What Can G20 Do With Fossil Fuel Subsidies in 2015?

Bengisu Özenç

TEPAV

24/04/2015

Fossil fuel subsidies have long been among the key issues on the G20 energy agenda. A quick glance at Leaders’ Communiqués reveals that, except for the opening summit in Washington (2008), the G20 leaders have denounced inefficient fossil fuel subsidies for encouraging wasteful consumption, distorting markets, impeding investment in clean energy sources and undermining efforts to deal with the threat of climate change.

While the rationalizing and phasing out of inefficient fossil fuel subsidies numbers among the G20 leaders’ commitments, the importance of knowledge, expertise and capacity sharing with respect to such programs and policies have also been recognized at some summits, such as in Seoul (2010). Starting from the Cannes Summit (2011), Finance and Energy Ministries have been encouraged to work together to design reforms and report on progress made. Los Cabos (2012) was the start of the discussion of the voluntary peer review process that was supposed to increase accountability and transparency. But what has been done so far?

In spite of leaders’ commitments, subsidization of fossil fuels continues to be widespread. A comprehensive calculation of fossil fuel subsidies should include provision of services (provision of land, water, infrastructure, permissions etc.) below market rate, market price support and market transfers (purchase obligations, tariffs and mandates) as well as the most commonly overlooked item of underpricing social and environmental externalities (cost of emissions) in addition to direct budgetary spending and tax relief measures. In line with this approach, , The OECD conducted a study on its 34 member states using 550 measures, which revealed a yearly average of $55-90 billion fossil fuel subsidies between 2005 and 2011. When the selection of countries is expanded to a global scale, the total of fossil fuel subsidies is as high as $548 billion in 2013, as calculated by the International Energy Agency. This amount is reportedly over four-times the value of the subsidies granted to renewable energy sources and more than four times the amount allocated to energy efficiency investments globally.

Despite the G20 leaders’ political commitments since 2009, fossil fuel subsidies have gone up, only declining with the recent sharp drop in global oil prices. Of the G20 countries that are in the OECD fossil fuel subsidies study, Mexico, India, Russia, Brazil, Turkey and United Kingdom experienced an increase in the fossil fuel subsidies in real terms, when calculated in domestic currencies between 2005 and 2011. In Turkey’s case, an additional study specializing on coal subsidies computes a 3 percent increase, from 2011 to 2013.

The above figures emphasize the need for more concrete steps by the G20 towards phasing out fossil fuel subsidies. This year will provide important opportunities to move forward with such a policy agenda for two reasons. First, there are important events on sustainable development that are taking place including the COP21 of the UNFCCC, and the UN Summit on Sustainable Development Goals (SDGs) that will determine the UN post-2015 development agenda. The International Conference on Financing for Development in Addis Ababa is also likely to contribute to the discussion from a fiscal point of view.

It would not be possible to discuss SDGs, which focus on securing the provision of affordable, reliable, sustainable and modern energy, as well as combating climate change and mitigating its impacts, without referencing fossil fuel subsidies, given that the use of fossil fuels account for a significant share of Greenhouse Gas (GHG) emissions. According to the IPCC’s Climate Change 2014: Synthesis Report CO2 emissions from fossil fuel combustion and industrial processes contributed about 78% of the increase in total GHG emissions, from 1970 to 2010; a similar percentage contribution for the increase is observed during the period of 2000-2010. From this point of view, the phasing out of fossil fuel subsidies seems to provide a meaningful policy alternative for those countries that are expected to announce their post-2020 emission reduction pledges - the Intended Nationally Determined Contributions (INDCs) - by October 1st.

The second opportunity arises from the downward trend in energy prices in recent years. In line with the argument put forward by Kemal Derviş, falling energy prices may be seized as a political opportunity to convert to policies of lower/null fossil fuel subsidization or to even introduce carbon tax without causing a rise in consumer energy prices. The latest IMF’s Fiscal Monitor report (April 2015) also emphasizes the opportunity in falling energy prices to better account for negative externalities from fossil fuel consumption. This way, not only the inefficient subsidies would be nullified, but through the targeted use of funds raised by the carbon tax, renewable energy investments would receive financial support.

In fact, the cost of renewable energy technologies is already compatible with that of conventional energy resources after the 40-50 percent fall in their prices since 2008. The cost of renewable energy is expected to drop even further in the upcoming decade. For example, the U.S. Energy Information Administration calculates the levelized cost of energy (LCOE) of wind-onshore technologies below that of conventional coal and natural gas-fired combustion turbine for plants entering service in 2019. Plus, contrary to arguments of renewable energy investments losing their competitiveness against declining oil prices, falling energy prices may also work against fossil fuel mining/extracting activities and enhance the competitiveness of renewable energy sources .

In short, the full extent of the 2015 sustainable development agenda, coupled with favorable energy prices, should be seized upon as an opportunity to mobilize efforts to combat climate change, which requires urgent attention. This year, more concrete steps must be taken in this direction by G20 leaders in order to ensure the success of negotiations at the COP21, which will shape the post-2015 climate change agenda. In this respect, the phasing out of fossil fuel subsidies provides a strong hand for governments to fulfill their possible emission reduction commitments and to shift to more environmentally-friendly energy alternatives.

Bengisu Özenç is a program manager at TEPAV.