How fossil fuel subsidies are hurting the energy transition
A man fills plastic containers with gasoline at a service station after Mexico suspended the gasoline subsidy along the U.S. border, in Ciudad Juarez, Mexico, April 4, 2022. REUTERS/Jose Luis Gonzalez
What’s the context?
After agreeing in 2009 to phase out dirty energy subsidies, G20 nations pumped $1.4 trillion into supporting fossil fuel use in 2022 - money that should be redeployed to support a shift into renewables, analysts say
NEW DELHI - G20 leaders are preparing to meet in New Delhi on Sept. 9-10, where action to tackle climate change and boost clean energy will be on the agenda - but recent reports have exposed how the world's most powerful nations are still pouring huge amounts of money into supporting the production and use of fossil fuels.
Analysis from the International Institute for Sustainable Development (IISD) shows that G20 governments provided a record $1.4 trillion to subsidise climate-heating fossil fuels in 2022.
This came despite the fact that those same nations committed in 2009 to phase out "inefficient" fossil fuel subsidies.
Moreover, in 2022 they gave more than double the amount of fossil fuel subsidies than in 2019 before the COVID-19 pandemic - funding that could have helped bridge the gap in funding the clean energy transition, the IISD said in an August report.
Another new paper by the International Monetary Fund (IMF) said that adding in the cost of environmental damage from fossil fuels including climate change and local air pollution deaths - which it calls "implicit" subsidies - pushed up the overall value of fossil fuel subsidies to $7 trillion in 2022, equal to about 7% of global GDP.
These findings come as many regions have faced extreme heatwaves and wildfires - and July was announced as the hottest month on record - underscoring the urgency of acting to curb climate change, including by burning less coal, oil and gas.
Experts told Context that G20 nations must show leadership and set a deadline for eliminating fossil fuel subsidies.
Here we look at the reasons for rising public support for dirty fuels, the financing gap for renewables - and how subsidies could be reformed to support a just energy transition.
Why have fossil fuel subsidies increased?
According to the IISD report, the 2022 rise in subsidies was driven mainly by governments dramatically expanding support to help consumers deal with peaking fossil fuel prices after Russia invaded Ukraine in February that year.
G20 governments spent nearly a trillion dollars on fossil energy subsidies for consumers in 2022, almost six times the $168 billion provided in 2021, it noted.
Around one-third - about $440 billion - of the total $1.4 trillion in subsidies flowed into new fossil fuel production, including some $322 billion in investments by state-owned enterprises and $50 billion from public financial institutions.
These subsidies from the public purse hurt global climate action by perpetuating the world’s reliance on fossil fuels, incentivising greenhouse gas emissions and undermining the cost-competitiveness of clean energy, the report said.
They also contradict commitments made by governments such as under the 2015 Paris Agreement when about 195 countries pledged to make “finance flows consistent with a pathway toward low GHG (greenhouse gas) emissions and climate-resilient development”.
And as part of the U.N. Sustainable Development Goals (SDGs), member states set a goal to reform subsidies by 2030.
“We have seen a lot of commitments - it is time to see implementation,” said Tara Laan, a senior associate with the IISD's energy programme and lead author of the study.
International commitments have yet to result in domestic implementation of reforms and regulations, she added.
Laan said G20 nations should clearly define what is meant by "inefficient subsidies" and set a deadline to eliminate them before 2030, given that the smaller G7 club of rich nations has already specified a time limit of 2025.
As chair of the G20, India can demonstrate global leadership, having cut its fossil fuel subsidies by 76% from 2014 to 2022, Laan noted.
What do fossil fuel subsidies mean for the clean energy transition?
Annual investments in renewable energy need to triple in order to limit climate warming to the most ambitious global goal of 1.5 degrees Celsius, the IISD report said.
Wind and solar energy received about $380 billion in 2022, leaving a projected gap of more than $450 billion per year this decade, it added.
Post-pandemic, G20 governments announced a combined $265 billion in new subsidies for renewable electricity generation - an average of $88 billion per year - including commitments that will be rolled out over several years, it noted.
While positive for the transition, clean energy subsidies are still dwarfed by the amounts going into fossil fuels.
Diala Hawila, programme officer at the International Renewable Energy Agency (IRENA), said the world is relying heavily on private investment to drive the energy transition - but that money goes mainly to less-risky capital markets mostly in developed nations.
Only 15% of private investment in clean energy goes to regions that are home to half the world's population, while multilateral and bilateral public investment flows for renewables from the Global North to the South dropped from a peak of $26 billion in 2017 to $10.8 billion in 2021, she added.
In addition, private investment is going mainly into mature clean technologies including solar and wind energy.
A large share of end-user technologies required for clean energy transition - including heating, cooling and transport - are not getting as much support and are areas where public financial subsidies are needed, Hawila said.
IISD researcher Laan noted that countries are meanwhile moving to support technologies to reduce emissions from fossil fuels, including carbon capture and storage.
Tens of billions of dollars have been extended by governments for these technologies, the report said.
Laan cited Australia's Gorgon gas project which was approved only because it promised to sequester carbon emissions.
However, no more than about a quarter of what was promised has been captured, she said, adding that the technologies remain unproven and are a way of perpetuating fossil fuel use.
How can fossil fuel subsidies be eliminated without hurting consumers?
Removing the subsidies would not only cut climate-heating emissions but also free up substantial public cash to bridge the clean energy funding gap, among other things, analysts said.
The IISD researchers found that G20 member countries could raise an additional $1 trillion every year by setting minimum taxation of $25–$75 per tonne of carbon-equivalent emissions.
Current carbon taxes on fossil fuels, averaging about $3 per tonne in G20 states, do not reflect their costs to society, the researchers added.
Taxing carbon more accurately could raise revenues equal to about 3% of global GDP, said Nate Vernon, an economist with the IMF.
It would also save more than 1.5 million lives a year from premature deaths caused by fossil fuel-driven air pollution, he noted.
Yet removing fuel subsidies and taxing emissions is tricky.
Governments must design, communicate and implement reforms clearly and carefully as part of a comprehensive policy package that underscores the benefits of reducing fossil fuel use, experts say.
Vernon said governments can phase in price increases for fossil fuels – whether by removing explicit subsidies or raising taxes – over time, following three key principles.
First, he recommended slowly tightening policies and communicating price trajectories in advance to households and businesses.
Second, if possible, cost increases can be timed to correspond with falling international prices, dampening the hike in post-tax prices and making them more politically acceptable.
Third, governments can use a share of the savings from lowering subsidies to invest in public goods that offer alternatives to fossil fuels such as public transport, reducing fossil-fuel spending by households and curbing inflation.
Part of the money from removing subsidies should be used to compensate vulnerable households for higher energy prices through channels such as direct cash transfer, Vernon added.
In recent years, rushed and inequitable plans to cut fossil fuel subsidies - with the burden falling on financially-stretched consumers - have provoked social unrest around the world in countries from France to Nigeria and Syria.
(Reporting by Bhasker Tripathi @BhaskerTripathi; editing by Megan Rowling)