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All Change and No Change: G20 Commitment on Fossil Fuel Subsidy Reform, Ten Years On

09 October, 2019
Laura Merrill and Franziska Funke, IISD

Oil rig, fossil fuel, subsidy, G20

Oil rig, fossil fuel, subsidy, G20
Oil rig. | © WORKSITE Ltd./Unsplash

Ten years after committing to rationalise and phase out inefficient fossil fuel subsidies, G20 countries still subsidise coal, oil and gas to the tune of around USD 150 billion annually. The process to try to move the G20 forward on this issue has been via peer review of fossil fuel subsidies, but these reviews need to be followed by action. Subsidy reforms could free up resources that could be channeled back into government programmes, which would be necessary to mitigate the impacts of rising energy prices on vulnerable populations and to help smooth reforms, and could also be spent on accelerating a clean energy transition.

September 2019 marked ten years since the Group of 20 (G20) committed to “Rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption” as part of the Pittsburgh Summit in 2009. Very little has changed since then, despite urgent calls for action on climate change in the lead up to and at the 2019 UN Climate Action Summit, from voices representing the youngest advocates (Greta Thunberg explained how we spend much more on fossil subsidies than on nature based solutions) to the largest global organization (António Guterres did not mince his words when opening the Summit stating, “The biggest cost is subsidizing a dying fossil fuel industry, building more and more coal power plants, and denying what is plain as day. That we are in a deep climate hole and to get out, we must first stop digging”). G20 country action on subsidies still appears as words on the page, the absence of commitments, and certainly no clear, concrete plans to phase-out subsidies once and for all. This has got to change.

Currently, G20 countries still subsidise coal, oil and gas to the tune of around USD 150 billion annually (for both production and consumption subsidies). During the Climate Action Summit, New Zealand’s Prime Minister Jacinda Ardern did not hesitate to call it out as it is: “Despite commitments to phase out such subsidies by groups like the G20 and APEC, we are still struggling to see concrete action. It is time to do things differently.”

The pace of change is glacial, and in the meantime glaciers have melted. The process to try to move the G20 forward on this issue has been via peer review of fossil fuel subsidies. China and the US jointly set the scene by publishing peer reviews of their subsidies in 2016 – seven years after the G20 commitment was made. Since then, the heads of both countries have changed, Obama to Trump, and Jintao to Jinping. A spirit for reform of subsidies and working together on climate change has been replaced with a very different dynamic today.

In 2016, the US identified USD 8.2 billion of subsidies but did not commit to a phase-out plan, repeatedly highlighting that “the US Congress must pass enabling legislation for this proposal to become law.” Research in 2017 found that, for the US, fossil fuel subsidies and preferential tax rates are the reason why half of all new investments in oil are profitable in the first place. President Trump has made it considerably easier for fossil fuel investors to undertake new drilling projects. US tax reform has further advantaged fossil energies over renewables, by scrapping subsidies for green energies while leaving those for the fossil sectors largely untouched. Overall progress on decreasing public finance for fossil fuels within G7 countries placed France first, and the US last.

The 2016 review from China listed subsidies worth USD 14.5 billion and included a reform plan and timeline. Since then China has continued to undergo petroleum pricing reforms reducing central government outlays by 50% between 2014 and 2017. Subsidies to coal still persist: support for domestic coal plants is largely via state-owned enterprises, and amounts to USD 7.6 billion per year (2016-2017 average). However, China’s 13th Five Year Plan (2016-2020) included a USD 14.5 billion fund for employment restructuring in coal areas, and plans to reduce coal consumption to 58% of total energy consumption or below by 2020. Shale oil benefited from a resource rent break of 30% in 2018, and shale gas has also benefitted from subsidies totaling USD 1 billion, although with plans to phase these out.

In 2017, Germany and Mexico published peer reviews. Mexico identified ten subsidies worth USD 2.6 billion in 2016. Two out of these ten subsidies have already been phased out as part of the large energy reforms that the country is carrying out. Germany identified 22 measures that favor fossil fuels in the form of tax breaks and direct budgetary transfers, totalling USD 17.6 billion in 2016. Two of these 22 measures will be phased out in 2018 as part of the existing EU-wide commitment to end subsidies to hard coal.

In 2019, Indonesia and Italy published reviews. Whilst there was unanimous praise for Indonesia’s reform of its petroleum fuel and electricity pricing over the 2014-2017 period, it is also the case that subsidies have crept back with domestic prices maintained whilst global oil prices rise. For Italy’s 39 identified subsidies to fossil fuel production or consumption, accounting for more than EUR 13 billion in 2016, nearly all of the measures (35 out of 39) were preferential tax treatment.

Argentina and Canada announced reviews of subsidies in 2018, but they have yet to be published. France and India will participate in a peer review together, as was announced as part of Prime Minister Modi’s visit to the French capital last August.

A few notable reforms have taken place since the G20 decision ten years ago. In December 2015, Saudi Arabia significantly increased prices for nearly all fossil fuels (although prices remain low in comparison to global levels), with plans to phase-out fossil fuel subsidies entirely by 2020. However, this date has now been postponed until 2025. Between 2014 and 2017, India cut subsidies to oil and gas by 76 %, from USD 26.1 billion to USD 5.5 billion, thanks to reform efforts combined with a decrease in international oil prices. Indonesia completed its reform of gasoline and diesel subsidies, saving up to USD 15.5 billion in 2015. But prices were last locked in 2019 in the leadup to recent presidential elections, and the country has continued to invest in coal power plants. Increasing oil prices are now testing the governments’ abilities to maintain their earlier reforms.

Civil society groups, including IISD, have consistently called on the G20 to “urgently set a timeline for the complete and equitable phase-out of FFS, leading with the phase-out of fossil fuel production subsidies by 2020, as a minimum”; and “establish a timeline and clear guidance for the completion of peer review of FFS by all G20 members to enable equitable phase out of all FFS.” At the current pace of change, however, it would take until 2025 for the completion of reviews.

While countries inch forward under the G20 decision, the international community has also nudged itself forward through decisions taken in other processes. More ambitious reform timelines for the actual phase out of subsidies exist for both the EU (2020) and the G7 (2025). The SDGs include target 12.c to “Rationalize inefficient fossil-fuel subsidies that encourage wasteful consumption by removing market distortions,” by 2030 at the latest. And, under the Paris Agreement on climate change, countries are to develop increasingly ambitious Nationally Determined Contributions (NDCs), for which fossil fuel subsidy reform could be a key component.

Reviews only matter when followed by actions. And the need for action has never been more urgent. The Intergovernmental Panel on Climate Change (IPCC) and climate scientists warn that we must act now in order to keep global warming below 1.5°C above preindustrial levels. Subsidy reform is estimated to be able to reduce 6-8% of global greenhouse gas (GHG) emissions by 2050. At the same time, subsidy reforms could free up significant resources that could be channeled back into government programmes, which would be necessary to mitigate the impacts of rising energy prices on vulnerable parts of the population and to help smooth reforms, but that could also be spent on accelerating a clean energy transition (such as through swaps).

In the lead up to the Climate Action Summit and throughout UN Summits Week 2019, the Global Subsidies Initiative of IISD along with the Friends of Fossil Fuel Subsidy Reform supported a campaign to raise the issue on the agenda with high-level champions from business, such as the CEO of Aviva, and government, such as Prime Minister of New Zealand. The time to review fossil fuel subsidies and to reform them is now. Find out more here and help spread the word.

 

[This article originally appeared on sdg.iisd.org.]

ArticleClimate Diplomacy
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Climate Change
Climate Diplomacy
Energy
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Global Issues

Topics

Adaptation & Resilience

All countries will need to adapt to some of the environmental, social and economic impacts of climate change that are already unavoidable. Food security, livelihoods, water resource availability and public health are some affected areas. People living in poverty are more vulnerable, having a lower capacity to adapt. Thus, it is essential to promote resilience building. The adaptation and resilience aspects need to be mainstreamed into planning by policy makers and the private sector as well as integrated into development strategies.

Biodiversity & Livelihoods

Nature protection is most sustainable if it essentially contributes to the long-term stability of human needs. Today many regions around the world are confronted with increasing destruction of the natural foundations of life. The consequences of wide-ranging resource destruction are no longer regionally limited, but rather represent a global threat. Those affected are mainly rural populations, who find the sources of their income and the foundations of their way of life swept away. The depletion and destruction of natural resources goes hand in hand with decreasing agricultural yields and increasing poverty, which in turn forces the affected populations to deplete the remaining resources.

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Capacity Building

On the one hand, conflicts are caused by structural factors, such as economic and social inequality or environmental destruction. On the other hand, conflicts are fuelled by a lack of democratic structures, deficient mechanisms of non-violent conflict settlement, inadequate rule of law, the destruction of social and cultural identity and the disregard of human rights. Against this backdrop, development policies have been dedicated to a broad concept of security, which comprises political, economic, ecological and social stability. As a consequence, development cooperation agencies and actors have developed a broad spectrum of approaches for conflict prevention and transformation as well as for sustainable use of natural resources.

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Civil Society

Civil society is the first victim of environmental pollution, under-development and conflicts. Economically disadvantaged and politically marginalized population groups are particularly affected by violent conflicts as well as increasing resource degradation. Simultaneously, civil society is a fundamental pillar for implementing sustainable development. It contributes in many ways to strengthening conflict prevention and plays a significant role in the peaceful and democratic development of states. It must be supported to strengthen civil rights, adherence to human rights in general and democratic participation.

Climate Change

Climate change resulting from the emission of greenhouse gases represents one of the vital challenges for international environmental policy. Flooding, droughts, shifting of climate zones and increasingly frequent and intense extreme weather events will have serious economic and social consequences for entire regions. The climate problem is also directly linked to the question of future energy generation.

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Climate Diplomacy

To address the challenges posed by climate change, a new profile of climate diplomacy is evolving. This utilises a full range of policies, including development cooperation, conflict prevention efforts, and humanitarian assistance, in addition to more traditional measures of climate change adaptation and mitigation. Moving from a risk analysis of climate-related threats to well-timed preventive action requires a greater commitment to integrating climate change concerns into development, foreign, and security policies. Examples include strengthening diplomatic networks, building new alliances with partners, and raising awareness – not only of potentially negative climate change impacts, but also of opportunities to embark on a sustainable transformation of our societies.

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Co-Benefits

Climate action entails an array of economic, social, political and environmental co-benefits. It provides an opportunity for economic growth and new jobs. Many investments can take into account climate considerations without becoming more costly. Further important co-benefits include: improved energy security, less local air and water pollution, health benefits as well as ecosystem and biodiversity protection.

Conflict Transformation

In order to overcome the structural causes of violent conflicts and thus bring about an improvement in the framework conditions for peaceful and fair development, it is essential to have long term and broadly planned peace development and peace advancement. Various governmental and non-governmental, national and international actors and groups are involved in these processes.

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Development

Climate change and development are inextricably linked. Climate change endangers the development agenda and has the potential to reverse development goals. Furthermore, successful mitigation of climate change heavily depends on development choices around the world. Therefore, development strategies need to be climate-compatible to provide long-term success, and there are viable policy options that support this compatibility. Many mitigation and adaptation activities can present development opportunities to developing countries and avoid the lock-in to environmentally damaging technologies.

Early Warning & Risk Analysis

The reasons for the development and escalation of conflicts and the incidence of risks are multifaceted and complex. Simultaneously, the assessment of the specific causes in the form of risk and conflict analyses can contribute to a better understanding of these processes and make it possible to provide warning of negative developments, or ideally help prevent them. In the context of natural resource use, risks and conflicts have gained increasing attention in the past years. The debate on possible future water wars is merely one example.

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Energy

The well-being of individuals, communities and nations depends on the availability of energy resources. The gap between energy supply and demand appears to be growing, making the world vulnerable to serious economic shocks. At the same time, the burning of fossil fuels causing climate change is one of the vital challenges of international environmental policy. So far, only rudimentary approaches exist for shaping climate and energy security in a sustainable way. The components of a strategy that can contribute to reducing vulnerabilities related to climate change and energy policy include a greater role for renewable energies, the improvement of energy efficiency and a stronger decentralisation of energy supply.

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Environment & Migration

The economic, social and environmental consequences of climate change aggravate the breakdown of eco-system-dependent livelihoods and are likely to become dominant drivers of long-term migration. Natural disasters already cause massive shorter-term displacement and the number of temporarily displaced people is likely to further increase with climate change. For vulnerable populations in vulnerable regions, such as the Sahel zone or the Ganges delta, migration often becomes the sole survival strategy. In order to address climate-related displacement and migration successfully, knowledge of effective adaptation and an improved understanding of how environmental change affects human mobility is essential. 

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Finance

Climate finance, from all sources, plays a key role in supporting and enabling adaptation and mitigation action as well as climate and energy innovation. The Paris Agreement ensured that the Green Climate Fund and the Global Environment Facility are at the core of climate finance architecture as entities entrusted with the operation of the Financial Mechanism of the UNFCCC. Increasing climate finance from all relevant public and private sources is crucial. Furthermore, much needs to be done to redirect finance flows to sustainable paths, e.g. reducing fossil fuel subsidies, introducing maritime and air transportation taxes. The conditions for green investment in developing countries should also be improved.

Forests

Forests are disappearing at an alarming rate. Competition for forest resources triggers, exacerbates, or finances numerous crises and conflicts in tropical developing countries. Illegal logging and timber trade foster instability and sometimes violent conflict by strengthening illegal and armed groups, increasing corruption and exacerbating use and claim conflicts among local communities, the state and the business sector. Forests are a vital resource to poor people but they can also become areas of conflict. Sustainable management of forest resources is therefore key to preventing violent conflict over and within forests.

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Gender

Gender plays an important role as a category of conflict for many reasons. The interlinkages between gender, environment and conflicts are complex and much research is still needed. Existing insights suggest that conflicts may worsen gender inequalities that existed before the outbreak of violence. The unequal distribution of land property rights in many parts of the world serves as an example. Moreover, women (and children) are among those most affected by both violent conflict and natural disasters. At the same time, women carry much of the burden of trying to implement rehabilitation measures after crisis events.

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Land & Food

Increasing water scarcity, desertification and crop failures due to extreme weather events are becoming more and more of a threat to global food production. While the world’s population continues to grow rapidly, food production is unable to keep pace. Due to the global food crisis in 2008, the number of hungry people reached the symbolic one billion threshold for the first time – corresponding to about 16 percent of world population. Food insecurity may be a consequence or cause of conflicts. Violent conflicts often lead to the destruction of agricultural infrastructure and means of production, as well as to the displacement of local communities.

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Minerals & Mining

In the past, the discovery and tapping of valuable or strategic resources like valuable minerals, oil and natural gas, particularly in developing and emerging countries, has often led to large scale environmental contamination and negative development. The "resource curse" of some countries shows that the wealth from resource yields is frequently unfairly distributed; instead of serving development it advanced the formation of corrupt elites and in some cases even led to conflicts and civil wars. Measures in various sectors and at all levels are important in order to use the potential of these natural resources in a manner that is sustainable and prevents conflicts.

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Private Sector

The spread of violent conflict not only affects people but also companies located in such regions. Destruction of investments and infrastructure, collapse of markets and trade partnerships, flight and expulsion of employees are phenomena of conflicts and environment-induced crises that directly affect companies in unstable regions. Almost all branches of the economy thus have a clear interest in a stable and peaceful environment for their activities. Conversely, the business sector plays an important role in the interaction of economic growth, social development and a healthy environment, all of which can advance peace and sustainable development. 

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Security

Environmental issues have a significant security dimension. Access to, and overuse of, natural resources often play a key role in civil wars or other forms of internal domestic conflict. This is compounded by climate change and environmental degradation. Climate change is now widely recognised as a non-traditional, risk-multiplying threat that will have increasing security impacts. Key risks with possible implications for human and national security include water scarcity, food crises, natural disasters, and displacement. More preventive diplomacy and advocacy is needed to address the strategic implications of climate and environmental change.

Sustainable Transformation

Sustainable Transformation allows societies to profit from a growing, environmentally sustainable and socially inclusive economy – especially in emerging and developing countries. This requires a higher up-front investment, but the benefits of a sustainable transformation in the medium and long term are significant. For instance, energy cost savings and reducing the impact of price volatility offer major incentives for deploying renewable energies and promoting energy efficiency. Such benefits exist in all key sectors of the economy.

Technology & Innovation

Innovations and technologies are already readily available and affordable but their global diffusion and uptake remains a challenge. Innovation and technology are crucial to achieving ambitious climate change mitigation and adaptation targets. However, research and development often do not receive appropriate public support. Developing countries can leapfrog high-carbon industrialisation phases by adopting, deploying and improving existing innovations and technologies. For this, it is essential to minimise financial, administrative and political barriers.

Water

The availability of freshwater resources in sufficient quantity and quality is essential for the preservation of human health and sound ecosystems. The use of water resources is also vital, however, for economic development: whether for agriculture, industrial production or for electricity generation. The world's freshwater resources are distributed very unevenly in terms of geography and seasons. In addition, water shortage is becoming more prevalent in several regions due to population growth, economic development, urbanisation and increasing environmental pollution. Thus, water resources can hold potential for conflicts between parties who have different interests and needs.

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Regions

Asia

The environment in Asia is already under tremendous pressure as a result of the unsustainable use of land, forests, water and even air in many regions. Climate change will only exacerbate these challenges. Rising sea levels will likely endanger densely populated areas, changes in the monsoon patterns can strongly impact agriculture, melting glaciers will increase long-term water scarcity, and extreme weather events such as heavy rainfall and cyclones can pose further hazards.

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Central America & Caribbean

Natural disasters and water scarcity are key challenges for most of Central America and the Caribbean. These challenges will become even more pronounced as the climate changes. Weak resource and disaster risk management and land disputes pose additional security challenges for large parts of the region. Several countries of Central America and the Caribbean have limited adaptive capacities as they face political instability caused by high social inequality, crime, corruption, and intra-state conflicts.

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Europe

As one of the most developed and most densely populated regions in the world, Europe makes heavy use of its resources, resulting in difficult trade-offs and negative consequences for the environment and ecosystems. Land is used for settlements, agriculture and dense infrastructure, creating problems of soil degradation. Water resources are stressed due to unsustainable agricultural practices. Despite nature protection policies, Europe continues to lose biodiversity at an alarming pace. Some of these trends are exacerbated by climate change, which is expected, for instance, to lead to shifts in water availability.

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Global Issues

Resource scarcities, environmental pollution and climate change are not limited by national borders, but often have a transboundary or even global impact. These issues interact with political stability, governance structures and economic performance, and can trigger or worsen disputes and violent conflicts. Exacerbating some of these trends, climate change is likely to lead to the degradation of freshwater resources, declines in food production, increases in storm and flood disasters and environmentally induced migration. All these developments pose potential for conflict.

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Middle East & North Africa

The geopolitical position of the Middle East and North Africa (MENA), its fossil fuel resources, high population growth and the political changes spurred by the Arab Spring all make the region one of the most dynamic in the world. Nevertheless, it is also one of the most arid and environmentally stressed. Dwindling water resources, limited arable and grazing land, high pollution from household and industrial waste, remnants of conflicts and increasing desertification are key environmental challenges.

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North America

Climate change has various impacts on the three North American countries of Canada, Mexico and the US. Canada and the US have well-developed adaptive capacities and foster the strengthening of capacities in other regions as well. With high per capita emissions, these two countries also bear a greater responsibility for a changing climate. Mexico has a sound national strategy for climate change adaptation, yet fewer capacities than Canada and the US. The poorer and rural populations of Mexico are especially vulnerable to climate change, due to an increased sensitivity and a lower adaptive capacity.

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Oceania & Pacific

In Oceania, population growth and economic development trends put a strain on oceanic and island ecosystems. Freshwater scarcity, overexploitation of fisheries, loss of land biodiversity, forests and trees, invasive species, soil degradation, increasing levels of settlement, poor management of solid and hazardous waste and disproportionate use of coastal areas are some of the problems. Climate change exacerbates most of these trends, while also raising questions about the future sovereignty of some island states.

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South America

South America has diverse and unique ecosystems and is very rich in biodiversity. Weak natural resource management, land disputes and extreme weather events bring about significant challenges for the region. While South America accounts for relatively few CO2 emissions, the changing climate will alter its ecosystems and greater climate variability will lead to more hurricanes, landslides, and droughts.

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Sub-Saharan Africa

In many African states, environmental security issues rank high on the political agenda. Throughout the continent, countries suffer from water scarcity, food insecurity and energy poverty. These chronic and worsening resource scarcities have severe livelihood implications and are exacerbated by political conflicts over access to and control over these resources. Climate change may seriously threaten political and economic stability in Africa. It may also put a severe strain on the capacities of states and societies to co-ordinate activities, to communicate and to organize.

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