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Fossil fuel subsidies, climate change and the G20

By Peter Wooders
Group Director, Energy Program, IISD

IISD.P_wooders.ClimateSection.PortraitIn 2009 the G20 countriesagreed “To phase out and rationalize over the medium term inefficient fossil fuel subsidies while providing targeted support for the poorest” (G20, 2009). Since then, G20 governments have reconfirmed commitments to this action five times over—most recently, in Australia in November 2014 (G20, 2014a)—and reiterated in theG20 Principles on Energy Collaboration(G20, 2014b).This year has seen wording on the issue includedas a Means of Implementation, linked to financing, in other international statements such as theFinancing for Development conferencein AddisAbaba, and in the United Nations Sustainable Development Goals.

Globally, consumer subsidies to fossil fuels stood at USD 548 billion in 2013 (International Energy Agency [IEA], 2014).More recent data from the Organisation for Economic Co-operation and Development (OECD) finds that the 34 OECD countries and emerging economies (Brazil, China, India, Indonesia, Russia and South Africa) are spending between USD 160–200 billion supporting fossil fuel consumption and production. This inventory covers all G20 countries and more, with the exception ofSaudi Arabia and South Korea. The Secretary General of the OECD, Angel Gurría, put it succinctly: “Governments are spending almost twice as much money supporting fossil fuels as is needed to meet the climate-finance objectives set by the international community, which call for mobilizing 100 billion US dollars a year by 2020” (qtd. in “OECD: leading countries,” 2015).Research from a GSI study of Turkey—host of the 2015 G20 summit—found spending of more than USD 730 million on annual subsidies to the coal industry(Acar, Kitson,& Bridle, 2015).

The future is clear. But what is needed nowis action and leadership from the G20 to dismantle subsidies to fossil fuels to both consumers and producers—and reinvestthe resulting savings into the low-carbon energy transition. Leadership is needed now more than ever in the context of both low oil prices and theefforts to build a new climate agreement in Paris at the end of 2015. This leadership may come, but too late for this year. A recentU.S.statement supportsChina’s 2016 presidency of the G20 and commits to work to “phasing out inefficient fossil fuel subsidies by a date certain”(Office of the Press Secretary, 2015). A timetable for phase out is now needed. Even in China, recent GSI research foundconsumer and producer subsidies for coal to be around USD 15.7 billion in 2013 (Bridle, Gerasimchuk and Attwood, 2015).Attwood

SOURCE: GSI (2014).

All countries have their work cut out for them, but time is now tightbecause noone knows the length of the window of opportunity presented by current low oil price for governments to organize and enact reforms, and because every year of fossilfuel subsidies in an age of climate change drives us further in the wrong direction. Lower prices to consumers means they consume more; lower costs to producers mean they produce more. This increases the use of fossilfuels and the levels of bothpollution in our cities and ofcarbon in the atmosphere. McGlade and Ekins(2015) find that “globally, a third of oil reserves, half of gas reserves and over 80 percent of current coal reserves should remain unused from 2010 to 2050 in order to meet the target of 2°C.”Furthermore, the historic link between fossilfuel subsidies and climate change suggests that these subsidies drove a staggering26 per cent of global carbon emissions between 1980 and 2010 (Stefanski, 2014). An IMF working paper includes the broader costs to society of fossil fuels (such as traffic accidents and pollution, as well as the social costs of climate change)and find the true cost of fossil fuels amounts to an eye-popping USD 5.3 trillion a year (Coady, Parry,Sears, & Shang, 2015)—or USD 10 million a minute (“Fossil fuels subsidised,” 2015).Studies suggest that such is the scale of these subsidies that theirremoval could lead to a decrease in global greenhouse gas (GHG) emissions of between 6 and 13 per cent by 2050, compared to business as usual (Merrill,Harris, Casier, & Bassi. 2015).

Countries partially increasing subsidized prices to fossil fuels (2013–2014)map

Source: IISD (2015) based on IEA (2014).

So governments, and particularly the G20, must now walk the talk. Atleast on consumer subsidies, many of them are. In the last few years there has been reform at a practical level in some shape or form across a number of countries including India, Indonesia, and Egypt. Furthermore, the good news is that once governments remove fossilfuel subsidies the taxation opportunities (and potential revenue collection) via conventional taxation such as VAT or GST on transport fuels abound. Global revenue gains to governmentsfrom the removal of subsidies and the efficient taxation of fossil fuels could be around USD 3 trillion. There is considerable scope to increase the tax take from fossil fuels in Emerging and Developing Asia, the Commonwealth of Independent States, the Middle East, North Africa, Afghanistan and Pakistan. For example the Philippines removed subsidies and now taxes fuel at 12 per cent VAT to pay for the national social safety net and provide incentives to renewables. Taxation and higher prices that reflect the true cost of fossil fuels can encourage greater energy efficiency and the more careful use of fossil fuels. They can also be used to fund safety nets and put renewable and sustainable sources of power at the centre of the energy sector.

References
GSI 2014, infographic 2014 ‘Paying the Polluter’
http://www.iisd.org/gsi/sites/default/files/FFSR_and_climate_infographic_snd10-12_0.jpg

Acar, S., Kitson, L., & Bridle, R. (2015). Subsidies to coal and renewable energy in Turkey. Winnipeg/Geneva: IISD/GSI. Retrieved from
http://www.iisd.org/gsi/sites/default/files/ffsandrens_turkey_coal_eng.pdf

Bridle, R., Gerasimchuk, I., &Attwood, C. (2015).Equally subsidized, but unequally sustainable: Coal and renewable energy discussion in China. Retrieved from http://www.iisd.org/gsi/news/equally-subsidized-unequally-sustainable-coal-and-renewable-energy-discussion-china

Coady, D., Parry, I. Sears, L. & Shang, B. (2015).How large are global energy subsidies?(IMF Working PaperWP/15/105). Retrieved from
https://www.imf.org/external/pubs/cat/longres.aspx?sk=42940.0

Fossil fuels subsidised by $10m a minute, says IMF. (2015). The Guardian. Retrieved from http://www.theguardian.com/environment/2015/may/18/fossil-fuel-companies-getting-10m-a-minute-in-subsidies-says-imf

G20. (2009).G20 Leaders Statement: The Pittsburgh Summit. Retrieved from http://www.g20.utoronto.ca/2009/2009communique0925.html

G20. (2014a). G20 Leaders’ Communiqué: Brisbane Summit, 15-16 November 2014. Retrieved from https://g20.org/wp-content/uploads/2014/12/brisbane_g20_leaders_summit_communique.pdf

G20. (2014b).G20 Principles on Energy Collaboration. Retrieved from  https://g20.org/wp-content/uploads/2014/12/g20_principles_energy_collaboration.pdf

Global Subsidies Initiative (GSI). (2014). Paying the polluter (infographic). Retrieved from http://www.iisd.org/gsi/sites/default/files/FFSR_and_climate_infographic_snd10-12_0.jpg

International Energy Agency. (2014). World energy outlook 2014. Retrieved from
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McGlade, C. & Ekins, P. (2015, January 8). The geographical distribution of fossil fuels unused when
limiting global warming to 2°C. Nature, 517, 187–190.

Merrill, L. (2014). Financing the sustainable development goals through fossil-fuel subsidy reform:
Opportunities in Southeast Asia, India and China. Winnipeg/Geneva: IISD/GSI. Retrieved from http://www.iisd.org/gsi/sites/default/files/financing-sdgs-fossil-fuel-subsidy-reform-southeast-asian-india-china(6).pdf

Merrill, L. Harris, M., Casier, L., Bassi. M. A. (2015). Fossil-fuel subsidies and climate change: Options for policy-makers within their Intended Nationally Determined Contributions. Nordic Council of Ministers. Retrieved from http://www.iisd.org/gsi/sites/default/files/FFS_Climate.pdf

Office of the Press Secretary. (2015, Sept. 25) Fact sheet: U.S. – China Economic Relations. The White House. Retrieved fromhttps://www.whitehouse.gov/the-press-office/2015/09/25/fact-sheet-us-china-economic-relations
Organisation for Economic Co-operation and Development (OECD). (2015). Support to fossil fuels remains high and the time is ripe for change. Retrieved from http://www.oecd.org/environment/support-to-fossil-fuels-remains-high-and-the-time-is-ripe-for-change.htm

OECD: Leading countries spend $200bn a year subsidising fossil fuels. (2015, Sept. 21). The Guardian. Retrieved from http://www.theguardian.com/environment/2015/sep/21/oecd-nations-200bn-subsidisies-fossil-fuels-climate-change

Stefanski, R. (2014). Dirty little secrets: Inferring fossil-fuel subsidies from patterns in emissions intensities.
Retrieved from http://www.oxcarre.ox.ac.uk/files/OxCarreRP2014134(1).pdf

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