Reforming fossil fuel subsidies requires a new approach to setting international commitments

This paper explores how the global climate regime established by the UNFCCC has governed, and could govern, fossil fuel subsidies. It begins by reviewing the literature documenting the relationship between fossil fuel subsidy (reform) and climate change (mitigation), which reveals not only that there is increasing evidence of the impacts of fossil fuel subsidies on greenhouse gas emissions, but also that efforts to reform subsidies can yield important climate change mitigation benefits. The paper then moves on to discuss how parties to the UNFCCC have by and large sought to avoid addressing fossil fuel subsidies directly, notwithstanding efforts by some parties. Although this could lead one to conclude that the global climate regime has had no discernible influence on fossil fuel subsidy reform at the national level, the paper moves on to discuss the various ways in which the UNFCCC can exert influence on fossil fuel subsidy reform in the future. The paper concludes that even though the role of the UNFCCC in the broader regime complex for fossil fuel subsidies may be constrained, it can nevertheless be an important complementary venue for promoting fossil fuel subsidy reform by: (i) increasing the reputational costs of not following through on voluntary pledges to reform subsidies; (ii) improving transparency around fossil fuel subsidies; (iii) changing incentive structures by providing financial support; (iv) strengthening an emerging international social norm on fossil fuel subsidy reform; and (v) offering a platform for inter-country learning.

As fossil-fuel subsidy reform moves higher up countries’ energy and climate change agendas – the G-20 and APEC have recently taken commitments to phase out fossil-fuel subsidies, countries such as Indonesia, India and Iran are attempting to reduce their subsidy burden, and organizations like the OECD, IEA, World Bank and IMF are refocusing on the topic – there remains the question: what role can international fora such as the WTO, UNFCCC, and international collaboration more generally, play? International collaboration and agreement can provide essential support to national efforts to reform fossil-fuel subsidies. In addition to supplying political legitimacy and peer pressure, it can also offer research and technical assistance, sharing of information and best practice, establishment of rules, financial support and promoting increased accountability. The WTO (World Trade Organisation), with its Agreement on Subsidies and Countervailing Measures, would seem to be the obvious first choice. However much work needs to be done prior to introducing new negotiations to the WTO – gathering information, building consensus, and in the case of energy subsidies, obtaining a mandate to negotiate disciplines that reach beyond the trade impacts. Immediate action could see improvements to WTO members’ reporting on subsidies, however with the Doha Round seemingly at a stand-still, the outlook for negotiations on fossil-fuel subsidy disciplines can only viably be a longer-term goal. The good news is there are other opportunities that can and should be taken advantage of in the meantime. Fossil-fuel subsidy reform is one national action that could have significant and multi-faceted impacts for addressing global climate change – driving down emissions and opening investment pathways for renewable energies. The UNFCCC may be struggling to define its post-Kyoto architecture but there is nothing stopping it from recommending specific non-binding measures that developed countries should take, with clear attractions compared to making a whole new agreement. Discussions around developing countries all suggest that their commitments are likely to based around their policies. Whether these are defined as nationally appropriate mitigation actions (NAMAs) or otherwise, subsidy reform seems a perfect fit and could be supported technically or financially by the developed world. The UNFCCC might be moving slowly towards a full agreement but we could envisage quick progress on more specific, voluntary actions, potentially even in the build-up to Cancun this December. The G-20 and APEC are already leading the way, having taken commitments to phase out and rationalize inefficient fossil-fuel subsidies that encourage wasteful consumption. The G-20 lacks a secretariat for supporting ongoing research and technical assistance, or monitoring progress on the phase out of members’ subsidies, however APEC may be able to fill some of these functions for its members. Country champions are picking up the torch with a newly-formed Friends of Fossil-Fuel Subsidy Reform group, led by New Zealand which includes Denmark, Norway, Sweden and Switzerland, with membership from developing countries still to be confirmed. As momentum for national fossil-fuel subsidy reform picks up, countries will look increasingly to the international community for support. This paper takes a detailed look at the opportunities, strengths and weaknesses of progressing fossil-fuel subsidy reform within the WTO, UNFCCC and under the G-20’s political leadership, and concludes that a collaborative approach between a range of organisations is needed, with country champions driving the process. The paper outlines a roadmap over the next 12 months, 1-3 years and the longer term for increasing international cooperation, and preparing the path to a multilateral agreement on fossil-fuel subsidy reform.

ABSTRACTFossil fuel subsidy reform(s) support the deployment of low‐carbon technologies, yet fossil fuel subsidies remain stubbornly high, while money allocated by governments to renewable energy continues to grow. In the transport sector, this tension is observed between biofuels that still rely on national policies and gasoline/diesel subsidies. Using a global Computable General Equilibrium (CGE) model, we study how phasing out gasoline and diesel subsidies would impact global biofuel mandates. We find that where they are implemented, Fossil Fuel Subsidy Reforms increase biofuel competitiveness and lower the cost of achieving the mandates. The fiscal benefit is therefore twofold with savings on fossil and bio‐based energy subsidies. In a multilateral reform scenario, we simulate the rise in fiscal revenue from phasing out the fossil fuel subsidies to be 25% higher when the avoided spending on biofuels' support is accounted for. In the rest of the world, however, the biofuel targets become costlier to achieve as the price of fossil fuels drops. Considering that global biofuel 2030 targets are achieved, governments' support for biofuel falls by $6 billion in regions phasing gasoline and diesel subsidies but increases by $600 million in the rest of the world.

At present, the scale of global subsidies for fossil fuels is still huge, and their energy, economic, environmental, and technological impacts cannot be ignored. This chapter reviews the previous literature to answer three questions: What are the impacts of fossil fuel subsidies? What are the benefits of reforms in fossil fuel subsidies? How can fossil fuel subsidy reforms be successfully implemented? Specifically, subsidies lead to excessive use of fossil fuels, resulting in wasted resources, increase the fiscal burden on governments and lead to smuggling of fossil fuels among some countries, are distributed unequally between rich and poor residents, increase emissions of carbon dioxide, and discourage the use and development of clean energy. Reforming fossil fuel subsidies might gradually mitigate the problems caused by subsidies. The increase in fuel prices after the removal of subsidies might enable more efficient use of fuels and affect a country’s gross domestic product, reducing the welfare of residents overall, but with a smaller effect on the interests of the poor than the rich, and affecting carbon emissions and promoting the development of clean energy. In the process of implementing subsidy reform, policymakers should pay attention to the method of reform. It is important to adjust subsidies based on local conditions, using cash transfer and other forms of compensation for residents, shifting to subsidies for clean energy, and gradually reducing subsidies of all types.

At present, the scale of global subsidies for fossil fuels is still huge, and their energy, economic, environmental, and technological impacts cannot be ignored. This chapter reviews the previous literature to answer three questions: What are the impacts of fossil fuel subsidies? What are the benefits of reforms in fossil fuel subsidies? How can fossil fuel subsidy reforms be successfully implemented? Specifically, subsidies lead to excessive use of fossil fuels, resulting in wasted resources, increase the fiscal burden on governments and lead to smuggling of fossil fuels among some countries, are distributed unequally between rich and poor residents, increase emissions of carbon dioxide, and discourage the use and development of clean energy. Reforming fossil fuel subsidies might gradually mitigate the problems caused by subsidies. The increase in fuel prices after the removal of subsidies might enable more efficient use of fuels and affect a country’s gross domestic product, reducing the welfare of residents overall, but with a smaller effect on the interests of the poor than the rich, and affecting carbon emissions and promoting the development of clean energy. In the process of implementing subsidy reform, policymakers should pay attention to the method of reform. It is important to adjust subsidies based on local conditions, using cash transfer and other forms of compensation for residents, shifting to subsidies for clean energy, and gradually reducing subsidies of all types.KeywordsFossil fuel subsidyReform policyResidential welfareCarbon dioxide emissionsClean energy

Fossil fuel subsidies are widespread in developing countries, where reform efforts are often derailed by disputes over the likely distribution of gains and losses. The impacts of subsidy reform are transmitted to households through changes in energy prices and prices of other goods and services, as well as through factor earnings. Most empirical studies focus on consumer expenditures alone, and computable general equilibrium analyses typically report only total effects without decomposing them by source. Meanwhile, analytical models neglect important open-economy characteristics relevant to developing countries. In this paper, we develop an analytical model of a small open economy with a preexisting fossil fuel subsidy and identify direct and indirect impacts of subsidy reform on real household incomes. Our results, illustrated with data from Viet Nam, highlight two important drivers of distributional change: (i) the mix of tradable and nontradable goods, reflecting the structure of a trade-dependent economy; and (ii) household heterogeneity in sources of factor income.

The paper uses social identity theory to assess South Korea’s lack of membership in the Friends of Fossil Fuel Subsidy Reform, a group of small states advocating for the global elimination of fossil-fuel subsidies. This paper asks whether South Korea would be a complement to the Friends group and whether joining the group would boost Korea’s international profile and middle power status. It subsequently tries to explain why Korea has yet to join the group. After a short introduction, the paper provides a general explanation of the need for fossil fuel subsidy reform. Section three introduces the concept of social creativity and argues that South Korea is embracing status-seeking behavior. Section four presents the Friends group and assesses South Korea as a complement to that group. Section five looks at the international prospects of subsidy reform from an institutional perspective and asks whether the Friends group or South Korea can potentially influence movement in subsidy reform. Section six argues that although South Korea seems an ideal fit to join the Friends group, South Korea has not joined for a number of reasons, including domestic economic constraints, considerations in bilateral relations and Korean preferences for certain institutional structures. Lastly, the paper concludes that status-seeking behavior has its limits, and although the Friends group would add little benefit to South Korea’s international profile, South Korea’s lack of membership in the group is a missed opportunity to further subsidy reform.

Transparency is the cornerstone of holding governments accountable for the ways in which they spend public money. As governments increasingly recognize that subsidizing fossil fuels undermines climate change, energy security and sustainable development objectives, good data and analysis will be vital for prioritising reform efforts and monitoring their effectiveness. This paper addresses the role that increased transparency could play in fossil-fuel subsidy reform and specifically asks what information and mechanisms are needed to support the G-20 and APEC calls for reform? As part of her analysis, Tara Laan considers the role of many of the inter-governmental and non-governmental organizations that currently contribute to the field and discusses options for developing a collaborative and comprehensive international system for evaluating and reporting fossil-fuel subsidies. The paper concludes that two track approach is necessary: domestic action to improve accounting and reporting, and international action to develop a new data gathering and management regime.

This study provides the first empirically-grounded assessment of how fossil fuel subsidies constrain renewable energy generation in Saudi Arabia. Leveraging an autoregressive distributed lag (ARDL) model with structural break testing (Zivot-Andrews) on 1995–2023 data—encompassing both the 2016 and 2018 subsidy reform waves—we quantify the dynamic interplay between fossil fuel subsidies and renewable energy generation. The current undertaking has unearthed that a 1% reduction in fossil fuel subsidies increases renewable energy generation by 6.45% in the short run and 9.94% in the long run, with economic diversification emerging as a statistically robust accelerant. These findings empirically validate that suppressing fossil fuel subsidies and reallocating investments via economic diversification are pivotal to unlocking Saudi Arabia’s renewable energy potential. The results we gleaned could prove substantially important to policymakers and stakeholders seeking to maximize fossil fuel subsidy reform benefits and strategically redirect resulting revenues to jump-start the renewable energy industry.

This article examines and critiques New Zealand’s role in international efforts towards the coordinated reform of fossil fuel subsidy practices, including through its leadership of the Friends of Fossil Fuel Subsidy Reform (FFFSR), a coalition of nine non-G20 countries who have formed an alliance in advancing international fossil fuel subsidy reform efforts. A particular aspect of New Zealand and FFFSR attention and strategy to date – a focus on fossil fuel consumption subsidies in developing countries – is assessed against principles of equity, “common but differentiated responsibilities and respective capabilities” and the duty of developed nations to “take the lead” on climate change mitigation. The article also explores arguments concerning the importance of supply-side climate mitigation measures and the need to take into account risks of stranded fossil fuel production assets in domestic climate change policies.

Impacts of increasing renewable energy subsidies and phasing out fossil fuel subsidies in China

Fossil fuel subsidies strain public budgets, and contribute to climate change and local air pollution. Despite widespread agreement among experts about the benefits of reforming fossil fuel subsidies, repeated international commitments to eliminate them, and valiant efforts by some countries to reform them, they continue to persist. This book helps explain this conundrum, by exploring the politics of fossil fuel subsidies and their reform. Bringing together scholars and practitioners, the book offers new case studies both from countries that have undertaken subsidy reform, and those that have yet to do so. It explores the roles of various intergovernmental and non-governmental institutions in promoting fossil fuel subsidy reform at the international level, as well as conceptual aspects of fossil fuel subsidies. This is essential reading for researchers and practitioners, and students of political science, international relations, law, public policy, and environmental studies. This title is also available as Open Access.

When in September 2009 the political leaders of the Group of Twenty (G20) nations issued a joint communiqué committing themselves to phasing out ‘inefficient fossil fuels that encourage wasteful consumption’, they were working with data from the International Energy Agency that related mainly to G20 and other countries that were not members of the Organisation for Economic Co-operation and Development (OECD). Estimates of fossil fuel subsidies provided by OECD countries had never been assembled. To fill that information gap, OECD staff sought and obtained permission to start identifying and compiling data on its own members’ subsidies in time for the G20 Leaders’ Summit in October 2011. That monitoring activity has continued since then, informing not only G20 discussions on fossil fuel subsidies, including in the context of peer reviews, but discussions in other international fora as well. This chapter describes the origins and evolution of that IO initiative.

Governments around the world continue to subsidize fossil fuel use, incentivizing unsustainable consumption levels with consequences for the global climate and human health. However, governments have proven reluctant to reform fossil fuel subsidies (FFS). This is mainly due to concerns over potential adverse effects on poverty and equity; the positive effects on air quality and health are often overlooked. This study offers new insights on the distributional consumption incidence of FFS reforms and expected benefits through improved air quality and health outcomes. Using the World Bank-International Monetary Fund Climate Policy Assessment Tool, we conduct country-level analyses of a complete removal of domestic FFS, considering 19 countries for the distributional consumption analysis, and 25 countries for the health benefits analysis. Our findings suggest that across countries, the absolute consumption burden of FFS reform on the richest decile would be 13 times larger than on the lowest-income decile, supporting evidence that FFS are an extremely inefficient way of supporting lower-income groups. In relative terms, however, the disparity is much smaller, with the richest decile bearing a relative consumption burden that is just 1.1 times larger than that borne by the lowest-income decile. In terms of positive health effects, removing FFS in 25 countries could save a total of 360,000 lives by 2035. The magnitude of the health effect depends on country-specific factors, such as the size of initial subsidy programs, and the extent to which these cover the most polluting fuels. FFS reforms can be a first step in improving air quality and reducing the burden of disease associated with air pollution.

Wind energy is an economically, technically, and environmentally attractive option due to its cheapness and availability in different regions. The most important obstacle to developing renewable resources in Iran is subsidies for fossil fuels. The Iranian government has recently decided to reduce subsidies for electricity and fossil fuels, which has led to an increase in the prices of fossil fuels and electricity and makes renewable technologies more attractive to use. This study uses a multi-criteria decision method to identify wind energy potential in Khuzestan province. A GIS is used to determine the wind energy potential in this province. The technical, environmental, and economic criteria, which are a total of 14 layers of information, were examined by considering different values for each and from a Boolean point of view. The results show that, from the economic point of view, Shadegan city has the most potential and, from the technical point of view, Khorramshahr city has the highest amount of electricity production through wind energy. Furthermore, Dasht-e Azadegan city, due to its population, can supply the maximum amount of electricity it needs through wind energy. Among the three 550, 2500, and 8000 kW turbines, the 550 kW turbine has the most potential in the region.