G20 summit delivers small progress on fossil fuels subsidies reform

G20 members are spending USD 452 billion a year subsidizing fossil fuel production, making it harder to cut greenhouse gas emissions and slow down climate change, a report recently released by the think-thank Overseas Development Institute (ODI) announced.

The results, published before the Turkish G20 Summit of Nov. 15-16, strongly call into question the comprehensiveness of the commitments undertaken by major economies on the road to COP21.

Achieving an effective commitment on the issue during the G20 in Antalya would have given greater certainty to the past pledge to “rationalize and phase out over the medium term inefficient fossil fuel subsidies”, dating back to G20 Pittsburgh summit of 2009. G20 ministers subsequently agreed to subject their countries to reciprocal peer reviews on fossil-fuel subsidies reform, with China and the United States doing the first step in this direction in 2014.

No further details were yet added last week, as in the statement published on Oct. 2 2015  G20 countries just reaffirmed their previous commitment and pledged to “make enhanced progress in moving forward this commitment in future G20 meetings”.

ODI’s report describes protracting support to fossil fuels as ‘lose-lose’ scenario, since large amounts of finance is poured into uneconomic, high-carbon assets while at the same time resources are diverted from cost-effective low-carbon alternatives: USD 452 billion is nearly four times the amount spent on renewable energy subsidies globally. Furthermore, increasing the flows of green finance is a key challenge for the developed countries of the UNFCCC.

According to ODI report, postponing action is unjustified also because current market conditions reinforce the reasons supporting the phase-out. A third of oil, half of gas and over 80 per cent of current coal reserves have to stay in the ground in order not to exceed the 2 °C targetLow fossil fuels price are making large part of these resources unprofitable, particularly for new hard-to-reach reserves. Public support, whether in the form of national subsidies, investment by state-owned enterprises or public finance, is sometimes the only factor making extraction financially viable. Financial support to fossil fuels production can lock in polluting technologies for years to come, increasing the risk of stranded assets.

The United Kingdom was the only G7 nation to provide more tax breaks in 2015 for its declining North Sea oilfields. Russia had instead the highest national subsidies among the G20, providing almost $23 billion.

Despite the weak results achieved last week, momentum is yet beginning to rise: China and France declared further commitment while the US, Germany, Indonesia and Canada have been the most active in pushing reform. Japan, Korea, China, the UK and Russia remain instead ‘laggards’ under ODI classification:

Source: ODI

Positive signal came on Tuesday (Nov 17) from Brussels, where OECD countries struck an agreement to restrict subsidies to export technology for coal-fired power plants after months of debate.

In 2015 the International Energy Agency (IEA), the OECD and the International Monetary Fund (IMF) independently identified, documented, and estimated consumption subsidies, a form of support that was not considered in the ODI report.

The IMF for instance estimated that the phase out of post-tax subsidies could raise government revenue by $2.9 trillion (3.6 percent of global GDP), cut global CO2 emissions by more than 20 percent and cut pre-mature air pollution deaths by more than half in 2015.

According to OECD, reforms have been slow because national governments have historically sought to control the production and value of these assets. Other factors preventing action are lack of transparent information, diffuse misperceptions on subsidies’ economic effectiveness and pressures from specific sectors or groups.

Since most of the subsidies were introduced in a very different context than today’s, the OECD suggests that to win the policy inertia subsidies “should be subject to periodic reviews against their initial objectives and in light of today’s changing economic and environmental landscape”. A coordinated response by governments will further facilitate reform since many of the questions raised by fossil-fuel subsidies removal are trans-boundary. Cooperation could be achieved for instance between G20 and the Asia-Pacific Economic Cooperation (APEC) forum.

A report by The New Climate Econommy and ODI was released earlier this year in order to assist governments in their reform efforts.


(Image: Oil well, Texas. Photo credit: Wikipedia)