Fossil fuel subsidies work against efforts to limit climate change. Making these greenhouse gas emitting fuels cheaper to produce or for consumers to buy, is an incentive to use more. New Zealand is working to encourage the reduction, and ultimately elimination, of fossil fuel subsidies.

What's wrong with fossil fuel subsidies?

The scale of subsidies for fossil fuels is massive. The IEA estimates that consumer subsidies alone amount to US$548 billion annually (2013).  This is equivalent to four times the level of aid from the OECD DAC in 2013 (US$134 billion) or more than four times the level of total financial support to renewable energy (US$121 billion).  Combined with the amount governments also spend subsidising the production of fossil fuels, this gives a total of between US$400-600 billion globally a year, depending on price fluctuations.

International Energy Agency (IEA) and OECD research indicates that removing subsidies could reduce global carbon dioxide emissions by up to 10% by 2050. This would make a substantial contribution to keeping global warming below 2 degrees in 2050.

Production subsidies

These come in many forms and include cash transfers, tax credits and rebates, and trade restrictions such as quotas. All distort the price of fossil fuels and are counter-productive to the global effort toward more renewable sources of energy. For example production subsidies in the coal industry remove the incentive to produce and use coal more efficiently, or to develop cleaner energy sources.

Consumption subsidies

These are often introduced to lower the price of fossil fuels to ensure people have access to energy. For example many countries heavily subsidise petrol to keep the cost at the pump low for consumers. However, these subsidies are rarely effective in helping the people they're designed to help. In 2010, only 8% of the world’s fossil fuel consumption subsidies reached the poorest 20% of people.

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. Subsidy reform can remove this financial burden and release funds for other priorities.

Reforming fossil fuel subsidies would also be good for energy security. The IEA estimates if fossil fuel subsidies were phased out by 2020, global primary energy demand would fall by 5%. That's equal to the current energy use of Japan, Korea and New Zealand combined. A reduction of this size would help reduce the risk of future oil shocks and smooth out energy-price volatility.

What’s being done about them?

In 2009 the ‘Group of 20’ (G20) made commitments to reduce fossil fuel subsidies. It agreed to “rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption.” Later that year APEC countries made a similar commitment.

Many countries are now working to reform their fossil fuel subsidies, but progress has been slow. There are many economic, political and social hurdles that need to be overcome to make lasting changes.

Friends of Fossil Fuel Subsidy Reform (FFFSR)

New Zealand has taken a lead role in advocating for the reform of fossil fuel subsidies. In 2010 we established an informal “Friends” group of non-G20 countries to encourage G20 and APEC leaders to take action on their commitments to phase out inefficient fossil fuel subsidies as soon as possible. Current members of the FFFSR are Costa Rica, Denmark, Ethiopia, Finland, New Zealand, Norway, Sweden and Switzerland.

What does FFFSR do?

The group works internationally to raise awareness around fossil fuel subsidies and promote the benefits of reform to the environment, energy security, social development and trade. We work to convince governments of the need for reform and help them with ways to do it. The group advocates that reform needs to be ambitious and transparent.

The FFFSR uses a number of international forums to spread the message including APEC, the OECD, UNFCCC and Major Economies’ Forum. 

The FFFSR recognises that there are challenges to face when removing fossil fuel subsidies, and that it will take time. We also recognise the importance of ensuring subsidy reform doesn’t harm vulnerable groups and their developmental needs. Subsidy reform must be carefully designed so as not to restrict access to basic energy services or to increase poverty.

The issue is gaining traction given concerns regarding the global economic recession, the cost of subsidies, energy security and global climate change.