Fossil Fuel Subsidy Reform: From Rhetoric to Reality

by Shelagh Whitley and Laurie van der Burg (New Climate Economy) The research underpinning this New Climate Economy Working Paper was a major input into the 2015 New Climate Economy report and articulates the practical steps that policymakers can take to phase out fossil fuel subsidies. The paper reinforces the recommendations of the Global Commission on the Economy and Climate to introduce or strengthen carbon pricing by 2020, and phase out fossil fuel subsidies.

Worldwide, a significant proportion of the private sector receives some level of support, interventions and subsidies from the public sector. In the specific case of energy subsidies (of which fossil fuels are a subset) their use has been historically linked to supporting energy security, domestic energy production and access to energy.

In recent years, however, accounting for the full economic, social and environmental costs and benefits of subsidies for fossil fuels, along with the development of other government interventions to achieve the same objectives, has led to demands to start removing them. This report outlines the economic, social and environmental costs of fossil fuel subsidies, emerging evidence of the benefits to be derived
from their reform and opportunities and processes to support such reform.

Fossil fuel subsidies can inhibit sustainable economic development by creating a burden on government budgets, reducing resources that could be put to more efficient use within the economy; increasing inequality and undermining access to affordable energy by benefiting the rich rather than the poorest members of society; decreasing the competitiveness of key industries, including low-carbon
businesses, by discouraging investment in renewable energy and energy efficiency; increasing the risk of stranded assets (in the event of climate regulation) by encouraging exploration for and production of unburnable carbon; compromising energy security (compared to subsidising alternatives such as
renewables and energy efficiency); damaging public health by increasing air pollution; and negating carbon price signals.

Despite this mounting evidence of the costs of fossil fuel subsidies, and the potential virtuous cycles that could result from their removal, governments are often reticent to undertake reform. Researchers have identified several specific reasons for the persistence of subsidies.

A number of these country case studies are included in this report (see Annex 3), and, in conjunction with wider research on the processes of reforming subsidies, have provided lessons for the key ‘ingredients’ for successful reform. These steps are very similar to those needed for any effective processes of policy change, and include:

• Mobilising resources in order to support many of the elements necessary for a robust reform process.

• Providing clear, open and honest information on the scale of subsidies, their costs and impacts, who pays and who benefits, plans for reform, and complementary measures to be adopted.

• Reallocating the resources saved to those groups most affected by reform by adopting complementary measures. These may include support to sectors, industries and firms, and to households and individuals.

• Setting credible and predetermined timeframes for phasing out subsidies, staggering the elimination of different subsidies, and ideally undertaking reform as part of broader sector- or economy-wide reforms. READ MORE and MORE (Fossil fuel subsidy reform in sub-Saharan Africa: from rhetoric to reality) and MORE (ODI: Empty promises: G20 subsidies to oil, gas and coal production)