Globally governments spend US$400-600 billion a year to keep domestic prices for oil, gas and coal products artificially low. Removing these subsidies frees up resources to invest in sustainable development for society such as health, education, public welfare and low-carbon energy pathways.
The scale of subsidies for fossil fuels is massive. The IEA estimates that consumer subsidies alone amount to US$548 billion annually (2013). This is equivalent to four times the level of official development assistance aid from OECD countries in 2013 (US$134 billion) or more than four times the level of total financial support to renewable energy (US$121 billion).
Subsidies to producers of fossil fuels also exist through tax breaks and other incentives. These have been estimated to stand at around US$100 billion globally.
These are resources that governments are spending or not collecting to keep the price of fossil fuels below international price levels. Where subsidies exist they artificially depress the price of extraction and use of fossil fuels which means that there are more incentives to produce and consume fossil fuels over the development of alternative cleaner technologies and renewable energy forms or incentives to invest in energy efficiency measures.
They also can be a huge drain on government resources and exacerbate fiscal deficits. In some countries, fossil fuel subsidies take up a significant proportion of government resources (consumer subsidies represent 5-30% of government spending in some Southeast Asian Countries). Some countries even spend more on fossil fuel subsidies than they do on health or education. Removing subsidies would lead to substantial fiscal savings and free up resources for governments to invest in areas such as health, education or climate finance.
By keeping prices to consumers artificially low, fossil fuel subsidies encourage wasteful consumption, disadvantage renewable energy and drain scarce public resources that could be better spent on other sustainable developments goals.
Removing fossil-fuel subsidies leads to emissions reductions in a world dealing with the impacts of climate change and alleviates local air pollution.
Fossil fuel subsidy reform is the missing piece of the climate change puzzle. The elimination of fossil fuel subsidies would make a significant contribution to the goal of keeping average temperatures from rising more than two degrees Celsius above pre-industrial levels.
In fact, studies show that the phase out of fossil fuel subsidies is a viable option for the mitigation of GHG emissions suggesting an associated decrease in emissions of between 6-13% by 2050 .
Moreover, the process of reform can pave the way for countries to shift from subsidizing fossil fuels to taxing them, and ‘getting the prices right’ to cover the social cost that society pays for in terms of air pollution, carbon emissions and accidents. Shifting from subsidizing to taxing fossil fuels means that governments move from a situation where fossil fuels are a drain on fiscal revenues and government budgets to being an earner. Savings from fossil fuel subsidy reform can go towards cash transfers to reduce poverty, sustainable energy for all to expand access to clean energy, education and health. Government resources can also be shifted from support to fossil fuels to more targeted welfare support and productive sectors of the economy.
The IMF estimates that by removing fossil fuel subsidies and then taxing fossil fuels correctly (based on the cost borne to society through air pollution, carbon emissions and accidents) could lead to a decline in CO2 emissions by 23 percent globally. But currently, 15% of global CO2 emissions receive an incentive of $110 per tonne in the form of fossil-fuel subsidies and at the same time only 8% are subject to a carbon price.
Some countries spend more on fossil-fuel subsidies than health or education. Fossil-fuel subsidies are a poor social welfare policy and counter-intuitively tend to benefit wealthier consumers.
Fossil fuel subsidies are failing as a social welfare policy tool in that they do not benefit the poor and are often regressive in nature (only 8% of the subsidy typically reaches the poorest income group).
Subsidies are often socially regressive and tend to disproportionately benefit wealthier consumers. In 2010, 92% of fossil fuel consumption subsidies were picked up by the top four quintiles of society contrary to often stated subsidy policy objectives . Reducing fossil fuel subsides would free up resources for other sustainable development goals, including investments in health, education, and targeted social welfare systems.
Fossil-fuel subsidies hold us back from a low carbon future and lock us into a high carbon one. Reform levels the playing field for clean and renewable energy solutions.
Fossil-fuel subsidies lock us into a high-carbon energy world. By keeping prices to consumers artificially low, these subsidies disadvantage renewable energy and drain scarce public resources that could be better spent on creating a more sustainable future.
Today the energy playing field it is far from level. $548 billion of fossil-fuel subsidies in 2013 is around four times the level of total financial support to renewable energy ($121 billion). Around 15% of global CO2 emissions receive an incentive of $110 per tonne in the form of fossil-fuel subsidies, with only 8% subject to carbon pricing.
On a global scale low-carbon technologies and energy pathways will struggle to compete on price when pitched against such levels of entrenched and ongoing state support. Removing subsidies to fossil fuels is one of the keys to opening the door on a low-carbon future.
Phasing out subsidies promotes more energy efficient consumption, thereby curbing the growth in global energy demand.
For concrete examples of fossil fuel subsidy reform click here.