Energy Subsidy Reform: The Fossil Elephant in the COP Room

by Henok Asmelash 

Fossil fuel subsidies are major obstacles to tackling climate change and the energy security-driven transition towards sustainable energy sources. They undermine the competitiveness of renewables and encourage the over-extraction and wasteful consumption of energy sources that are responsible for around two-thirds of global greenhouse gas emissions. The increased recognition of their adverse environmental effects over the last few decades has prompted numerous intergovernmental fossil fuel subsidy reform initiatives. However, the primary intergovernmental forum for negotiating the global response to climate change (i.e., the UNFCCC) is conspicuously absent from the forefront of these initiatives. Fossil fuel subsidy reform first appeared on its agenda some three decades ago, but it has remained a peripheral issue within the UNFCCC ever since.

The environmental case against fossil fuel subsidies

The environmental case for fossil fuel subsidy reform is straightforward. Subsidies – no matter how they are defined – make fossil fuels artificially cheaper to consume and profitable to produce. Cheap fuel prices encourage wasteful consumption and undermine energy efficiency. Production subsidies in the form of tax emptions and low royalty payments enable the production of fossil fuels that are otherwise economically unviable.

The fact that no other human activity generates more emissions than fossil fuel production and consumption makes the transition away from fossil fuels essential to keep the global average temperature increase below the 1.5°C limit set in the Paris Agreement. However, our current over-reliance on fossil fuels for virtually everything makes the transition one of the most difficult challenges the world has ever faced. Making the transition happen without disruption and delay requires a massive and urgent improvement in the development and deployment of energy efficiency and renewable energy technologies. Countries are taking a wide range of legal and policy measures towards this direction, but their simultaneous subsidisation of fossil fuels is perverse and detrimental to the transition.

Renewables have come a long way in their competitiveness, but they are not likely to outcompete and replace fossil fuels if governments continue to subsidise them. Fossil fuels have benefited not only from decades of subsidies and free public infrastructure but also from the failure of the market to internalise the negative externalities of fossil fuel combustion and the positive externalities of renewables. Switching subsidies from fossil fuels to renewables must be a first-order priority in any country’s effort to help accelerate the transition. The COP has already agreed in the Paris Agreement to such action by undertaking to make ‘finance flows consistent with a pathway towards low greenhouse gas emissions and climate resilient development’. Fossil fuel subsidies make finance flow in the wrong direction and lock the world into decades of damaging unsustainability.


Intergovernmental fossil fuel subsidy reform initiatives

Fossil fuel subsidies first appeared on the international environmental agenda during the Kyoto Protocol negotiations in the 1990s. An earlier draft of the Kyoto Protocol contained an explicit reference to the progressive phasing out of ‘subsidies in all fossil fuels’ as one of the policy measures to reduce greenhouse gas emissions. The corresponding provision in the final text of the Kyoto Protocol replaced the specific reference to fossil fuels with a generic reference to subsidies in ‘all greenhouse gas emitting sectors’. The diluted language and advisory nature of the provision undermined its ability to attract much attention to fossil fuel subsidies.

Intergovernmental efforts to promote fossil fuel subsidy reform started in earnest with the 2009 G20 Summit at which G20 Leaders agreed to ‘phase out and rationalize’ ‘inefficient fossil fuel subsidies’ over the medium term. This agreement has prompted numerous intergovernmental organisations and forums to launch their own fossil fuel subsidy reform initiatives. The Leaders of the Asia Pacific Economic Cooperation (APEC) echoed the G20 commitment to ‘phase out inefficient fossil fuel subsidies that encourage wasteful consumption’ at their Summit in 2011. The G7 Leaders also agreed to eliminate inefficient fossil fuel subsidies by 2025 at their 2016 Summit in Ise-Shima, Japan. Nine non-G20 countries have formed the Friends of Fossil Fuel Subsidy Reform (FFSR) to advocate for fossil fuel subsidy reforms in various intergovernmental forums. Fossil fuel subsidy reform has also become part of the UN Sustainable Development Goals (SDGs). One of the targets to ensure sustainable consumption and production patterns (G12) is the rationalisation of inefficient fossil fuel subsidies that encourage wasteful consumption by 2030. A group of 12 World Trade Organization (WTO) Members issued a Statement at the last WTO Ministerial Conference in 2017 calling for fossil fuel subsidy reform in the multilateral trading system. Moreover, most recently, five WTO Members have launched negotiations for a plurilateral Agreement on Climate Change, Trade, and Sustainability (ACCTS) that aim, among others, to discipline environmentally harmful fossil fuel subsidies.

These initiatives have successfully made fossil fuel subsidy reform an important component of the climate policy toolkit, but fossil fuel subsidies remain prevalent and considerably higher than renewable energy subsidies. The OECD and IEA estimated that fossil fuel subsidies in 77 economies alone amounted to $478 billion in 2019. This figure is without considering the value of the negative externalities from fossil fuel production and consumption that the IMF counts as part of its post-tax subsidy estimate. Governments are not only failing to phase out their existing subsidy programmes, but they are also introducing new ones. Promising to build back better and greener and at the same time subsidising fossil fuels is affront to such promises – let alone to the various commitments they undertook to eliminate such subsidies.


The UNFCCC and Fossil Fuel Subsidy Reform

The Paris Agreement makes no explicit reference to fossil fuel subsidies nor fossil fuels. The reference to fossil fuel subsidy reform as one of the climate finance options in the draft text did not make it to the final text of the Agreement. However, the bottom-up nature of the Agreement affords countries the opportunity not only to determine their own emission reduction targets but also to pick the policy measures to meet them. A few developing countries took advantage of this opportunity to include fossil fuel subsidy reform to their intended climate policy measures. This is a significant step in the right direction but insufficient for at least three reasons. First, only 13 of the 191 Parties to the Paris Agreement mentioned fossil fuel subsidies in their Nationally Determined Continuations (NDCs). This is despite the fact that nearly all countries subsidise fossil fuels in one form or another. Second, with a few exceptions, most of the 13 references to fossil fuel subsidy reform are coached in a broad and imprecise language that is difficult to monitor and ascertain compliance. Third, and most importantly, the mere inclusion of fossil fuel subsidy reform in NDCs falls short of providing the necessary incentive and support governments need to implement such reforms. Governments – especially in the Global South – often face backlash in their attempt to reform fossil fuel subsidies. A recent study found that 41 countries encountered at least one fuel riot between 2005 and 2018 in response to fossil fuel subsidy reforms. Such protests are the function of multiple factors.

The most prominent of this is lack of public awareness and participation of stakeholders in the reform process. Fossil fuel consumption subsidies are often justified in the name of the poor and vulnerable groups of the society. As such, they form part of social welfare policies to protect such groups against high fuel prices. The problem is that most fossil fuel subsidy programmes are targeted so poorly that they benefit middle and high-income households more than low-income households. The regressive nature of most fossil fuel subsidy programmes means that those with higher energy consumption capture most of the benefits. To make matters worse, low-income households are more likely to feel the increased fuel prices in the aftermath of subsidy reforms than their richer counterparts are. Unless fossil fuel subsidy reforms are accompanied by effective public awareness campaigns, they will continue to trigger public protests.

Undertaking fossil fuel subsidy reforms in times of low oil prices such as the current one will also help lessen the backlash. The public backlash also stems from the failure of reforms to encompass compensatory schemes that alleviate the adverse effects of fossil fuel subsidy reforms on low-income households. It is important to acknowledge that low-income households suffer the most from the removal of fossil fuel consumption subsidies. Successful reforms require clear implementation plans and compensatory measures directly targeted at the poor and other vulnerable groups. Countries such as India and Iran have replaced some of their price-based fuel subsidies with direct cash transfers. The implementation of such schemes, however, poses significant administrative burden for most developing countries with weak institutional and human resources. This is one area where international organisations could support fossil fuel subsidy reforms in developing countries.

The reluctance to address fossil fuel subsidies within the UNFCCC (beyond NDCs) stems from the consideration that energy issues remain the exclusive prerogatives of national governments. The numerous multilateral initiatives to promote fossil fuel subsidy reform however suggest that a common understanding and some degree of consensus has emerged on the need to address fossil fuel subsidies at the intergovernmental level. The increasing evidence of the crucial role subsidies play in perpetuating the status quo and maintaining the dominance of fossil fuels in the global energy supply mix is yet another reason why the COP can no longer afford to treat fossil fuel subsidy reform as a peripheral issue. The key item on the COP26 agenda is securing global net-zero by 2050. No pathway to net-zero exists that does not require the fundamental restructuring of the global energy system. Even the International Energy Agency (IEA) has now recognised that a ‘radical transformation of the global energy system’ is required to achieve net-zero carbon emissions by 2050. The world stands no chance of reaching net-zero and limiting the rise in global temperatures to 1.5 °C without keeping the majority of fossil fuels in the ground. This means that our chance of reaching net-zero carbon emissions by 2050 hinges on our ability to accelerate the transition towards sustainable energy sources. Any net-zero commitment at COP26 therefore needs to come with clear and strong dedication to address one of the major culprits to the energy transition – fossil fuel subsidies.


COP26, Biden and the United Kingdom

COP26 comes at a critical time. The coronavirus pandemic has shown how much the world is ill-prepared to respond to a public health emergency - let alone to the ‘even deeper emergency’ of climate change. Urgent and co-ordinated action is needed if the world is to stand any chance of avoiding the catastrophic consequences of climate change. Making such action an integral part of the recovery from the pandemic is essential to avoid (and correct) past mistakes and accelerate the transition towards sustainable energy future. Subsidising the fossil fuel industry in the name of recovery will perpetuate and further entrench fossil fuel use. It is therefore imperative that COP26 sends a clear and strong signal on the need to phase out existing fossil fuel subsidies and refrain from introducing new ones under the guise of recovery.

Recent developments in the United States and United Kingdom provide some grounds for optimism on this front. The coming into power of the Biden-Harris administration in the United States and its strong determination to combat climate change will help recover the fossil fuel subsidy reform momentum undermined by the administration of Donald Trump and its pro-fossil fuel and anti-environmental rhetoric over the last four years. The administration has already brought back the United States to the UNFCCC and promised to restore US leadership to global climate action. It has also enjoined Federal Agencies to ensure that ‘Federal funding is not directly subsidizing fossil fuels’ and ‘eliminate fossil fuel subsidies from the budget request for Fiscal Year 2022 and thereafter’. Only time will tell how much of this will translate into action but having one of the leading greenhouse gas emitters and fossil fuel subsidisers on board is crucial for the intergovernmental movement against fossil fuel subsidies.

The United Kingdom is also taking important steps in the right direction ahead of COP26. Over the last two years, the government has launched various renewable energy support programmes to help businesses build back greener, promote green innovation and supercharge green start-ups. It has also announced its plans to end support for overseas fossil fuel projects. These measures are crucial to help accelerate the sustainable energy transition, but the continued subsidisation of fossil fuels undermines their effectiveness. It is incoherent to introduce renewable energy support measures and subsidise fossil fuel at the same. The UK is one of the key G20 countries that not only failed to honour their fossil fuel subsidy reform commitments but also introduced new subsidy programmes since the 2009 G20 Summit in Pittsburgh. The government deny its subsidisation of fossil fuels despites numerous reports to the contrary. The government need to stop hiding behind technicalities and a narrow definition of fossil fuel subsidies to maintain policy measures inconsistent with its climate change agenda. The UK has joined forces with the FFFSR recently in calling for fossil fuel subsidy reform at the COP26. The joint communique urges countries to turn their commitments into action with urgency. If the government is serious about tackling climate change and climate leadership, the starting place is to be transparent about its own subsidisation of fossil fuels. Recognition and clear plan of action to reform fossil fuel subsidies is essential for the UK to have any moral authority to urge its guests to take action against their fossil fuel subsidies at the COP26.