel Subsidy Reform in a number of different fora, including G7, G20, COP and UNFCCC negotiations.
APEC
As an APEC economy, New Zealand seeks to build momentum on fossil fuel subsidy reform.
APEC Leaders have committed to rationalise and phase out inefficient fossil fuel subsidies that encourage wasteful consumption while recognising the importance of providing those in need with essential energy services. This was re-affirmed by APEC Leaders in 2023(external link).
To support economies to meet this commitment, APEC leaders have set up a voluntary reporting mechanism to annually review progress. New Zealand completed a peer review in 2015(external link).
As part of our APEC host year in 2021 progress was made on agreeing a plan to stop the increase in damaging fossil fuel subsidies. New Zealand also supports research and capacity building at APEC to support economies with fossil fuel subsidy reform.
- 2021 Report and Virtual Workshop(external link) on Lessons Learnt and Good Practice from APEC – Economy Fossil Fuel Subsidy Peer Reviews
- 2021 – Study and Trade Policy Dialogue(external link) on Potential Options for a Voluntary Standstill on Inefficient Fossil Fuel Subsidies
- 2022 Capacity Building Workshop(external link) for Accelerating Efforts on Inefficient Fossil Fuel Subsidies including through voluntary self-reporting
OECD
As a member of the OECD New Zealand supports OECD research and contributions on trade and climate change. This includes the OECD Inventory of support measures for fossil fuels(external link).