Subsidies for extracting, processing and consuming coal oil and gas persist in most parts of the world, despite high-profile pledges by governments to phase them out. But what are they, and why is it so difficult to remove them in the face of the climate emergency?
What is a fossil fuel subsidy?
Essentially, a fossil fuel subsidy is any government action that gives coal, oil or gas an easier ride compared with other energy sources. It can take many forms, including lowering the cost of production, raising the price received by energy producers, or lowering the price paid by energy consumers.
Obvious examples include direct funding and tax giveaways. But many activities that count as subsidies are more subtle, such as loans and guarantees at favourable rates, price controls, governments providing resources like land and water to fossil fuel companies at below-market rates, and funding for research and development.
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Support independent eco journalism that drives real change.Subsidies can come directly from government, international financial institutions, regional development banks, export credit agencies (ECAs) and bilateral aid agencies.
Since the definition is so broad, estimates of the value of fossil fuel subsidies vary considerably, depending on what is included in calculations. However, in 2018, eight G20 member states maintained US$207 billion in fossil fuel subsidies, according to researchers at Rice University’s Baker Institute for Public Policy.
Outside the G20, advanced countries spent around $800 billion per year to support purchases of fossil fuel products and services, versus $140 billion for all subsidies worldwide on renewable power generation, according to the International Monetary Fund (IMF) .
Why do they need to be scrapped?
The removal of fossil fuel subsidies has been advocated by G20 governments along with the OECD, the Asia-Pacific Economic Cooperation, the IMF, the World Bank, the International Energy Agency (IEA), and the World Economic Forum, along with environmental, religious, educational, and business associations.
Subsidies on fossil fuel consumption are expensive for governments to finance and compete with other public spending priorities such as education and healthcare, as well as more green policies to boost energy efficiency and clean energy, the IMF says .
They also benefit wealthy people as well as those who are poorer, meaning that it would be more efficient to remove or reduce subsidies and target the money directly to programs that help only the disadvantaged.
Climate campaigners argue that fossil fuel subsidies are not compatible with meeting the Paris Agreement goal of keeping global temperature rise within 1.5°C of pre-industrial levels. Greenhouse gas emissions need to be cut by 7.6% a year from 2020, according to the UN Environment Programme. Instead they are growing, with global energy-related CO2 emissions are projected by the IEA to rebound after a dip in 2020 caused by global lockdowns, and grow by 4.8% this year. The IMF estimates that retracting fossil fuel subsidies would bring a 22% reduction in CO2 emissions, alongside public health benefits from reduced local pollution and traffic.
Extraction of fossil fuels also needs to end. UNEP estimates that production of coal, oil and gas needs to decline by 11%, 4% and 3% respectively each year between 2020 and 2030 to meet the Paris target.
Research by campaign group Oil Change International (OCI) found that even if coal was phased out overnight, the emissions from oil and gas reserves currently in production would push the world beyond 1.5C.
Why are fossil fuels subsidised?
Governments have historically justified subsidies for reasons including social welfare, protection and promotion of jobs or industries, rural development, and energy security, according to expert Doug Koplow, who founded Earth Track to analyse public policy on the issue.
The most commonly cited reason in developing countries is to regulate fossil fuel prices to protect local industries – notably energy-intensive industries – and domestic consumers from volatile international prices. Governments also argue that they need to facilitate access to energy of lower income households – World Bank data shows that around 11% of people worldwide still do not have electricity, though access is gradually improving.
Other experts cite the fact that subsidies are easy to administer in many developing countries with limited administrative capacity; the strength of vested interests which dominate energy policies in many countries; and that they allow governments to provide highly visible favours to attract voters or political support. This is particularly the case in less democratic countries, where governments may subsidise fossil fuels to please the population, and in oil-producing countries.
Why are fossil fuel subsidies so hard to turn off?
Despite the fact that they disproportionately benefit the rich, fossil fuel subsidies can still comprise a significant proportion of the income of poorer people, according to researchers at Rice University’s Baker Institute for Public Policy.
As a result, removing subsidies without compensation can be “socially undesirable and politically dangerous,” they say. “Discounted energy remains popular with the public, particularly in low-income communities, and taking it away is one of the most politically fraught policy instruments. Subsidy reform is a proven trigger for violence, instability, and even government overthrow,” they note.
An example of this is Ecuador, which attempted to remove fossil fuel subsidies in 2019 without any replacement, as part of a deal with the IMF. This led to 11 days of rioting, during which seven people died. The government was forced to reinstate the subsidies.
What are governments doing to turn subsidies off?
At the 2009 meeting of G20 nations, heads of state agreed to “phase out and rationalise over the medium-term inefficient fossil fuel subsidies”. Phasing out subsidies has also been agreed in other international fora such as the Sustainable Development Goals in 2015 and the G7 in 2016.
However, progress has been slow. A decline in fossil fuel support between 2013-2016 not only reversed in 2017, but subsidies rose by 5% compared with 2016, according to estimates covering 76 countries by the IEA and OECD published in 2019.
G20 countries have dropped their support to fossil fuels by only 9% collectively since 2014-16, according to research by the International Institute for Sustainable Development (IISD), the Overseas Development Institute (ODI), and OCI published in November 2020.
Moreover, they predicted that this marginal progress was likely to be undone by billions of dollars committed to fossil fuels in response to the COVID-19 pandemic. Data from the Energy Policy Tracker revealed that G20 governments had given at least $233 billion in additional support through recovery measures to fossil fuel-intensive sectors since the pandemic began.
“Often we see governments take one step forward and then take two steps back. Since 2009, when the G20 committed to phasing out fossil fuel subsidies, some countries have made progress on some subsidies, but then at the same time actually introduced new subsidies as well,” says Laurie van der Burg, senior campaigner at OCI.
There have been some recent moves by governments and multilateral banks. In November 2019, the European Investment Bank said it would phase out its multibillion-euro financing for fossil fuels within two years. UK prime minister Boris Johnson committed in December 2020 to end direct government support for the fossil fuel energy sector overseas through export finance, aid funding and trade promotion for new crude oil, natural gas or thermal coal projects, “with very limited exceptions”.
The governments of Denmark, France, Germany, the Netherlands, Spain, Sweden and the UK launched the Export Finance for Future (E3F) coalition in April 2021 to harness public export finance as a key driver in the fight against climate change, including by reviewing trade and export finance support to fossil fuels, and assessing how to phase it out. However, this was criticised for not being sufficiently ambitious by campaigners.
Also in April, the Biden-Harris administration committed to end international investments in, and support for, fossil fuel-based energy projects at multilateral and bilateral finance agencies such as the US International Development Finance Corporation and US Export-Import Bank as part of its International Climate Finance Plan.
What are campaigners doing to force governments to turn off subsidies?
Some campaigners claim that government support for fossil fuel financing is illegal. Friends of the Earth is taking legal action against the UK government over its decision (taken several months before Johnson’s announcement) to provide around $1 billion of UK taxpayer support for a huge liquified natural gas development in Mozambique.
OCI warns that other legal action could follow. A legal opinion commissioned by the campaigners, concluded that states are required by law not to finance new fossil fuel-related projects and activities, neither through ECA finance, nor other forms of government-backed support.
Domestic law and the law under which an ECA operates in a particular jurisdiction would need to be considered before an individual government could be taken to court, van der Burg explains. “But this opinion certainly suggests that there's an international law basis for challenging governments on their export finance for fossil fuels. It's definitely an area where we're doing more work to figure out what the basis of the case would be, and in what jurisdictions it could be appropriate to file such a challenge,” she says.
