The G20 group of countries’ undertaking six years ago to phase out fossil fuel subsidies gave a significant boost to efforts to abolish artificial price support for one of the world’s most powerful and wealthy industries. Despite the undertaking, subsidies have stubbornly persisted, undermining global efforts to curb climate change.
Last year, governments and taxpayers spent $500bn artificially lowering the end-user prices of fossil fuels, according to the IEA, up from around $300bn in 2009. In 2013, fossil fuel subsidies were four times the value of renewable energy subsidies and more than four times the amount invested globally on energy efficiency.
Around 13pc of global energy-related CO2 emissions are from subsidised fuels. This equates to an average incentive to emit greenhouse gas (GHG) emissions of $115/t CO2e, the IEA says.
Critics of renewable energy subsidies contend that they distort the market. They fail to recognise — or refuse to acknowledge — that a world where the burning of fossil fuels is incentivised to the tune of $115/t CO2e represents anything but a level playing field.
Similarly, opponents of stronger climate action in the EU argue that, unless other industrialised nations take comparable action, the higher carbon costs imposed on EU-based firms represent a competitive disadvantage that will force them to relocate. But the estimated 6.3bn carbon allowances that EU industry is likely to receive for free in the fourth phase (2021-30) of the EU emissions trading scheme (ETS) amounts to another €150bn ($169bn) of government and tax payers’ money that will offset the costs of pollution and emissions from industry that still depends on coal.
By contrast, the global carbon price today averages a meagre $7/t CO2e — a far cry from the $100/t CO2e by 2040 required to keep global warming below 2°C if carbon pricing is the only climate policy tool in operation, the IEA estimates.
The IEA suggests that fossil fuel subsidies should be phased out by 2030. But taking over 10 years to get rid of these harmful subsidies is far too long, given the urgency of tackling climate change and the fact that the world is on course to breach the 2°C global warming level by 2040.
Right now, 40 countries worldwide are subsidising fossil fuel consumption, with oil and gas exporters in the Middle East and north Africa accounting for almost half of this. But the halving of oil prices from mid-2014 to early-2015 introduced two more compelling reasons to abolish fossil fuel subsidies.
Firstly, the crude market slump has shrunk hydrocarbon exporters’ revenues — an incentive for them to lower or abolish fuel subsidies. Key fossil fuel exporters such as Iran, Kuwait and Venezuela are implementing reforms or considering them. Secondly, the lower oil price has made the repeal of fossil fuel subsidies less politically controversial, and importers including India, Indonesia, Malaysia and Thailand have already reformed subsidies.
Fossil fuel subsidies undermine the competitiveness of renewables and entrench global fossil fuel dependence. Yet renewables have shown a rapid uptake and in 2014 accounted for nearly half of all new power generation capacity globally. Even Saudi Arabia is prioritising renewable energy.
The shale revolution had the unforeseen consequence of dramatically lowering US GHG emissions, meaning that the world’s second-largest emitter is now better placed to commit to substantial GHG cuts and lead by example in climate negotiations.
Similarly, China has shown a new willingness to co-operate on climate change and work towards a global deal. It has embarked on restructuring that will shift it away from fossil fuels. Stagnation in Chinese coal use was a key factor in a stalling of global CO2 emissions growth in 2014 — the first time in 40 years that there was a halt or reduction in global CO2 emissions that was not the result of economic downturn.
Governments’ nonsensical strategy of giving handouts to fossil fuel firms while taxing them amounts to a game of subterfuge where politicians pretend to be committed to tackling climate change while they undermine efforts to counter it by continuing to pander to the fossil fuel industry.
Phasing out fossil fuel subsidies will again be a key topic at the G20 summit this year. To accelerate the transition to a low-carbon economy and help keep global warming below the critical 2°C level, G20 leaders must honour their undertaking to abolish fossil fuel subsidies. This time, it is to be hoped that they will do more than pay lip service to the pledge and take concrete action.