Friends of Fossil Fuel Subsidy Reform
The evidence for reform:
- Fossil fuel consumption subsidies in 37 countries cost an estimated US$409 billion in 2010; almost US$110 billion more than in 2009 (IEA, 2011).
- In 2010, fossil fuels were subsidised at a weighted average of 23 percent, meaning that consumers paid roughly 77 percent of the competitive market reference prices for products (in economies surveyed by the IEA)
- In 2010, only 8 percent of fossil fuel consumption subsidies reached the poorest income quintile (the bottom 20%) (IEA).
Why reform fossil fuel subsidies?
The reform of inefficient fossil fuel subsidies offers significant environmental and climate change benefits.
IEA and OECD research indicates that removing subsidies could reduce global carbon dioxide emissions by up to 10 percent by 2050. This would make a substantial contribution to keeping global warming below 2ºC in 2050.
Reform would also remove an existing disincentive to the development and greater uptake of renewable sources of energy.
Each year, between US$300-$500 billion is spent on production and consumption subsidies for fossil fuel. Production subsidies, such as subsidies for coal production, inhibit innovation and the development of cleaner technologies, and they reduce incentives to produce and use fossil fuels more efficiently.
Consumption subsidies, which are often introduced with the intention of lowering the price of fossil fuels to ensure people have access to energy, are seldom effective in assisting the people they are designed to help.
The essential energy needs of vulnerable groups must be met, but there are better ways to do this than through universal consumption subsidies. Experience shows that well-targeted safety net programmes can help address distributional concerns.
Paying for subsidies is a significant financial burden for many governments. Some countries spend more on fossil fuel subsidies than they do on health or education.
Reform of FFS can remove this financial burden and release financing for other priorities. The recent World Bank, IMF and OECD report to G20 Finance Ministers on “Mobilising Climate Finance” noted that if fossil fuel subsidies reforms in developed countries resulted in the redirection of even 20 percent of the current level of support to public climate finance, this could yield around $10 billion per year. There is also considerable scope for reform of fossil fuel subsidies in developing and emerging economies.
Reforming fossil fuel subsidies would also be good for energy security. The IEA has estimated that universal phase-out of fossil fuel subsidies by 2020 would cut global primary energy demand by 5 percent, which is equal to the current energy consumption of Japan, Korea and New Zealand combined. A reduction of this magnitude would help reduce the risk of future oil shocks and smooth out energy-price volatility.
Without reform, the cost of fossil fuel subsidies is set to reach US$660 billion in 2020 (in year 2010 dollars), which will be equivalent to 0.7 percent of global GDP. But if subsidies are eliminated, in 2020 energy demand would be cut by 4.1 percent. And growth in CO2 emissions would be 4.7 percent lower.
 IEA 2010 World Energy Outlook