Read Full Post Here

KATOWICE, December 11, 2018 – A cohort of government officials kick off a virtual, international hub today dedicated to understanding fossil fuel subsidies in order to accelerate their phase-out and meet the Paris Agreement.

Officially launched at COP 24 in Poland, the Friends’ Network – led by the Friends of Fossil Fuel Subsidy Reform – brings together 20 country representatives from around the world to share lessons, knowledge, and experiences for successfully implementing fossil fuel subsidy reform (FFSR) by encouraging innovative, tried and tested solutions. Hosted by IISD’s Global Subsidies Initiative, participants took part in five virtual round tables during the past year addressing a variety of challenges related to the reform and taxation of fossil fuels.

“Subsidies to fossil fuels still remain incredibly high at around 400$ billion. These subsidies take us in the opposite direction of the Paris Agreement,” said Kimmo Tiilikainen, Minister of Environment, Finland. “The resources used for fossil fuel subsidies should be redirected to supporting access to clean energy and enabling a fair transition”.

According to the Intergovernmental Panel on Climate Change,temperatures are on track to rise above 1.5degC – the internationally agreed threshold set by scientists to limit climate change impacts. Figures from the International Energy Agency also show an increase in fossil fuel subsidies in 2017, and a high risk of backsliding on energy sector reforms from previous years.

“We must learn from each others’ successes, to enable smooth policy changes and reforms towards adequate pricing of fossil fuels, taking into account the needs of all, with special consideration of the most disadvantaged groups,” said Marc Chardonnens,State Secretary for the Federal Office for the Environment, Switzerland. “This Network shares lessons between countries and to identify, what works, and what doesn’t.”

Eliminating fossil fuel subsidies by making finance flows consistent with low greenhouse gas emissions is a key area outlined in the Paris Agreement that could help contain global temperature rise. Emission reductions from FFSR alone represent a quarter of all countries pledged efforts towards the Agreement.

The momentum to accelerate the ongoing energy transition is clear, and as governments work to phase out fossil fuel subsidies, sharing experiences between countries is more important than ever.

“Experiencing price increases in Zambia has been tough especially for low income earners who have felt the impact through a higher cost of living,” said Kangwa Muyunda, Assistant Policy Analyst with CUTS Lusakain Zambia. Support like this helps governments to do the right thing and invest in social safety nets and low-carbon energy with the savings from reforms.”

For media inquires,please contact Ziona Eyob, Media and Communications Officer zeyob@iisd.ca

About the Friends of Fossil Fuel Subsidy Reform: Set up in June 2010, the “Friends” is an informal group of non-G20 countries aiming to build political consensus on the importance of FFSR. Members of the group include Costa Rica, Denmark, Ethiopia, Finland, New Zealand, Norway, Sweden,Switzerland and Uruguay. Learn more at www.fffsr.org

About the IISD Global Subsidies Initiative: The International Institute for Sustainable Development (IISD) is an independent think tank championing sustainable solutions to 21st century problems. The Global Subsidies Initiative supports international processes, national governments and civil society organizations to align subsidies with sustainable development. Learn more at www.iisd.org/gsi

2017 was an important year for the linkages between fossil fuel subsidies and trade. The year concluded with the presentation of a Ministerial Statement at the World Trade Organization’s (WTO) Eleventh Ministerial Conference (MC11) in Buenos Aires, endorsed by 12 members. The statement asked to “advance discussion in the World Trade Organization aimed at achieving ambitious and effective disciplines on inefficient fossil fuel subsidies that encourage wasteful consumption.”

As we look to build upon the statement in 2018 and 2019, we see that, at the centre of WTO legitimacy is the notion of “trade impacts.” Policies that have clear and adverse trade impacts find their way onto the WTO agenda, while others struggle. So far, fossil fuel subsidies have struggled to reach the WTO agenda. This is not because there are no trade impacts, nor because they might not be averse, but more because they are unidentified, complex or not easily understood.

To improve our understanding of the trade impacts of fuel subsidies, the Geneva-based Global Subsidies Initiative (GSI) of the International Institute for Sustainable Development (IISD) and the Centre for Trade and Economic Integration (CTEI) of the Graduate Institute for International and Development Studies (IHEID) convened a research workshop on October 5, 2018.

“I am not optimistic. I am not pessimistic. I am determined” – Ambassador Walker

Fossil fuel subsidies have struggled to reach the WTO agenda not only because of a lack of clarity, but also because of differentiated interests between energy importers and exporters. This has caused some pessimism about whether fuel subsidies can ever reach the WTO’s core negotiations. Ambassador Walker of New Zealand opened the workshop by communicating his and others’ determination to advance the need to address fossil fuel subsidies in the WTO. He invited research on trade impacts to facilitate this process.

The first collection of research on trade impacts was provided by both academic and institutional researchers. Researchers affiliated with the Organisation for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF), the World Bank and the United Nations Framework Convention on Climate Change (UNFCCC) presented research on trade impacts, indicating their clear support for the WTO to play a more active role.

In addition, academic researchers from the Oxford Institute for Energy Studies, Victoria University, Columbia University, International Food Policy Research Institute (IFPRI) and the Graduate Institute of International and Development Studies introduced novel academic research into fuel subsidy trade impacts. They suggested the potential of using computable general equilibrium (CGE) models, input–output tables, regression analysis and spatial difference-in-difference models to better unveil clear fossil fuel subsidy trade impacts.

JUST A BEGINNING, A NEW RESEARCH COMMUNITY IS FORMED

There was a consensus among researchers that the trade impacts of fuel subsidies are prolific. The research results from this workshop will be compiled in a special issue of World Trade Review, an independent journal established at the initiative of the Secretariat of the World Trade Organization.

But this is only the beginning. The research consortium identified the need for more modelling to unravel and measure the actual effects on trade. This would include a better integration of the CGE research community. The group suggested beginning with the fossil fuel subsidies with the worst trade impact. They also indicated the desire to complement quantitative research with a political economy angle. Right now, vested interests are keeping fuel subsidies out of the WTO, so it is deemed necessary to understand these interests better.

Finally, this new research community asserts that trade impact work needs to support the SDG 12.c target of fuel subsidy reform. As such, they want to clearly distinguish fuel subsidies according to different categories (e.g., fuel, electricity) and sectors (e.g., industrial energy, producer subsidies). GSI is keen to support this new research community and will integrate their advice into an action plan to reform fossil fuel subsidies within the WTO.

The message is clear. The latest report from the Intergovernmental Panel on Climate Change (IPCC) about the current ambition under the Paris Agreement and Nationally Determined Contributions (NDCs) says the world isn’t doing enough and isn’t doing it fast enough:

Pathways reflecting these ambitions would not limit global warming to 1.5°C, even if supplemented by very challenging increases in the scale and ambition of emissions reductions after 2030 (high confidence). Avoiding overshoot and reliance on future large-scale deployment of carbon dioxide removal (CDR) can only be achieved if global CO₂ emissions start to decline well before 2030 (high confidence). (Summary for Policy Makers, p. 24)

To stand a chance of limiting warming to 1.5 degrees, we need a systems change, and we need it fast. By 2030, global emissions need to decline by about 45 per cent from 2010 levels. Waiting means we will have a high overshoot above 1.5°C, with dangerous consequences.

Limiting the risks from global warming of 1.5°C in the context of sustainable development and poverty eradication implies system transitions that can be enabled by an increase of adaptation and mitigation investments, policy instruments, the acceleration of technological innovation and behaviour changes (high confidence). (Summary for Policy Makers, p. 29)

The global energy system plays a pivotal role. In all scenarios, fossil fuels need to be dramatically reduced. Scenarios show the importance of removing emissions from fossil fuels and industry . This is much higher than the smaller contributions of bioenergy with carbon capture and storage and removals in agriculture, forestry and other land use (see p.19 of the Summary for Policy Makers).

Fiscal policies are another important piece of the puzzle. The IPCC report explains how no single policy, including carbon pricing or fossil fuel subsidy reform (FFSR), will work alone. But fiscal policies such as FFSR or taxation would create the necessary enabling environment (“lubricant”) for other low-carbon policies to take off. The IPCC report highlighted carbon pricing, fossil fuel taxation and FFSR to reduce emissions in Chapter 4, Strengthening and Implementing the Global Response. This includes shifting the finance, putting in place the policies to direct the shift and encouraging populations to respond: low-carbon energy and energy efficiency need to increase.

At the moment, we are still headed in the wrong direction on too many fronts. Research from the International Energy Agency (IEA) estimated that, in 2014, 13 per cent of energy-related carbon dioxide emissions came from subsidized fossil fuels. For these emissions, governments are paying the equivalent of USD 115 per tonne of carbon dioxide emitted in subsidies! This is the opposite of a carbon tax and the equivalent of paying people to smoke. The IPCC report included that “in 2016 only 15% of global emissions are covered by carbon pricing, three-quarters of which prices below 10 USD tCO₂^-1 (World Bank, 2016)” (p. 92). Work from the International Monetary Fund (IMF) is also cited regarding fossil fuel subsidies: “Estimated at 650 billion USD in 2015 (Coady et al., 2017), they represent 25–30% of government revenues in forty (mostly developing) countries (IEA, 2014b)”. (Chapter 4, p.92)

It’s time to turn around quickly. Removing subsidies and taxing carbon can go a long way. Research from earlier this year shows how FFSR, could deliver carbon emission reductions of between 0.5 and 2 Gt, or between 1 and 4 per cent, globally by 2030. This is around a quarter of the combined effort currently proposed by countries for emissions reductions from fossil fuels and industry as part of the Paris Agreement. Like the IMF, this research also found that, without reform, fossil fuel subsidies would reach between USD 550 billion and 970 billion in 2030, or 1 per cent of world GDP. This is a huge lost opportunity for governments. Governments can save money and reduce emissions by removing subsidies to fossil fuels.

Many countries are indeed reforming subsidies. There is an opportunity to include FFSR in the next round of NDCs to increase ambition. Currently only 9 per cent of NDCs include FFSR or energy pricing.

In the short term, there are emissions reductions and budgetary savings from removing subsidies or increasing taxes on fossil fuels. At the same time, governments need to shift energy policy and direction toward low-carbon energy pathways. Recent work by the Global Subsidies Initiative of IISD has shown how reforming subsidies to fossil fuels can enable a switch to renewable energy to get onto a different energy path. Shifting funds saved from FFSR into renewables, energy efficiency and public transport can accelerate the energy transition, for example in India (with a shift from kerosene subsidies to solar ones), Indonesia (between coal and renewables), Morocco (from gas to solar), Bangladesh (toward solar power and safety nets) and Zambia (reforms alongside industrial energy efficiency). Indeed, any country reforming subsidies to fossil fuels could make this swap.

With a big focus on shifting investments toward adaptation and mitigation, governments could start with where they have the most control and where they can benefit most from savings. Actively changing policy and directing those energy subsidies away from fossil fuels and toward sustainable energy could shift us onto energy pathways consistent with staying within 1.5°C.

The question is: what are we waiting for?

• The IPCC report is available to download here.
• More information on the climate impacts of fossil fuel subsidies is available on producer subsidies here and on consumer subsidies here.

On July 18, 2018, we presented a side event at the UN High Level Political Forum (HLPF), “Leadership on fossil fuel subsidy reform for sustainable energy access and poverty reduction”

The side event was organized by New Zealand on behalf of the Friends of Fossil Fuel Subsidy Reform (“Friends”),  with Finland, Switzerland, Sweden and Norway as co-organizers. IISD’s Global Subsidies Initiative coordinated the event.

This side event presented opportunities for financing and delivering the SDGs through fossil fuel subsidy reform, with a focus on sustainable energy access. Speakers presented replicable strategies for fossil fuel subsidy reform with high benefits for poverty reduction, gender and the SDGs. These strategies include better targeting of subsidies and subsidy “swaps,” which entail shifting fossil fuel subsidies toward sustainable energy solutions like renewable energy and energy efficiency, as well as investments in public transport. The event also saw the launch of a report on the interlinkages between energy access and fossil fuel subsidies.

IISD RS Video Coverage

• Publication: Getting on Target: Accelerating energy access through fossil fuel reform
• Guest Article on IISD SDG Knowledge Hub
• IISD RS Coverage of the Side Event on Fossil Fuel Subsidy Reform 
• SDG Knowledge Hub coverage of fossil fuel subsidy reform news and events