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

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.

Viet Nam joined the international Fossil-Fuel Subsidy Reform Communiqué. Viet Nam joins over 40 countries and organisations representing thousands of businesses behind the international Fossil-Fuel Subsidy Reform Communiqué that calls for increased transparency, ambition and targeted support towards reform of subsidies towards fossil fuels. Vietnam has been reforming fossil fuel subsidies that totalled 3.4% of GDP in 2011 or almost 7% of the state budget in 2010. Viet Nam is also undergoing a voluntary peer review of fossil fuel subsidies and is hosting APEC Leaders in November 2017.

The reform of fossil fuel subsidies has been included as part of APEC commitments since 2010, most recently from the Peru Leaders’ summit in 2016 which reaffirms APEC’s commitment to ‘rationalizing and phasing out inefficient fossil fuel subsidies which encourage wasteful consumption, while still providing essential energy services…’ as well as expressing ‘appreciation to the economies that have volunteered to undergo a voluntary inefficient fossil fuel subsidy peer review in APEC and the G20’ with further encouragement to ‘more economies to participate in peer review.’ A Guide-book for policy makers on self and peer review of fossil fuel subsidies with examples from Friends countries such as Sweden, Finland and New Zealand is now available for download here.

BONN – 11 May 2017 – A new report from the Nordic Council of Ministers finds that redirecting fossil fuel subsidies toward the clean energy transition could help climate vulnerable countries reap major savings while slashing greenhouse gas emissions. The report was launched at an event hosted by the Friends of Fossil Fuel Subsidy Reform and held at the Bonn Climate Change Conference.

The study by the International Institute of Sustainable Development (IISD) Global Subsidies Initiative (GSI) and Gaia Consulting is entitled “Making the Switch: From Fossil Fuel Subsidies to Sustainable Energy.” Based on this study, countries already undergoing energy reforms (like Bangladesh, Indonesia, Morocco and Zambia) would especially benefit from SWAPs—the transfer of funds that normally go towards fossil fuel subsidies into sustainable energy investment, such as renewable energy and energy efficiency. The report includes examples of how Nordic countries have managed this switch.

Fossil fuel subsidies are a cost that governments can no longer afford to ignore from both economic and social perspectives. Global subsidies to both consumers and producers of fossil fuels are reported at USD 425 billion in 2015. Research estimates suggest that removing all consumer fossil fuel subsidies would decrease global carbon emissions anywhere between 6.4–8.2 per cent by 2050. By reinvesting these savings into renewable energy, energy efficiency, education, health care, and targeted social protection schemes for adaptation to climate change, countries have major opportunities to support the delivery of the both the Paris Agreement and the Sustainable Development Goals

The event to launch the report was moderated by Karoliina Anttonen, Ministry of Environment, Finland, and focused on how governments can scale up investments in green energy by “making the switch” from fossil fuel subsidies to sustainable energy subsidies.

Highlighting the climate change mitigation, clean air and health benefits of fossil fuel subsidy reform, Hans Jakob Eriksen, Ministry of Energy, Utilities and Climate, Denmark, launched the report ‘Making the Switch from Fossil Fuel Subsidies to Sustainable Energy,’ funded by the NCM. He underlined that, in an “ideal world,” fossil fuel subsidies would be removed and reallocated to renewable energy and energy efficiency measures. He noted the feasibility of introducing reforms now, while oil prices are low.

Kindy Syahrir, Ministry of Finance, Indonesia, noted that fossil fuel subsidies in his country currently represent just one tenth of what they used to be before reforms began in 2015. He underscored how the relevant funding is better spent on renewable energy, green infrastructure, health, education and other social programmes.

(L-R): Oras Tynkkynen, Sitra; Mikko Halonen, Gaia Consulting; Hans Jakob Eriksen, Ministry of Energy, Utilities and Climate, Denmark; Laura Merrill, GSI, IISD; Kindy Syahrir, Ministry of Finance, Indonesia; and Karoliina Anttonen, Ministry of Environment, Finland Photo IISD ENB

Laura Merrill, Senior Researcher and Operations Manager with IISD explained how “Current subsidies to fossil fuel subsidies from governments are worth around half the funding needed to bridge the global energy access gap, double renewable energy and energy efficiency rates by 2030,” said. “These subsidies are also three times higher than current global renewable energy subsidies, and continue to distort energy markets. Reform would create a level energy playing field for renewable energy takeoff and for energy efficiency to add up. Savings made by governments from removing subsidies to fossil fuels can be redirected or swapped to help fund a clean and just energy transition.”

Oras Tynkkynen, Sitra, outlined findings by the Finnish innovation fund that scaling up existing solutions in both the global North and South could dramatically cut global greenhouse gas emissions. He said that the necessary investments could be financed by diverting “a fraction” of fossil fuel subsidies and invited interested countries to get in touch to explore the potential of existing climate solutions in their national contexts. 

Noting that public finance needs to be used very efficiently, Mikko Halonen, Gaia Consulting, noted efforts by Nordic countries to operationalize and mobilize climate finance by facilitating investments through de-risking and enhancing the bankability of climate projects.

In the ensuing discussion, participants raised, inter alia: the relevance of fossil fuel subsidy reform in the redesign of countries’ Nationally Determined Contributions (NDCs); the need for a “vocabulary shift” that does not only emphasize fossil fuel subsidy reform, but also a reallocation of funds to finance sustainable development objectives; and challenges in defining “subsidies,” and what constitutes an “inefficient” subsidy. Participants also highlighted: “rent-seeking” with regard to fossil fuel subsidy policies; “the elephant in the room” of political economy; the need for a carbon price; and the need to take into account political realities and alignments in order to achieve successful reform.

To download a copy of the report please click here. 

Infographics are available here. 

Full report and pictures of the event are available from IISD ENB here.

Video of the event is available here in English and French.

(Spanish version follows the English version below)

The representatives of Costa Rica, Denmark, Finland, New Zealand, Norway, Switzerland and Sweden show their support to Mexico in efforts to tackle current government subsidies to fossil fuels, focusing now on gasoline and diesel for transportation. While reform is never easy, Mexico has recognized that the conditions both nationally and internationally provide a favorable context for reform.

Over 40 countries, including Mexico, recognized the importance of reforming subsidies to fossil fuels by endorsing an international Communiqué launched in 2015 by a group of countries called the Friends of Fossil Fuel Subsidy Reform. It calls for a transparent, ambitious and well-supported reform of fossil fuel subsidies. The G20, including Mexico, recognized the need to reduce and reform inefficient subsidies to fossil fuels so as to improve government bank balances, provide government resources to invest in social protection schemes for the poor, and increase efficiency and investment within the energy system. The Paris Agreement which entered into force in November 2016, was adopted by consensus by 195 member countries at the United Nations Framework Convention on Climate Change and sets out a global action plan to attempt to prevent dangerous climate change by limiting global warming to below 2°C. Actions to limit global warming include the reduction or elimination of the use of fossil fuels.

Mexico is not alone in undergoing fossil fuel subsidy reform. 50 countries underwent similar reforms in the last two years, including large economies such as Indonesia and India. All of them took the opportunity of the current low oil price to link their energy prices to world prices. Countries increasingly recognize that fossil fuel subsidies are a poor social welfare policy in that the majority of benefits go to the rich, rather than to the poor. Subsidy reform needs to be undertaken alongside measures that properly protect the poor and vulnerable groups from the impact of higher energy prices.

For example, Indonesia was able to save around USD 15 billion through a combination of fossil fuel subsidy reforms (removing significant gasoline and diesel subsidies). Savings were spread across government ministries, enterprises, regions and villages and aimed at programmes linked to poverty eradication, human development and infrastructure development.

Recent pricing reforms in India, mainly to gasoline and diesel also cut the country’s subsidies bill by USD 15 billion, and subsidy reforms have enabled the parallel implementation of one of the largest cash transfer programmes in the world.

An important step to reforming subsidies to fossil fuels is to understand the scale and nature of them through a thorough review. Mexico and Germany, as G20 countries, are undergoing such a review via a peer-to-peer process. These follow on from China and the US who together, last year identified over USD 20 billion of subsidies to fossil fuels and identified plans to reform these. Peru volunteered to undergo a peer review of its fossil fuel policies by the APEC Peer Review Panel. In order to mitigate the effects on vulnerable groups, the government introduced a cook stove distribution programme (LPG and biomass), introduced an LPG voucher scheme, and expanded an existing conditional cash transfer programme.

Reform of course presents challenges. For example, the Philippines tried to reform subsidies three times in the 1990’s before eventually succeeding. Its package of measures included developing a national social safety net and investing in renewable energy. The Philippines example, and the many other experiences across the world, show that reform can be successfully undertaken using established practices. Key among these are that the poor and other vulnerable groups are safeguarded, that the pace of reform is ideally gradual and that savings are used to support national development goals.

Many countries including Mexico have understood that today’s low oil prices present an opportunity for reform of their fossil fuel subsidies. These reforms result in savings that can be used to build better social protection schemes and more efficient and cleaner energy systems.

We the undersigned country representatives strongly support Mexico’s and other countries’ efforts to reform fossil fuel subsidies and we strongly encourage these reforms to be undertaken according to the three basic principles outlined in the international Communiqué: increased transparency around fossil fuel subsidies; ambitious reform; and targeted support to ensure reforms are implemented in a manner that safeguards the poorest.

Los representantes de Costa Rica, Dinamarca, Finlandia, Noruega, Nueva Zelanda, Suecia y Suiza muestran su apoyo a México en sus esfuerzos por abordar los actuales subsidios gubernamentales a los combustibles fósiles, centrándose en la gasolina y el diésel para el transporte. Si bien la reforma nunca es fácil, México ha reconocido que las condiciones tanto a nivel nacional como internacional proporcionan un contexto favorable para la reforma.

Más de 40 países, entre ellos México, han reconocido la importancia de reformar los subsidios a los combustibles fósiles mediante el respaldo de un Comunicado internacional (el “Communiqué”) lanzado en 2015 por un grupo de países llamado Amigos de la Reforma de Subsidios a los Combustibles Fósiles. Este grupo pide que la reforma de los subsidios a los combustibles fósiles sea transparente, ambiciosa y esté bien respaldada. El G20, entre ellos México, ha reconocido la necesidad de reducir y reformar los subsidios ineficientes a los combustibles fósiles para mejorar los saldos financieros del gobierno, proporcionar recursos gubernamentales para invertir en planes de protección social para los pobres y aumentar la eficiencia e inversión dentro del sistema energético. El Acuerdo de París, que entró en vigor en noviembre de 2016, fue adoptado por consenso por 195 países miembros de la Convención Marco de las Naciones Unidas sobre el Cambio Climático y establece un plan de acción mundial para prevenir el cambio climático peligroso, limitando el calentamiento global a menos de 2°C. Las acciones para limitar el calentamiento global incluyen la reducción o la eliminación del uso de combustibles fósiles.

México no es el único país en someterse a la reforma de los subsidios a los combustibles fósiles. 50 países experimentaron reformas similares en los últimos dos años, incluyendo grandes economías como Indonesia e India. Todos ellos aprovecharon la oportunidad del actual bajo precio del petróleo para vincular sus precios de la energía a los precios mundiales. Los países reconocen cada vez más que los subsidios a los combustibles fósiles son una política deficiente de bienestar social, ya que la mayoría de los beneficios se destinan a los ricos y no a los pobres. Es necesario emprender una reforma de la subvención acompañada de medidas que protejan adecuadamente a los grupos pobres y vulnerables del impacto causado por la subida de los precios de la energía.

Por ejemplo, Indonesia pudo ahorrar alrededor de 15 mil millones de dólares americanos a través de una serie de reformas de los subsidios a los combustibles fósiles (eliminando importantes subsidios a la gasolina y al diésel). Los ahorros se distribuyeron entre los ministerios, las empresas, las regiones y las aldeas, y se dirigieron a programas relacionados con la erradicación de la pobreza, el desarrollo humano y el desarrollo de infraestructuras.

Las recientes reformas de precios en la India, principalmente de gasolina y diésel, también redujeron la factura de subsidios del país en 15 mil millones de dólares americanos, y las reformas de subsidios han permitido la implementación paralela de uno de los mayores programas de transferencia de efectivo en el mundo.

Un paso importante para reformar los subsidios a los combustibles fósiles es entender la escala y la naturaleza de los mismos a través de una revisión exhaustiva. México y Alemania, como países del G20, están siendo sometidos a una revisión de este tipo a través de un proceso “peer-to-peer”. Estos países siguen a China y Estados Unidos, quienes el año pasado identificaron más de 20 mil millones de dólares americanos de subsidios a combustibles fósiles así como planes para reformarlos. Perú se ofreció voluntariamente a someterse a una revisión por pares de sus políticas de combustibles fósiles por el Panel de Revisión por Pares del Foro de Cooperación Económica en Asia y el Pacífico (APEC). Con el fin de mitigar los efectos sobre los grupos vulnerables, el gobierno introdujo un programa de distribución de cocinas (GLP y biomasa) y un sistema de vales GLP, y amplió un programa de transferencia de efectivo.

Es por supuesto que la reforma presenta retos. Por ejemplo, Filipinas intentó reformar las subvenciones tres veces en la década de los 90 antes de finalmente tener éxito. Su paquete de medidas incluía el desarrollo de una red nacional de seguridad social y la inversión en energía renovable. El ejemplo de Filipinas, así como el de muchas otras experiencias en todo el mundo, muestran que la reforma puede llevarse a cabo con éxito utilizando prácticas establecidas. Es fundamental que estas prácticas incluyan: la protección a los pobres y otros grupos vulnerables, un ritmo de reforma idealmente gradual y la utilización de los ahorros para apoyar a los objetivos de desarrollo nacional.

Muchos países, incluyendo a México, han comprendido que los actuales bajos precios del petróleo presentan una oportunidad para la reforma de sus subsidios a los combustibles fósiles. Estas reformas generan ahorros que pueden utilizarse para construir mejores sistemas de protección social y sistemas energéticos más eficientes y más limpios.

Nosotros, los representantes de los países abajo firmantes, apoyamos firmemente los esfuerzos llevados a cabo por México y otros países para reformar los subsidios a los combustibles fósiles, y alentamos firmemente que estas reformas se realicen de acuerdo con los tres principios básicos del Communiqué: mayor transparencia en torno a los subsidios a los combustibles fósiles; ambición en la reforma; y apoyo específico para asegurar que las reformas se implementen de una manera que proteja a los más pobres.