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What's wrong with fossil fuel subsidies?
Fossil fuel subsidies work against international efforts to limit climate change.
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, climate adaptation and development.
Reform of inefficient fossil fuel subsidies would also release government funds that can instead be allocated towards a green and climate-resilient COVID-19 recovery.
What removing subsidies could achieve
Removing these subsidies would substantially contribute to The Paris Agreement(external link) objective of holding the increase in global temperatures to below 2 °C degrees above pre-industrial levels and would contribute towards pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels.
Recent estimates(external link) suggests that fossil fuel subsidy reform would lead to significant reductions in emissions and fiscal savings for governments.
The scale of subsidies for fossil fuels is massive
The International Energy Agency (IEA)(external link) estimates that consumer subsidies alone amounted to more than US$426 billion in 2018. This rises to approximately US$500 billion(external link) when you add the amount governments spend subsidising fossil fuel production.
By contrast, official development assistance by Organisation for Economic Cooperation and Development (OECD) countries totalled US$153 billion in 2018.(external link) That’s less than a quarter of what the world spent subsidising fossil fuels in the same period.
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 erode the incentives to move to more renewable sources of energy.
For example, production subsidies in the coal industry discourage more efficient production and use of coal, and the development of cleaner energy sources. By subsidising fossil fuel production infrastructure, such as coal fired energy plants, they also lock-in a high carbon future.
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. While the intention behind such subsidies is often positive, such as providing vulnerable communities with access to energy, they are rarely effective in helping the poorest households(external link)
Paying for subsidies is a significant financial burden for many governments. Some countries spend more subsidising fossil fuels than they do on health or education. Subsidy reform can alleviate this financial burden and release funds for other priorities.
New research shows positive impacts of effective policy changes
A recent report on greenhouse gas mitigation opportunities from fossil fuel subsidy reform was launched in July 2021 by the Global Subsidies Initiative along with the Friends of Fossil Fuel Subsidy Reform (FFFSR) and the German Ministry of the Environment, Nature Conservation and Nuclear Safety (BMU).
The research modelled the possible impacts by 2025 of policy changes across 32 countries. It found that removing subsidies to fossil fuels could reduce emissions by an average of 6 per cent across the countries modelled while generating significant subsidy savings as co-benefits. The reform could reduce average emissions by up to an additional 13.2 per cent by 2030 – if combined with 10 per cent energy tax from 2025 until 2030 and investing 30 per cent of the savings into clean energy.
Action on fossil fuel subsidies
Following the G20 commitment in 2009, APEC Leaders also acknowledged the importance of rationalising and phasing out over the medium term, inefficient fossil fuel subsidies that encourage wasteful consumption(external link).
Voluntary peer reviews
In 2011, APEC Leaders agreed to set up a ’voluntary reporting mechanism’ that they would review annually to assess APEC’s progress toward that commitment. Voluntary peer reviews, similar to the G20 peer reviews, deliver transparency and discussion on fossil fuel subsidies at the country level. Relevant government agencies participate, one of which acts as a coordinator, as well as other stakeholders such as representatives of energy producers and consumers and research institutes.
In 2015, New Zealand was one of the first APEC economies to do a peer review(external link). Since then, 10 APEC economies have done peer reviews, either under the APEC process or the G20 process.
New Zealand is hosting APEC 2021
As hosts of APEC 2021, New Zealand is leading efforts to support an inclusive and green COVID-19 recovery in the region. A key priority for New Zealand is to advance action on the reform of environmentally harmful subsidies, specifically fossil fuel subsidies(external link)
In June 2020, the APEC Ministers responsible for Trade directed officials to explore options for a potential standstill on new fossil fuel subsidies(external link) for economies in a position to do so.
The WTO can have a central role in disciplining fossil fuel subsidies
The World Trade Organisation (WTO) was established with a view to ensure economic progress is achieved in accordance with the objective of sustainable development, and is one of the implementing agencies identified for work under the Sustainable Development Goals. Given its central role in disciplining trade-distorting subsidies across sectors, New Zealand believes that the WTO is an obvious candidate for advancing fossil fuel subsidy reform internationally.
In addition to the ASCM disciplines(external link) the WTO has already established and is in the process of negotiating specific sectoral disciplines for certain types of subsidies, for example in agriculture and fisheries. It also has transparency mechanisms (e.g. notifications and the Trade Policy Review), as well as enforcement mechanisms (i.e. the dispute settlement mechanism) to encourage implementation.
A statement on FFSR – delivered to the WTO
In 2017, New Zealand delivered a statement on FFSR(external link) to the 11th WTO Ministerial Conference. The statement was endorsed by 12 countries: Chile, Costa Rica, Iceland, Liechtenstein, Mexico, The Republic of Moldova, New Zealand, Norway, Samoa, Switzerland, Taiwan and Uruguay.
The 12th WTO Ministerial Conference (MC12) in November 2021 will present an opportunity to renew this commitment and to expand the support of the Membership. The MC12 Statement was shared with WTO members in mid-July and New Zealand, alongside our Friends of FFSR will be working hard to garner further support for this important work.
The Statement proposes an approach for achieving ambitious and effective disciplines on inefficient fossil fuel subsidies through capacity-building, and exchange of information and experience of reform. The Statements acknowledges the importance of considering the needs of vulnerable groups to ensure the transition from government fossil fuel support is equitable and ‘just’.
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(external link) 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 Friends of Fossil Fuel Subsidy Reform (FFFSR) are Costa Rica, Denmark, Ethiopia, Finland, New Zealand, Norway, Uruguay, Sweden and Switzerland.
What does FFFSR do?
Raises awareness and promotes benefits of reform
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.
Shares knowledge and experience
The Friends’ Network is an international network of government officials who share lessons, knowledge and experiences, and encourage innovative thinking on successfully implementing FFSR.
A series of five virtual interactive roundtables in 2018 included representatives from around 20 countries. Topics included:
- self- and peer reviews of FFS
- FFSR to sustainable energy (swaps and climate impacts)
- mitigation measures and cash transfers to the poor
- FFSR and just transition.
Understands that reform shouldn’t harm poor and vulnerable groups
The FFFSR recognises that there are challenges to removing fossil fuel subsidies, and that it will take time. Accelerated subsidy reform needs to happen alongside measures that protect the poor and vulnerable groups from the impact of higher energy prices.
The group recognises the importance of ensuring subsidy reform doesn’t harm vulnerable groups and their developmental needs. Subsidy reform must be carefully designed so it doesn’t restrict access to basic energy services or to increase poverty.
In May 2021, Group of Seven (G7) Environmental Ministers committed to aligning official international financing with the global achievement of net zero GHG emissions no later than 2050 and committed to phase out direct government support for carbon intensive international fossil fuel energy(external link). G7 countries also committed to end funding for new overseas coal projects by the end of 2021.
In 2009, the ‘Group of 20’ (G20), which is responsible for 70-80% of total global carbon emissions, formally committed to phase out fossil fuel subsidies(external link). G20 countries agreed to “rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption.” Since then, the G20 has reaffirmed its commitment to this goal annually.
G20 countries are voluntarily peer-reviewing their domestic fossil fuels subsidies programmes with the support of the OECD. To date, peer reviews have been completed for China, the United States, Germany, Mexico, Indonesia and Italy(external link). Canada and Argentina have recently committed to do their peer reviews in 2019/20(external link).
In 2020, G20 Leaders(external link) reaffirmed their commitment to rationalise and phase out fossil fuel subsidies whole providing targeted support for the vulnerable.
The United Nations has been increasingly active in advocating action to limit climate change and has recognised that eliminating fossil fuel subsidies is critical to meeting the climate challenge.
In 2018, United Nations Secretary General, Antonio Guterres said, “Governments need to be courageous and smart – that means ending billions of dollars in subsidies for fossil fuels. It means establishing a fair price for carbon. It means stopping investments in unsustainable infrastructure that will lock in bad practices for decades to come.”
Many other foreign Leaders as well as the heads of the OECD and the International Monetary Fund (IMF) have made similar statements in recent years(external link).
Sustainable Development Goals (SDGs)
On 1 January 2016, the 17 Sustainable Development Goals (SDGs) of the 2030 Agenda for Sustainable Development officially came into force. The SDGs commit countries, over the next fifteen years, to mobilize efforts to end all forms of poverty, fight inequalities and tackle climate change, while ensuring that no one is left behind.
SDG 12.C(external link) specifically addresses fossil fuel subsidies, committing signatories to: Rationalize inefficient fossil-fuel subsidies that encourage wasteful consumption by removing market distortions, in accordance with national circumstances, including by restructuring taxation and phasing out those harmful subsidies, where they exist, to reflect their environmental impacts, taking fully into account the specific needs and conditions of developing countries and minimizing the possible adverse impacts on their development in a manner that protects the poor and the affected communities.
Conference of the Parties to the UN Framework Convention on Climate Change (UNFCCC) – COP21
In this 2015 conference, countries endorsed an international Communiqué encouraging support for quicker action to eliminate inefficient fossil-fuel subsidies. And to do so in an ambitious and transparent way that contributes to climate change mitigation. Forty three Member Governments have endorsed the Communiqué, which remains open to further endorsement.
If you were in charge, what would you spend $526 billion on? Would you make improvements to healthcare and education? Or would you use it to discount fossil fuels? It’s time to act to stop fossil fuel subsidies around the world. Share this video if you th
Read about the role international trade policy can play in addressing the environmental harm being caused by fossil fuel subsidies.