Phasing out fossil fuel subsidies in the G20: From Pittsburgh to Hamburg and beyond

4 August 2017

The Hamburg Summit marked the eighth year since the G20 committed to phasing out inefficient fossil fuel subsidies (FFSs). Despite repeated calls from countries most vulnerable to climate change, civil society organisations and investors, the Summit failed to take concrete measures to deliver on the commitment.

 

One of the highlights of the Hamburg Summit was the firm stance taken by the G19 (the G20 minus the United States) to defend the Paris Agreement in the wake of the United States’ decision to withdraw from the Agreement. They reaffirmed their resolve to fully implement the Accord by adopting a detailed Climate and Energy Action Plan with concrete steps guided by the Paris Agreement and the 2030 Agenda for Sustainable Development.

However, ironically, these same countries also spend billions subsidizing activities deleterious to the objective that united them in Hamburg – tackling the threats of dangerous climate change. Recent estimates indicate that G20 countries spend (through direct spending and tax breaks alone) an average of US$78 billion per year on fossil fuel production subsidies. The International Energy Agency (IEA) estimated the total value of fossil fuel consumption subsidies worldwide at US$325 billion in 2015. Some analysts consider fossil fuel subsidies to be even larger. Cody et al. for instance estimate that fossil fuel subsidies amounted to $US5.3 trillion in 2015 (6.5% of global GDP) when taking into consideration negative externalities otherwise not compensated for. These subsidies harm the environment by encouraging the over-extraction and wasteful consumption of fuels and undermining the competitiveness of renewable energy. The continued subsidization of fossil fuels will lock the world into decades of fossil fuel dependency and related high greenhouse gas emissions.

Source: Coady et al. (2017)

 

In recognition of these adverse environmental effects, the G20 countries committed to phasing out inefficient FFSs at the Pittsburgh Summit in 2009. Since then, they took important steps to implement the commitment: developing national implementation strategies and timelines; self-reporting on inefficient FFSs; voluntary peer-reviews of fossil fuel subsidies reform (FFSR) efforts; and commissioning studies on FFSs. Despite these steps, however, a vast gap remains between their commitment and action. Among the major factors hindering the successful implementation of the commitment are limited transparency, ambiguity over the scope of the commitment, and the lack of definitive implementation timelines. It is therefore necessary that the G20 take action on addressing these shortcomings.

Opportunities for action…

A combination of several factors has created a unique window of opportunity for the G20 to step up its efforts. First, the adoption of the Paris Agreement in 2016 obliges G20 countries to: “[make] finance flows consistent with a pathway towards low greenhouse gas emissions and climate resilient development”. Subsidizing fossil fuels goes against the spirit of this obligation to the extent that it diverts financial flows away from renewable energy sources. Second, the fall in global oil prices since mid-2014 facilitates FFSRs by making them less politically controversial and costly. Moreover, the adoption of the 2030 Agenda and the inclusion of FFSR as one of the measures to meet SDG 12 (on ensuring sustainable consumption and production patterns) gives much more weight to tackling FFSs.

Ways forward…

There are several ways in which the G20 can advance the implementation of the FFSR commitment. First among these is defining the scope of the commitment, which is currently vague. In the absence of an agreed subsidy definition, each G20 member is allowed to use their own. This has enabled reluctant members to define subsidies narrowly to circumvent the commitment. The G20 should clarify this by defining subsidies and eliminating the use of ambiguous terminology like “inefficient” and “wasteful consumption”.

Improving transparency is another prerequisite for a successful implementation of the commitment. The self-reporting and voluntary peer-reviews together with the G20-commissioned studies shed some light on the scale and impacts of FFSs. However, there is still a serious lack of complete and comparable data on the forms, size and impacts of FFSs. The starting place to change this could be adopting a common template for subsidy reporting within the G20. This would allow for cross country comparisons and the identification of under-reporting. The G20 could also use existing transparency mechanisms in other intergovernmental fora such as the UNFCCC and the WTO. Within the WTO, G20 Members should enhance their subsidy notification under Article 25 of the SCM Agreement. They could also improve the system by adopting a standard notification template and allowing notification by non-governmental organisations. Another option is using the counter-notification mechanism of Article 25.10 of the SCM Agreement. They should also consider adding a section on FFSs to their trade policy review reports.  

The G20 should also set clear and realistic implementation timelines. Eight of the 20 members have agreed to eliminate inefficient FFSs by 2025 under the auspices of the G7. The SDGs require all countries to phase out their inefficient FFSs by 2030. There are now widespread calls for the G20 to set the deadline for 2020. At a minimum, the G20 should adopt the G7 deadline with clear and unambiguous language. Other options include setting different deadlines depending on the type of subsidy, its effects and the capacity of countries to reform their FFSs. The G20 should also consider imposing a standstill on new FFSs with carefully defined exceptions for well-targeted subsidies to the poor and most vulnerable.

The G20 should further take advantage of its position as the leading forum for global governance to advance FFSR. The intergovernmental efforts initiated in the aftermath of the Pittsburgh Summit have underscored the group’s potential to play a vital leadership role in promoting FFSR. The G20 can build on that in two ways. One is by taking concrete actions to eliminate its own FFSs. The other is by directly supporting FFSR efforts in countries outside the group, for instance, through the provision of capacity building and technical assistance to developing countries in cooperation with international and civil society organisations.

Another option is to promote FFSRs through regional and multilateral fora such as the WTO – an area that ICTSD leads research on through its E15 Initiative. The friends of fossil fuel subsidy reform (FFFSR) have already taken steps in this direction by issuing a communiqué calling for action within the UNFCCC and voicing their concerns within the WTO. The G20 should support these efforts and work towards multilateral action on FFSR. The upcoming WTO Ministerial Conference in Buenos Aires offers a perfect opportunity for the G20, together with the FFFSR, to put the FFSs issue on the WTO agenda. Three possible options worth mentioning in this respect are; a Ministerial Decision mandating the WTO to examine the adequacy of existing WTO rules in disciplining FFSs and explore new ways for tackling FFSs; a Ministerial Declaration committing WTO Members to tackle environmentally harmful FFSs; and, at the very least, a WTO-specific joint communiqué of the G20, FFFSR and the Asia-Pacific Economic Cooperation (APEC) to phase out FFSs.

 

The article is derived from the paper Phasing Out Fossil Fuel Subsidies in the G20: Progress, Challenges, and Ways Forward authored by Henok Birhanu Asmelash and published by ICTSD.

Henok Birhanu Asmelash is a Research Fellow at the Max Planck Institute Luxembourg for Procedural Law and a PhD Candidate in International Law and Economics at Bocconi University, Milan.

 
. ICTSD gratefully acknowledges funding from the KR Foundation—Denmark for this project