5 October 2017

Country Reviews of Fossil Fuel Subsidies: Guiding countries through the process

Self- and peer reviews of government support to oil, gas and coal are a first step and practical tool for phasing out wasteful fossil fuel subsidies (FFSs). The G7, G20, European Union and Asia-Pacific Economic Cooperation (APEC) governments have all committed “to rationalize inefficient FFS that encourage wasteful consumption.” But how can we support them? The Global Subsidies Initiative has published A Guidebook to Reviews of Fossil Fuel Subsidies. This publication unpacks how all other countries can join almost a third of G20 members and nearly half of APEC members who are at different stages of their FFS reviews. The guidebook will be shared with the participants of the 54th APEC Energy Working Group in Wellington, New Zealand on November 20–24, 2017.

Perverse Incentives

With a global value of at least USD 425 billion a year, FFSs are often fiscally burdensome, economically inefficient, socially regressive and environmentally harmful. If reformed, these vast amounts of public money can support sustainable development causes such as public health, education, and the switch to renewable energy and low-carbon infrastructure.

These subsidies incentivize the production and consumption of fossil fuels. Research estimates that the removal of global subsidies to fossil fuel consumption would lead to a global decrease in carbon emissions of between 6.4 and 8.2 per cent by 2050. In addition, a removal of global subsidies to fossil fuel production would save 37 Gt of carbon dioxide emissions over the same timeline. Thus, the elimination of all subsidies to both fossil fuel production and consumption globally will reduce emissions by roughly 10 per cent.

The economic and environmental case for FFS phase-out is obvious, and their reform is a “when” rather than an “if” question. Over 2014–2016, over 50 countries—from Saudi Arabia to Ukraine, India to Egypt—removed certain subsidies to fossil fuel consumption. These reforms have created fiscal space for repayment of debt and funding development.

Transparency Building Blocks

To inform the reform process, policy-makers and other stakeholders need a coherent and clear presentation of information on FFSs. The information on the nature of magnitude of FFSs is at least partially available through governments’ reporting on budgetary transfers, tax expenditures and other forms of support or market data (especially for price-gap estimates of subsidies). However, such information is often scattered over different documents and government agencies, without a systematic approach to subsidy identification and measurement.

That is why methodologically robust FFS reviews are important. The Guidebook to Reviews of Fossil Fuel Subsidies summarizes the practices and benefits that countries have already accumulated through self-reports and peer reviews within APEC and G20. It also draws on the time-tested methodologies of subsidy analysis developed by the Organisation for Economic Co-operation and Development (OECD), International Energy Agency (IEA) and the Global Subsidies Initiative.

FFS reviews take different forms depending on the needs of the government in question. It can be helpful to think of different FFS review elements as Lego bricks that can be assembled in various configurations. These elements are: scope of an FFS review, identifying and defining FFS, measurement and description of FFS, their evaluation and, finally, next steps on the FFS under the review.

Typically, FFS reviews go a step beyond subsidy listings and tend to focus on reform efforts. Some reviews also discuss the inefficiencies as well as sustainability and pollution issues in their energy sectors more broadly. For example, both Finland and Sweden have benefited from the broader scope of their reviews by examining FFS within the context of potentially environmentally harmful subsidies under the EU commitment to phase these out by 2020. Meanwhile, FFS reviews should specifically analyze the impact of FFSs, and their possible reform, on the poorest.

From Self-Reports to Peer Learning

Self-reports are the engine of both transparency and discussion over FFSs at the country level. They involve participation of various relevant government agencies, one of which acts as a coodinator, as well as other stakeholders such as representatives of energy producers and consumers and research institutes. Self-reports can further feed into other processes, such as trade policy reviews of the World Trade Organization and peer reviews of FFS within G20 and APEC.

Peer reviews within APEC and G20 add a further benefit of governments learning from each other’s experience. For example, China and the United States completed their peer reviews of FFSs in 2016. The reviews’ scope included both consumption and production subsidies. The review for the United States lists 17 subsidies with a total value of USD 8.2 billion. The review for China lists nine subsidies worth USD 14.5 billion. China’s peer review report is notable for also including a reform plan and timeline that identifies subsidies for phase-out in the near future. Since China and the United States are members of both G20 and APEC, these reviews under G20 also support the two countries’ commitments within the APEC.

The table below provides a complete overview of the status of FFS peer reviews under both G20 and APEC, as of  October 5, 2017. With this growing body of experience, all countries—and not just G20 and APEC members—can perform reviews, starting with self-reports and volunteering for peer reviews where expedient. For example, the Friends of Fossil Fuel Subsidy Reform is a group of nine countries (Costa Rica, Denmark, Ethiopia, Finland, New Zealand, Norway, Sweden, Switzerland and Uruguay) that advocates for self- and peer reviews of fossil fuel subsidies. While New Zealand undertook its self- and peer review within APEC, Sweden and Finland completed self-reviews independently of APEC and G20.

 

Status of FFS peer reviews within the G20 and APEC as of October 5, 2017

Context Country Report released Main findings
APEC Peru 2015, available Three subsidy reviews focused on their efficiency, concluding that two of them had to be phased out and that the third one, the FISE (provides targeted liquefied petroleum gas subsidies to the poor), was an efficient subsidy that should be expanded to other areas.
APEC New Zealand 2015, available The APEC panel reviewed eight measures that are considered to support the fossil fuel sector, but none of them was identified as inefficient FFSs that led to wasteful consumption.
APEC Philippines 2016, available Out of the five policy measures identified, two were no longer in effect, two were not subsidies (but created market distortions) and one was a subsidy. A list of recommendations was submitted with the review.
APEC Chinese Taipei 2017, available Listed five subsidies of which three were related to energy use in agriculture. The peer review team concluded that all five subsidies have inefficiencies, though small in magnitude, and provided recommendations for the rationalization of these policies.
APEC Vietnam Expected release in 2017 Not yet available
APEC Brunei Pending Not yet available
G20 China 2016, available Listed nine subsidies worth USD 14.5 billion and included a reform plan and timeline, identifying subsidies for phase out in the near future.
G20 United States 2016, available Identified 16 inefficient FFSs benefitting upstream activities and one subsidy for fossil fuels used in the residential sector, with a cost estimated at USD 8.2 billion per year.
G20 Mexico Expected release in 2017 Not yet available
G20 Germany Expected release in 2017 Not yet available
G20 Indonesia Pending Not yet available
G20 Italy Pending Not yet available

 

The Guidebook to Reviews of Fossil Fuel Subsidies is available to download from here.

A further Guidebook to Fossil-Fuel Subsidy Reform is also available to download here.

The Friends group was formed in June 2010 to support G20 and APEC leaders’ commitments to phase out inefficient fossil fuel subsidies. The Friends encourage the G20 and APEC to implement their initiative as soon as possible, with maximum ambition and transparency.

Friends of Fossil Fuel Subsidy Reform are

  • Costa Rica
  • Denmark
  • Ethiopia
  • Finland
  • New Zealand
  • Norway
  • Sweden
  • Switzerland
  • Uruguay