Globally, governments spend around USD 400 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 in areas such as health, education, public welfare and low-carbon energy pathways.
The scale of subsidies for fossil fuels is massive. In 2017, the International Energy Agency (IEA) estimates that consumer subsidies alone amount to USD 300 billion annually. This is equivalent to twice the level of official development assistance aid from Organisation for Economic Co-operation and Development countries in 2017 (USD 153 billion) or more than twice the level of total financial support to renewable energy (USD 143 billion). For 2018, the IEA has estimated a further increase in consumer subsidies, up to more than USD 400 billion, reflecting the higher price of fuels in the international market.
Subsidies 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 can also 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 per cent 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. For instance, the reform of fossil fuel subsidies could finance the global energy access funding gap 7.5 times over.
Fossil fuel subsidy reform (FFSR) is the missing piece of the climate change puzzle. The elimination of fossil fuel subsidies would make a significant contribution to the goal of limiting temperature increase to 1.5°C above pre-industrial levels, and well below more than 2°C.
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 in terms of air pollution, carbon emissions and accidents. A government shift from subsidizing to taxing fossil fuels means they cease being a drain on fiscal revenues and become an earner of them. Savings from FFSR can go toward cash transfers to reduce poverty; sustainable energy for all can 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 to productive sectors of the economy.
FFSR also has the important co-benefit of reducing carbon emissions and therefore helping to achieve the Paris Agreement climate targets. One study estimates that FFSR could lead to carbon emission reductions equivalent to a quarter of the combined effort currently proposed by countries as part of the Paris Agreement. A review of 60 publications found global emission reductions of between 6 and 8 per cent by 2050 from the removal of fossil fuel subsidies. The Global Subsidies Initiative (GSI) estimated that, if a modest part of the savings from the FFSR was also invested in renewables and energy efficiency, emission reduction gains would be magnified.
The IMF estimates that taxing fossil fuels correctly (based on the cost borne to society through air pollution, carbon emissions and accidents) could lead to a decline in carbon dioxide emissions by 23 per cent globally. However, the IEA found that, in 2014, 13 per cent of global carbon dioxide emissions received an incentive of USD 115 per tonne in the form of fossil fuel subsidies while only 11 per cent are subject to a carbon price, with an average cost of only USD 7 per tonne of carbon dioxide.
Some countries spend more on fossil-fuel subsidies than on health or education. Fossil fuel subsidies are a poor social welfare policy that, counter-intuitively, tend to benefit wealthier consumers. An IMF study showed that, on average, the top quintile of households benefits more than six times more than the bottom quintile from fuel subsidies. Gasoline subsidies are especially regressive, with more than 80 per cent going to the top two quintiles of society.
Reducing fossil fuel subsides would free up resources for other sustainable development goals, including investments in health, education and targeted social welfare systems. In addition, FFSR can have impacts on gender: when well-targeted and well-distributed, subsidies are likely to foster gender empowerment and improve living conditions for poor women.
4 Low-carbon future
Fossil fuel subsidies hold us back from a low-carbon future and lock us into a high-carbon one. 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.
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 to a low-carbon future.
Furthermore, part of the savings from FFSR can be redirected toward renewable energy, energy efficiency or public transport, promoting a transition to clean energy forms and helping with national goals toward meeting the Paris Agreement and the Sustainable Development Goal targets. This transfer is called a subsidy swap.
5 Energy security
Phasing out subsidies promotes more energy-efficient consumption, thereby curbing the growth in global energy demand. In addition, shifting subsidies to renewable energy technologies for energy access and energy efficiency can support households and improve the sustainability of energy access.
For concrete examples of fossil fuel subsidy reform click here.