G20 Countries Must Speed Up Fossil Fuel Subsidy Reforms
By Ivetta Gerasimchuk, December 14, 2018
Like dancers doing the tango, G20 countries step forward and back when it comes to climate action.
Phasing out fossil fuel subsidies seems to be one of the most difficult maneuvers of this dance. At every summit since 2009, G20 countries have reconfirmed this pledge. But in reality, they made very limited progress in delivering on it and in certain cases, progress has backslid.
If there is a way to stop taxpayers’ money going into the pockets of oil, gas and coal companies and rich energy guzzlers, it is through G20 countries learning from each other’s experiences: the hard-won reforms and steps forward that some have made.
A recent report showed G20 countries provided $147 billion subsidies to coal, oil and gas in 2016. Factoring in the cost of external negative impacts such as on health and climate, fossil fuel subsidies are on the order of several trillion dollars.
Direct cash transfers, tax breaks, concessional loans, regulated prices and other forms of subsidies for fossil fuels strain government budgets, benefit the rich much more than the poor, and drive fossil energy over-investment and over-consumption. This public money locks in high-carbon production and consumption choices, ultimately fueling climate disbalance.
Organizations such as the World Bank, OECD, International Energy Agency and IMF have long made a compelling case for fossil fuel subsidy reform, while recognizing it can be difficult in the face of political inertia, vested industry interests and weak institutions.
Change, however, is possible. A recent analysis shows examples of phasing out fossil fuel subsidies all over the G20. Indonesia, for instance, saved $16 billion by reforming untargeted subsidies for gasoline and diesel in 2015. These savings were invested into health insurance, housing for low-income groups, clean water access, infrastructure and other areas. Other G20 countries such as India, Mexico and Saudi Arabia have also considerably reduced subsidies to fossil fuel consumption, though some of these reforms are now at the risk of backsliding due to rising oil prices.
When it comes to subsidies to fossil fuel production, Canada and Argentina saved $260 million and $780 million per year respectively by removing some of their incentives to upstream fossil fuel companies in recent years. In doing so, Canada referenced the G20 pledge. Canada and Argentina are now preparing for mutual review of fossil fuel subsidies, following the example of voluntary peer reviews by their G20 predecessors: China, Germany, Indonesia, Italy, Mexico, and the United States.
Other examples are similarly positive:
- The European Union has committed to phasing out environmentally harmful subsidies by 2020, including those for fossil fuels. The EU has moved first in phasing out subsidies for hard coal mining by the end of 2018 and has directed some government support to a just transition for workers and communities currently engaged in fossil fuel production.
- Amongst multi-lateral finance institutions, the World Bank Group has considerably reduced its financing of coal and announced that, after 2019, it will no longer finance upstream oil and gas either. Some other multilateral and national development banks have also reduced support to fossil fuel projects.
- Some state-owned enterprises previously focused on coal mining and power, such as China Energy Investment Corporation and Coal India Limited, have begun to diversify their activities into renewables and towards a just transition for workers in those sectors.
- China, Saudi Arabia and South Africa have all made steps to increase taxation of fossil fuel consumption, generating more government revenue and reducing consumption. India collected $12 billion in revenue over 2010-2018 in the form of a tax on coal production – this translates to a carbon price of around $2 per ton of carbon dioxide.
These reforms indicate the possibility of change but tackle only a fraction of public money in comparison to the scale of government support funneled to fossil fuels.
Like tango dancers, G20 countries must echo each other’s steps and increase their tempo of reforms. Completing voluntary peer reviews of fossil fuel subsidies puts the focus on policies that may have been in place for decades and that often do not represent either good public policy or good ways of spending scarce public money.
By 2020, all G20 countries should have completed such peer reviews and adopted concrete and ambitious timelines for reforming each type of government support related to fossil fuels. There is an opportunity to match the reform timelines with those that already exist for fossil fuel subsidy phase out in the EU (by 2020) and G7 (by 2025). The reforms should be implemented in a way that protects vulnerable groups and supports a just transition for workers and communities currently dependent on fossil fuels.
Reforming fossil fuel subsidies has the added benefit of creating extra public budget – budget that can be used for wider social and sustainable development needs that ultimately benefit people, the planet and the country’s economy.