Fossil Fuel Subsidies and Climate Change

Fossil fuel subsidies undermine the efforts to stop climate change. Yet, governments in many countries continue to give – what are essentially unreasonably large discounts – to coal, oil, and gas companies. This is despite the fact that many of these countries have committed themselves to climate change solutions.

Fuel subsidies are a major barrier to reaching the Paris Agreement Goals as well as the Sustainable Development Goals (SDGs). In particular, subsidising fossil fuels makes transitioning to renewable energy sources more difficult. Bridle and Kitson (2014) have identified three of these impacts on the renewable electricity generation, finding that subsidies:

  1. reduce costs of fossil fuel-powered electricity generation and make renewable energy less competitive
  2. reinforce fossil fuels’ position within the electricity system
  3. create conditions that favour investment in fossil fuel-based technologies rather than in renewable energy

Patrick DeRochie, from the Environmental Defence, summarises this nicely in an International Institute for Sustainable Development (IISD) Report (Touchette & Gass, 2018), stating that “Combining carbon pricing and fossil fuel subsidies is like trying to bail water out of a leaky boat. If you don’t fix the leak (the subsidies) you are never going to fix the problem (growing GHG emissions from the oil and gas sector).”

But first, what are fossil fuel subsidies?

Fossil fuel subsidies involve any actions that governments would take in order to reduce the price of fossil fuel production (Oil Change International, n.d.). These actions can be direct, such as providing fossil fuel companies tax reductions or directly funding for their activities. They can also be indirect, such as providing resources to companies at below-market rates. However, the effects of this often consist of consumers receiving fossil fuel-produced energy at lower prices, while the producers sell the energy at higher prices.

How big is this problem?

Fossil fuel emissions are accelerating climate change, while subsidies don’t necessarily impact climate change directly. However, removing subsidies could be the move that allows the renewables to take off, with huge environmental and climate change-related benefits as a result. Not to mention, there would be massive savings from this move.

Freeing up money for domestic spending

In 2019, a REN21 report found that 112 countries were subsidising fossil fuel prices. In total, global expenditure on fossil fuels subsidies amounts to around $5.2 trillion US dollars a year (or 6.5% of the global GDP), according to the International Monetary Fund (Coady et al, 2019). About three-quarters of this come from domestic fossil fuel pricing, meaning that fossil fuel subsidy reform could lead to governments having more available funds for domestic spending. This amount includes the estimate for the cost of damage to human health and the climate, which is caused by fossil fuel burning.

In other words, removing subsidies would provide governments additional money that would be greater than the amount that is spent on education each year – all countries combined (UNESCO, 2019). This is a massive amount. Given that the fossil fuel industry will not be unable to sustain its current activity for many more decades, this seems to be a waste of tax-payers’ funds.

Reducing carbon emissions

In fact, fossil fuel subsidy savings could pay for an energy transition towards renewable energy. Some estimates have found that 10% to 30% of global subsidies could be sufficient for funding a green transition (Bridle et al., 2019).

Eliminating fossil fuel subsidies would remove fossil fuel projects that would be uneconomic without government funding. It would also increase the fossil fuel prices. This would level the playing field with the renewable energy options on the market. Over time, this would result in reduced net emissions.

Estimates by the International Institute for Sustainable Development (IISD) in 2017 showed that completely removing subsidies to fossil fuel production could reduce the world’s emissions by 37 gigatons of CO2 between 2017 to 2050 (Gerasimchuk et al., 2017). This is roughly equal to burning all the known fossil fuel reserves in the US and Norway.

Eliminating fossil fuel subsidies: Steps for moving forwards

Of course, a just and fair plan needs to be made in order for fossil fuel subsidy reform to occur. Social, economic, and environmental factors are all important considerations. This will be difficult and will require planning. However, numerous reports have found that removing subsidies is economically and environmentally sound.

An IISD study of stories of coal phase-outs has provided us with some guidelines on how the subsidies reform could play out. Some simple principles that could help countries include (Gerasimchuk et al., 2018):

  • Analysing potential impacts of fossil fuel decline and developing policies that could address these impacts.
  • Diversifying the economy, creating social safety nets, and new employments to support workers during the energy transition.
  • Using fossil fuel subsidy reform savings and environmental taxes to support a just energy transition and economic diversification.
  • Engaging with labour groups, communities, industry associations, and other related parties to identify and solve the reform challenges.

There have been some small success stories. For example, India cut coal-based subsidies by 76% between 2014 and 2017 (IISD & GSI, 2019). At the same time, their government grew expenditure towards renewable energy by six fold, generating 175 gigawatts of India’s electricity grid using renewable energy sources by 2022, which would be almost half of its national grid’s capacity.

It seems pretty clear that commitment is what countries need to follow through with eliminating subsidies and to fight climate change. You can read more about ways that countries can work towards making the world a more THRIVEable place on the THRIVE Project’s blog!

References

Coady, D., Parry, I., Le, N-P. & Shang, B. (2019). IMF Working Paper. Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates. Retrieved from https://www.imf.org/~/media/Files/Publications/WP/2019/WPIEA2019089.ashx

Touchette, Y. & Gass, P. (2018). Public Cash for Oil and Gas: Mapping Federal Fiscal Support for Fossil Fuels (iisd.org). Retrieved from https://www.iisd.org/system/files/publications/public-cash-oil-gas-en.pdf?q=sites/default/files/publications/public-cash-oil-gas-en.pdf

Bridle, R. & Kitson, L. (2014). The Impact of Fossil-Fuel Subsidies on Renewable Electricity Generation (iisd.org). Retrieved from https://www.iisd.org/system/files/publications/impact-fossil-fuel-subsidies-renewable-electricity-generation.pdf?q=sites/default/files/publications/impact-fossil-fuel-subsidies-renewable-electricity-generation.pdf

UNESCO. (2019). Global Education Monitoring Report. Retrieved from https://gem-report-2019.unesco.org/chapter/finance/#:~:text=Analysis%20for%20this%20report%20estimates,at%20US%244.7%20trillion%20worldwide.

Oil Change International. (n.d.) Fossil Fuel Subsidies Overview. Retrieved from http://priceofoil.org/fossil-fuel-subsidies/#:~:text=The%20most%20obvious%20subsidies%20are,and%20development%20funding%2C%20and%20more

Gerasimchuk, I., Bassi, A., Merrill, L., Ordonez, D., Doukas, A. & Whitley, S. (2017). Zombie Energy: Climate Benefits of Ending Subsidies to Fossil Fuel Production. Retrieved from https://www.iisd.org/publications/zombie-energy-climate-benefits-ending-subsidies-fossil-fuel-production?q=library/zombie-energy-climate-benefits-ending-subsidies-fossil-fuel-production

Gerasimchuk, I., Merrill, L., Bridle, R., Gass, P., Sanchez, L., Kitson, L. & Wooders, P. (2018). Fossil Fuel Phase-Out and a Just Transition: Learning from Stories of Coal Phase-Outs. Retrieved from https://unfccc.int/sites/default/files/resource/69_IISD%20Fossil%20fuel%20phase%20out%20and%20just%20transition%2C%20stories%20for%20success.pdf

International Institute for Sustainable Development (IISD) & Global Subsidies Initiative (GSI). (2019). Through Fossil Fuel Subsidy Reform: Greenhouse Gas Emissions Modelling 26 Countries. Retrieved from https://www.iisd.org/system/files/publications/raising-ambition-through-fossil-fuel-subsidy-reform.pdf

Bridle, R., Sharma, S. & Geddes, A. (2019). Fossil Fuel to Clean Energy Subsidy Swaps: How to pay for an energy revolution. Retrieved from https://www.iisd.org/system/files/publications/fossil-fuel-clean-energy-subsidy-swap.pdf

Author

  • Anita is studying Science with a Major in Mathematics at UQ, Brisbane. She has an interest in STEM (Science, Maths and Engineering mainly), particularly the theory, techniques scientists are using to better understand the world, and how this translates into policy and practice.

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