Source: Small Island Developing States
September 2019 marked ten years since the Group of 20 (G20) committed to “Rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption” as part of the Pittsburgh Summit in 2009. Very little has changed since then, despite urgent calls for action on climate change in the lead up to and at the 2019 UN Climate Action Summit, from voices representing the youngest advocates (Greta Thunberg explained how we spend much more on fossil subsidies than on nature based solutions) to the largest global organization (António Guterres did not mince his words when opening the Summit stating, “The biggest cost is subsidizing a dying fossil fuel industry, building more and more coal power plants, and denying what is plain as day. That we are in a deep climate hole and to get out, we must first stop digging”). G20 country action on subsidies still appears as words on the page, the absence of commitments, and certainly no clear, concrete plans to phase-out subsidies once and for all. This has got to change.
Currently, G20 countries still subsidise coal, oil and gas to the tune of around USD 150 billion annually (for both production and consumption subsidies). During the Climate Action Summit, New Zealand’s Prime Minister Jacinda Ardern did not hesitate to call it out as it is: “Despite commitments to phase out such subsidies by groups like the G20 and APEC, we are still struggling to see concrete action. It is time to do things differently.”
The pace of change is glacial, and in the meantime glaciers have melted. The process to try to move the G20 forward on this issue has been via peer review of fossil fuel subsidies. China and the US jointly set the scene by publishing peer reviews of their subsidies in 2016 – seven years after the G20 commitment was made. Since then, the heads of both countries have changed, Obama to Trump, and Jintao to Jinping. A spirit for reform of subsidies and working together on climate change has been replaced with a very different dynamic today.
In 2016, the US identified USD 8.2 billion of subsidies but did not commit to a phase-out plan, repeatedly highlighting that “the US Congress must pass enabling legislation for this proposal to become law.” Research in 2017 found that, for the US, fossil fuel subsidies and preferential tax rates are the reason why half of all new investments in oil are profitable in the first place. President Trump has made it considerably easier for fossil fuel investors to undertake new drilling projects. US tax reform has further advantaged fossil energies over renewables, by scrapping subsidies for green energies while leaving those for the fossil sectors largely untouched. Overall progress on decreasing public finance for fossil fuels within G7 countries placed France first, and the US last.
The 2016 review from China listed subsidies worth USD 14.5 billion and included a reform plan and timeline. Since then China has continued to undergo petroleum pricing reforms reducing central government outlays by 50% between 2014 and 2017. Subsidies to coal still persist: support for domestic coal plants is largely via state-owned enterprises, and amounts to USD 7.6 billion per year (2016-2017 average). However, China’s 13th Five Year Plan (2016-2020) included a USD 14.5 billion fund for employment restructuring in coal areas, and plans to reduce coal consumption to 58% of total energy consumption or below by 2020. Shale oil benefited from a resource rent break of 30% in 2018, and shale gas has also benefitted from subsidies totaling USD 1 billion, although with plans to phase these out.
In 2017, Germany and Mexico published peer reviews. Mexico identified ten subsidies worth USD 2.6 billion in 2016. Two out of these ten subsidies have already been phased out as part of the large energy reforms that the country is carrying out. Germany identified 22 measures that favor fossil fuels in the form of tax breaks and direct budgetary transfers, totalling USD 17.6 billion in 2016. Two of these 22 measures will be phased out in 2018 as part of the existing EU-wide commitment to end subsidies to hard coal.
In 2019, Indonesia and Italy published reviews. Whilst there was unanimous praise for Indonesia’s reform of its petroleum fuel and electricity pricing over the 2014-2017 period, it is also the case that subsidies have crept back with domestic prices maintained whilst global oil prices rise. For Italy’s 39 identified subsidies to fossil fuel production or consumption, accounting for more than EUR 13 billion in 2016, nearly all of the measures (35 out of 39) were preferential tax treatment.
Argentina and Canada announced reviews of subsidies in 2018, but they have yet to be published. France and India will participate in a peer review together, as was announced as part of Prime Minister Modi’s visit to the French capital last August.
A few notable reforms have taken place since the G20 decision ten years ago. In December 2015, Saudi Arabia significantly increased prices for nearly all fossil fuels (although prices remain low in comparison to global levels), with plans to phase-out fossil fuel subsidies entirely by 2020. However, this date has now been postponed until 2025. Between 2014 and 2017, India cut subsidies to oil and gas by 76 %, from USD 26.1 billion to USD 5.5 billion, thanks to reform efforts combined with a decrease in international oil prices. Indonesia completed its reform of gasoline and diesel subsidies, saving up to USD 15.5 billion in 2015. But prices were last locked in 2019 in the leadup to recent presidential elections, and the country has continued to invest in coal power plants. Increasing oil prices are now testing the governments’ abilities to maintain their earlier reforms.
Civil society groups, including IISD, have consistently called on the G20 to “urgently set a timeline for the complete and equitable phase-out of FFS, leading with the phase-out of fossil fuel production subsidies by 2020, as a minimum”; and “establish a timeline and clear guidance for the completion of peer review of FFS by all G20 members to enable equitable phase out of all FFS.” At the current pace of change, however, it would take until 2025 for the completion of reviews.
While countries inch forward under the G20 decision, the international community has also nudged itself forward through decisions taken in other processes. More ambitious reform timelines for the actual phase out of subsidies exist for both the EU (2020) and the G7 (2025). The SDGs include target 12.c to “Rationalize inefficient fossil-fuel subsidies that encourage wasteful consumption by removing market distortions,” by 2030 at the latest. And, under the Paris Agreement on climate change, countries are to develop increasingly ambitious Nationally Determined Contributions (NDCs), for which fossil fuel subsidy reform could be a key component.
Reviews only matter when followed by actions. And the need for action has never been more urgent. The Intergovernmental Panel on Climate Change (IPCC) and climate scientists warn that we must act now in order to keep global warming below 1.5°C above preindustrial levels. Subsidy reform is estimated to be able to reduce 6-8% of global greenhouse gas (GHG) emissions by 2050. At the same time, subsidy reforms could free up significant resources that could be channeled back into government programmes, which would be necessary to mitigate the impacts of rising energy prices on vulnerable parts of the population and to help smooth reforms, but that could also be spent on accelerating a clean energy transition (such as through swaps).
In the lead up to the Climate Action Summit and throughout UN Summits Week 2019, the Global Subsidies Initiative of IISD along with the Friends of Fossil Fuel Subsidy Reform supported a campaign to raise the issue on the agenda with high-level champions from business, such as the CEO of Aviva, and government, such as Prime Minister of New Zealand. The time to review fossil fuel subsidies and to reform them is now. Find out more here and help spread the word.
This article was authored by Laura Merrill and Franziska Funke, IISD.