Phasing-out Fossil Fuel Subsidies
As countries emerge from the economic crisis, the revenues that can be saved from removing inefficient fossil fuel subsidies can be redirected to poverty alleviation, health and education.
The G20 consists of the finance ministers and governors of the central banks of 19 countries—including France, Germany, Italy and the UK—plus the EU itself which is represented by the President of the Council and by the European Central Bank. The G20 is therefore a key instrument in the EU's collaboration on global energy policy.
In 2009, at a two-day G20 Summit in Pittsburgh USA, world-leaders agreed to phase out fossil fuel subsidies “whilst providing support for the [world’s] poorest” (The G20 Pittsburgh Summit Leaders’ Statement). China, India and Russia were united in this agreement which was coupled with a commitment that energy and finance ministers would develop strategies for implementing the subsidies phase-out.
A decision to phase out fossil fuel subsidies was largely influenced by estimates produced by the International Energy Agency (IEA) stating that if fossil fuel subsidies were completely phased-out by 2020, it would “cut expected growth in global energy demand by 5%” (World Energy Outlook). This amounts in fact to the current consumption of Japan, Korea and New Zealand combined. Pertaining to oil demand, the IEA estimated that the savings created by phasing out fossil fuel subsidies would “amount to 4.7 million barrels per day, or around one-quarter of current US demand.” The expected growth in carbon-dioxide would be cut by 2 gigatonnes according to IEA projections.
To those who argue that the consumer oriented fossil fuel subsidies make fuel more affordable for the poor, the evidence elucidated by the OECD and IEA stands in stark contradiction. This form of energy subsidy, they say, is an extremely inefficient means of assisting the poor “as only 8% of the $409 billion spent on fossil-fuel subsidies in 2010 went to the poorest 20% of the population” (IEA/OECD, 2011). The IEA stresses the economic benefit to the poor during a time of crisis which results from phasing out fossil fuel subsidies: “As countries emerge from the economic crisis, the revenues that can be saved from removing inefficient fossil fuel subsidies can be redirected to more directly tackle pressing priorities such as poverty alleviation, health and education, will be important.”
Fossil fuel subsidies are a sub-category of the wider ‘energy subsidies’ —defined by the IEA as any government action that lowers the cost of energy production, raises the revenues of energy producers, or that lowers the price paid by energy consumers. Fossil fuel subsidies, whether producer or consumer oriented, produce market distortions and lead to inefficient allocation of resources. As acknowledged by the G20, these subsidies “encourage wasteful consumption, reduce … energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change.” With a clear global consensus expressed by the G20 and with a concrete commitment to the phasing-out of fossil fuel subsidies, it is surprising therefore to learn that whilst fossil fuel subsidies amounted to $300 billion in 2009, since the G20 summit in Pittsburgh, they have risen further: $409 billion in 2010 and $630 billion in 2012 according to OECD estimates. Committing to reducing fossil fuel subsidies must amount to more than just rhetoric.
A stark demonstration that governments are speaking out of both sides of their mouths when it comes to pursuing clean energy is to consider the ratio of ‘fast-start climate finance’ to fossil fuel subsidies provided by European governments (Research by Oil Change International). These ‘fast-start climate finance’ funds are funds dedicated by developed countries to firstly mitigate the effects of green-house gas emissions produced by developing countries, and secondly to provide for climate adaptation. The UK government is among the worst offenders, as according to Oil Change International it pledged in excess of $6 billion in fossil fuel subsidies in 2011, whilst contributing only $790 million in ‘fast-start climate finance’ that year.
It is hoped that the United Nations’ Sustainable Energy for All global initiative —which aims at promoting energy that is “accessible, cleaner and more efficient”—will be a success, however fossil fuel subsidies threaten to jeopardise the initiative. European governments must deliver upon their commitments, and must do so with haste if the EU’s commitment to a low carbon economy, to reducing green-house gas emissions and to mitigating the effects of climate change are to become a reality.
Stephen N. Rooney
Jesuit European Social Centre