Countries eye COP29 finance deal while subsidising climate damage

• Fossil fuel subsidies at odds with phase-out pledges
• Rapidly cutting subsidies may have steep political costs
• Tangible support to communities and clear roadmap for reform key

DHAKA/BAKU - At the U.N. COP29 climate summit in Azerbaijan, one issue is dominating proceedings: money.

Countries are tasked with agreeing a new financial goal to help developing nations tackle climate change, a figure U.N. agencies say should reach $1 trillion a year by the end of the decade.

But governments are also spending trillions of dollars to support the production and use of fossil fuels, such as subsidising the cost of petrol at the pump, which are the primary drivers of the climate crisis. 

States spent more than $1.5 trillion subsidising fossil fuels like coal, oil and gas in 2022 alone, according to a report published in September by Earth Track, a U.S.-based research outfit tracking subsidies harming the environment.

In Brazil, the lion's share of government support goes to subsidising fossil fuels instead of renewable energy, said Helena Spiritus, the global lead, oil and gas transition for WWF.

"Fossil fuels keep going because of that and renewable energy doesn't have the same competitive advantage," she told Context at COP29.

Spiritus said that while COP29 negotiations may not explicitly mention subsidies, global efforts being discussed to transition away from fossil fuels, agreed at the last COP28 in Dubai, are impossible without shifting these payments.

There have already been a series of international pledges to phase out fossil fuels and subsidies incentivising them, including a series of statements at U.N. COP meetings.

The G20 group of countries meeting in Rio de Janeiro this week recommitted to phasing out "inefficient" subsidies in a leaders' declaration, a pledge it first made in 2009.

But actual global progress has been limited. Subsidies remain stubbornly high and cutting them is not easy politically, as consumers rely on them.

G20 nations spent nearly $1 trillion on fossil fuel subsidies for consumers in 2022, according to another analysis by the International Institute for Sustainable Development (IISD).

Governments from the Global South are also following suit, spending an average of $439 billion a year between 2016 to 2023, compared to just $10 billion a year on renewable energy public investment, a recent report by the rights group ActionAid said.

"The figures on the subsidies show that the world's finance is moving in the wrong direction, with far more finance flowing to fuelling the climate crisis rather than taking action against it," said Teresa Anderson, the global lead on climate justice at ActionAid.

Reform pitfalls

The drive to cut back fossil fuel subsidies in many countries is driven by domestic economic concerns like rising debt or heavy energy spending, rather than as a measure of addressing climate change, said Jakob Skovgaard, a senior lecturer at Lund University in Sweden.

Attempts to remove subsidies can raise costs of transport or irrigation, which in turn may badly impact workers and the poor unless proactive measures are taken to protect them. 

"Any attempt at reform or phase-out tends to be extremely contentious," he said.

Protests against rising fuel prices have erupted in emerging economies from Angola to Nigeria as debt-ridden governments try to cut back subsidies. That has made politicians reluctant to adopt further unpopular economic policies.

Mass protests that toppled Bangladeshi Prime Minister Sheikh Hasina in August this year were inflamed by fuel price hikes that impacted small businesses, farmers and consumers.

Rather than scrapping subsidies overnight, countries should have a fair, phased strategy for fossil fuel subsidy reform, said IISD policy advisor Natalie Jones.

Such reforms should be undertaken when fuel prices are lower and the government should have a clear, predictable road map allowing consumers to adjust to the changes, she said.  

Emerging economies can find ways to support the most vulnerable in society while pushing subsidy reforms, energy experts said.

In Egypt, cuts to fossil fuel subsidies in 2014 were tied with food subsidies and social pensions to cushion poorer people from the impact of the reform.

Other countries, like the Dominican Republic, set up cash transfer programmes to compensate for fuel price hikes.

As many countries undertaking these reforms are debt-ridden, cancelling debts could be a key way of allowing governments to direct resources towards social assistance programmes, said Anderson form ActionAid.

Global public debt is rising, exceeding $100 billion for the first time this year and creating pressure on countries relying on imported fuels.

"Ultimately, you have to phase out fossil fuels to end subsidies and rich nations should lead by example," said Jakob Skovgaard.

(Reporting by Md. Tahmid Zami and Jack Graham; Editing Jon Hemming.)