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Fossil Fuel Subsidies and The Cost of Inaction

At the G20 Summit in Cannes, France in November of this year, participating nations re-affirmed their support “to rationalise and phase-out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption, while providing targeted support for the poorest.” This commitment is rooted in a pledge made by the “Group of Twenty” in Pittsburgh in 2009, and it has been echoed in other forums.

Again this pledge was reiterated last week at the 19th Asia-Pacific Economic Cooperation (APEC) Economic Leaders Meeting in Honolulu, Hawaii adding 11 new countries to the commitment (The APEC countries first announced this pledge in 2009 following the G20 Pittsburgh meeting.)

This reaffirmation by the G20 and APEC is a positive development and an important one if we are to ever make clean energy competitive, but the time has come to move from noble ambitions toward tangible steps. As states face serious fiscal constraints, volatile energy prices, energy security concerns and a need to cut increasing carbon dioxide emissions, now is an opportune moment to capitalize on the benefits projected from a phase out of inefficient fossil fuels subsidies.

Most APEC and G20 nations provide some sort of financial assistance to reduce prices for fossil fuels. According to the 2011 IEA World Energy Outlook, in 2010 $409 billion was spent on fossil fuel subsidies – almost $110 billion higher than in 2009 – which can be attributed to the steep rise in global energy prices. In comparison, the IEA estimated that in order to achieve 450ppm or 550ppm, clean energy annual investment to 2030 would need to be $379 billion or $542 billion, respectively.

If left unchecked the IEA predicts this figure could reach as high as $660 billion in 2020, or 0.7% of global GDP, illustrating the enormous cost of inaction. In addition to being a painful financial burden to state budgets, fossil fuel subsidies encourage the wasteful consumption of energy, exacerbate energy security issues with increased reliance on imports, distort markets, increase CO2 emissions, and tilt the balance away from clean energy investments. Moreover, the intended benefits of these subsidies such as promoting economic development and improving energy access to the world’s poor may be overstated; according to the IEA only 8% of the $409 billion spent on fossil-fuel subsides in 2010 went to the poorest 20% of the population.

The benefits of phasing out fossil-fuel subsidies are not difficult to discern-according to a recently published report by the OECD, “subsidy reforms increase GDP in OECD countries and even more in non-OECD countries although the resulting world GDP gain should be rather modest and below 1% in the longer term.” By IEA estimates they could slash growth in energy demand by 4.1%, reduce growth in oil demand by 3.7% mb/d and cut growth in CO2 emissions by 1.7 Gt by 2020, providing states with some much needed financial relief from high energy prices while reducing soaring emissions. However, implementing reform will require states to overcome some formidable challenges, not least, finding a common definition of what constitutes an inefficient fossil fuel subsidy and disclosing that information, something developed countries have been reluctant to do. In order to promote international coordination on this issue, transparency and standardizing subsidy information are critical first steps.

There has been progress cataloguing government policies that support fossil fuels, filling an important information gap, and paving the way for further action. In 2011 the IEA, OPEC, OECD and the World Bank released a “joint report on the fossil-fuel and other energy subsides: An update of the G20 Pittsburgh and Toronto Commitments.” and the OECD released the first-ever Inventory of Estimated Budgetary Support and Tax Expenditures For Fossil Fuels; a regularly updated report that provides detailed information on over 250 mechanisms that support fossil fuel production and use in OECD countries.

These publications and online databases not only serve as an important focal point of information but demonstrate that a growing number of countries are already implementing meaningful subsidy reform and benefiting from the environmental and economic rewards. There has been progress since the G20’s initial pledge in 2009, but the bulk of the work is yet to be done and the full positive impacts yet to be realized.

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  1. offshore oil drilling companies

    Can anybody here fill me in on the pros and cons of offshore oil drilling in the usa? I’m from India so this is merely not local news if you ask me. I am hoping my English just isn’t very bad. I keep hearing regarding the oil spills in the news and I wanted to know exactly how bad things really have been in the Gulf coast of florida and how the recovery is coming.

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    • mt

      Thanks for the comment. The economic and environmental impacts of offshore oil drilling are complicated and hotly debated. I would recommend looking at a publication by the Council on Foreign Relations (an independent, nonpartisan membership organization, think tank, and publisher) for more information on the future of deepwater oil drilling in the US and the impact of the Deepwater Horizon oil spill.

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