425 billion
reasons for change

Every year, world governments spend a colossal sum to lower the price of fossil fuels.

That doesn't make sense. New Zealand is pressing for a new solution to this global challenge.

1. Fossil fuel subsidies are massive

Every year, governments spend at least US$425 billion to make oil, gas, coal and other fossil fuels cheaper to buy – and cheaper to burn.

That is four times as much as they put towards encouraging renewable energy. It’s also three times more than the world’s wealthy countries spend on aid. It could buy roughly 4 billion solar panels – or pay for the global eradication of malaria four times over.

In a world committed to putting the brakes on climate change, this doesn’t make sense.

"We've got a real question as to why we want to be spending $425 billion each year on subsidising the oil industry to produce emissions? Why would you do that?"
Vangelis Vitalis, Deputy Secretary, Trade and Economic Group, New Zealand Ministry of Foreign Affairs

Ending fossil fuel subsidies has been called “the missing piece of the climate change puzzle”. It could have a major impact on the world’s bid to keep global temperature rise beneath 2 degrees – as well as saving millions of people from deaths caused by air pollution.

"Many countries have made political commitments to reduce these harmful subsidies, but progress has been too slow," says Vangelis Vitalis, Deputy Secretary, New Zealand Ministry of Foreign Affairs and Trade.

New Zealand is proposing a new solution that harnesses global trade rules – the agreements that nearly all countries make about how they buy and sell to each other – to drive change.

"We believe that a solution for addressing this lack of action is to drive enforceable change through the World Trade Organisation (WTO)," says Vitalis.

"This is the one global institution that legally binds all of the major economies in the world. It's the only place where major economies can be held to account in an enforceable way."

Read on to find out how subsidies encourage pollution and blunt renewable energy, how some countries are showing that reform is possible, and how you can join the push for change.

2. Subsidies mean
all kinds of problems

When a government spends money to lower the price of fuel, it is often seen in positive terms by consumers – who see the good deal right in front of them.

But this act of apparent generosity unleashes a set of much deeper problems.  

For a start, when the price of fossil fuels is brought down, people use them more. This means more carbon emissions are pumped into the atmosphere, hastening climate change.

Research from the International Energy Agency and the Organisation for Economic Cooperation and Development suggests that removing subsidies could reduce global carbon dioxide emissions by almost 10 per cent by 2050.

In the same way, subsidies also mean more air pollution, which blankets many world cities and is thought to claim six million lives every year.

Meanwhile, all that money spent on fossil fuels makes success much more difficult for new industries built on clean or more efficient technologies. Electric cars, for instance, are a tougher sell when petrol is artificially cheap.

“Fossil fuel subsidies are public enemy number one for the growth of renewable energy.”
Fatih Birol, International Energy Agency executive director

Finally, government funding for fossil fuels represents money that could have been spent elsewhere – on schools, hospitals or research into new technologies.

At the moment, some countries spend more on subsidies than they do on their health or education systems.

3. The road to reform

The international spotlight has been on fossil fuel subsidies for nearly a decade. In 2009, the G20, a group of major industrial and emerging nations, agreed to “rationalise and phase out … inefficient fossil fuel subsidies that encourage wasteful consumption”.

Members of APEC, a group of Asia-Pacific countries, have since made a similar commitment.

Some countries have led the way by putting their record forward for independent scrutiny. New Zealand was among the first to undergo a peer review of its fossil fuel subsidies. Others including China, the United States, Mexico and Germany, have done the same. These reviews have revealed billions of dollars in subsidies, a crucial first step towards reform.

“New Zealand has long been an advocate for the reform of fossil fuel subsidies and has played a leadership position on this issue, not only at the WTO but also in APEC and OECD.”
Mari Kiviniemi, Deputy Secretary General of OECD and former Prime Minister of Finland

Another important signal was the United Nations Sustainable Development Goal number 12c, an agreement established in 2013. This goal, too, supports reforming inefficient fossil fuel subsidies – while still protecting poor and vulnerable communities. 

But despite the impressive pledges, concrete progress has been slow. Much more could be done. Currently, there are no legally binding consequences for countries that aren’t acting.  New Zealand believes there’s an opportunity to change this.

4. Trade: a new way of tackling the problem

The opportunity is international trade – or more specifically, the rules that govern it. 

About 98 per cent of world trade is bound by the rules of the World Trade Organisation. If new rules discouraging inefficient fossil fuel subsidies were introduced, almost every country in the world would be legally obliged to comply.

“It seems to us that trade – and trade agreements – are a pivotal way in which we can address these subsidies. Because subsidies are trade issues.”
David Parker, New Zealand Minister for Trade and Export Growth

That doesn’t mean this change is simple to achieve. To get there, we need to build global support for the cause.

The odds are not stacked in our favour. Many other countries rely on fossil fuels much more than we do, especially developing countries. Even countries like New Zealand will continue to need fossil fuels in the foreseeable future for their energy security.  We recognise the transition will take time.

Yet we do have a useful precedent for how trade rules can help the environment: fisheries subsidies. With most of the world’s fish stocks in trouble, it’s a huge problem that world governments still spend $35 billion a year to make it more attractive to catch and sell fish. About 20 years ago, New Zealand began working at the WTO to build support for reforming fish subsidies. It has taken a long time and a lot of work, but we are making progress. In December 2017, we secured an important milestone – the agreement of WTO members to work towards prohibiting harmful fisheries subsidies by 2020.

An even bigger task looms ahead with fossil fuel subsidies. But the need is pressing, and New Zealand believes the cause is worth the effort.

As with trade discussions that take on fisheries subsidies, labour standards or the freer movement of environmental goods, this work is also a way to prove that trade can be a powerful force for solving global problems.

In recent months, New Zealand has been working behind the scenes to canvass support for bringing this important issue to the WTO for consideration.  Our first attempt at attracting the attention of World Trade Organisation Members was at a conference in Buenos Aires, Argentina on 11 December, 2017.

By the time we made it to the WTO conference, our proposal had already been endorsed by 12 economies: New Zealand, Chile, Costa Rica, Iceland, Liechtenstein, Mexico, Moldova, Norway, Samoa, Switzerland, Chinese Taipei, Penghu, Kinmen and Matsu, and Uruguay.

Here is a video that captures the event:

5. Some countries are showing the way

We know there are challenges. The scale of fossil fuel subsidies is massive. They exist in most parts of the world, in rich countries and developing countries, including (to a small extent) in New Zealand.

But the case for cutting fossil fuel subsidies is compelling – and some countries are showing the way forward.

For example, countries as varied as Morocco, Mexico, Indonesia, India, Viet Nam and China have made enormous strides in reducing their public support for fossil fuels.

From 2011 to 2016, Morocco cut its total subsidies for petroleum products by about 80 per cent – from US$5.2 billion to US$1.1 billion.

Likewise, within a year of Indonesia’s 2015 reform of transport fuel subsidies, the government had saved about US$15 billion, which was used instead for health, education and infrastructure spending.

“If you don’t want more of something, then don’t subsidise it. On a finite globe, we don’t want more fossil fuels, so we must stop subsidising them. 
JM Figueres, former president of Costa Rica

Of course, reform is not always easy. Industries and workers associated with fossil fuels often fear job losses.  Consumers can be understandably reluctant to accept sharply higher fuel prices, so reducing subsidies gradually can make sense.

Indonesia’s approach shows how spending can be successfully transferred to other programmes, with public support.

Another way of answering public concern is good, clear information about what subsidies actually cost countries – and how else they might be spent. That’s why an early focus of reform is simply to show how much governments are spending on fossil fuel subsidies.

Reducing subsidies also means tackling the idea that they are mostly about helping the very poorest people with their energy needs. In fact, research shows that only a bare fraction (8 per cent) of fossil fuel subsidies reaches the poorest 20 per cent of people.

There are much better ways to fight poverty than by cutting the price of petrol for everyone.

Join the conversation

Want to see fossil fuel subsidies reformed? Share your views on our Facebook page, or join the conversation #FFSR on Twitter