Fossil Fuel Subsidies: How we are paying to pollute…
“Fossil fuel subsidies are paying for our own destruction.”
- Tina Stege, the climate envoy for the Marshall Islands, a South Pacific nation threatened by rising sea levels.
On Friday 12 November towards the close of Cop26 the U.S. special envoy for climate change, John Kerry, described fossil fuel subsidies as “the definition of insanity.” The burning of fossil fuels is one of the primary causes of global warming, yet a report from the International Monetary Fund (IMF) recently claimed that the fossil fuel industry benefits from subsidies of $11m every minute.
Whilst financial-focussed negotiations continue regarding climate financing, monetary support for most vulnerable nations, and how to transition to renewable energy, nations are continuing to pour billions of dollars into the very industry threatening life and land across the planet.
“That’s a definition of insanity […] to feed the problem we’re here to cure. It doesn’t make sense.”
As a senior analyst at the thinktank Carbon Tracker phrased it: “We are adding fuel to the fire.”
How are fossil fuels subsidised?
Fossil-fuel subsidies generally take two forms: Production Subsidies and Consumption Subsidies.
Production subsidies are governmental tax breaks or direct payments to fossil fuel industries that reduce the cost of producing coal, oil or gas. These subsidies are often highly influential in the development of new fossil fuel infrastructure such as oil pipelines and gas fields.
Consumption subsidies cut fuel prices for the end user, such as by fixing the price at the petrol pump so that it is less than the market rate. This often means what we pay for our energy does not reflect the market value of gas and oil (let alone the true human and environmental costs!).
From 2017 to 2019, 52 countries (representing about 90% of global fossil-fuel supplies) gave direct subsidies worth an average of US$555 billion each year from 2017 to 2019.
(This dipped to $345 billion in 2020 only because of lower fuel consumption and declining fuel prices during the COVID-19 pandemic.)
So, what is the true cost of fossil fuels?
Well, it gets even more complicated.
Beyond direct subsidies, there is also public financing of fossil fuels, such as that of state-owned enterprises. If we combine this public financing of fossil fuels with the other subsidies, this combined “support” for fossil fuels adds up to $584 billion a year - from just 20 countries.*
*between 2017-2019. The self-titled G20: Argentina, Australia, Brazil, Canada, China, the European Union, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, and the United States.
What about the environmental and social costs?
Beyond us all propping up fossil fuels financially, the price of fossil fuels does not even begin to reflect the true environmental and social costs.
Some analysts argue that the hidden costs of fossil fuels — such as their impacts on air pollution and global warming — are also a kind of subsidy, because polluters are not paying for the damage they cause.
Accounting for the external costs, total fossil fuel subsidies in 2020 was calculated at $5.9 trillion.
42% of this $5.9tn was based on the failure to make polluters pay for the deaths and poor health caused by air pollution.
29% was based on the costs for the heatwaves and other impacts of global heating. (IMF)
“Fossil fuel subsidies are paying for our own destruction.”
- Tina Stege, the climate envoy for the Marshall Islands, a South Pacific nation threatened by rising sea levels.
What effect would reducing subsidies have on climate change?
A report from the International Institute for Sustainable Development (IISD) found that removing even just consumption subsidies in 32 countries would cut their greenhouse-gas emissions by an average of 6% by 2025.
This resonates with a 2018 United Nations report which suggests that phasing out all fossil-fuel support could reduce global emissions by between 1% and 11% from 2020 to 2030.
“Phasing out fossil-fuel support could reduce global emissions up to 11% from 2020 to 2030.” (UN)
Ending fossil fuel subsidies could also prompt a positive chain reaction further reducing global emissions if that money was rechanneled into initiatives such as renewable energy, ecosystem restoration, regenerative agriculture, and supporting land defenders. Currently, fossil-fuel subsidies are one of the biggest financial barriers hampering the world’s shift to renewable energy sources; governments around the world are pouring around half a trillion dollars in direct subsidies to artificially lower the price of fossil fuels — more than triple what renewables receive.
Furthermore, ending fossil fuel subsidies would have huge benefits for human health, preventing nearly a million deaths a year from dirty air (IMF). Once we also consider the impacts of oil spills, water contamination, and fracking on communities across the world, the potential benefit for health and quality of life is huge.
“Ending fossil fuel subsidies would prevent nearly a million deaths a year from dirty air.” (IMF)
So, what are our world leaders doing about this?
Repeated pledges have been made by politicians to end this kind of support.
In 2009 the group of countries which are referred to as G20 agreed to phase out “inefficient” fossil fuel subsidies...
In 2016, Canada, France, Germany, Italy, Japan, the United Kingdom and the United States (G7) even set a deadline of 2025...
In July 2021, a report showed that the G20 countries had subsidised fossil fuels by trillions of dollars since 2015, the year the Paris climate deal was reached.
Most recently, a draft agreement published at the COP26 climate summit has called on all countries to accelerate the phasing out of subsidies for fossil fuels - but no firm dates have been set. A version released early Friday (November 12) called on countries to accelerate “the phaseout of unabated coal power and of inefficient subsidies for fossil fuels.”
However, wording such as ‘unabated’ and ‘inefficient’ has prompted criticism and skepticism regarding the effectiveness of this agreement, with Greenpeace international executive director Jennifer Morgan describing the clause as "weak and compromised".
“We need clear language on the need to eliminate all fossil fuel subsidies, not only the inefficient ones, and to accelerate the phaseout of coal power.”
- Andrea Meza, Costa Rica’s environment minister.
What does “inefficient subsidies” mean?
What’s in a word? Quite a lot. In this case, the issue lies not so much in what the word ‘inefficient’ means, but rather the inability to agree on what it means:
One problem is definitions. The G7 and G20 countries have vowed to eliminate “inefficient fossil fuel subsidies”, although they haven’t clearly defined what this phrase means. “It’s a very vague commitment,” says Ludovic Subran, chief economist at the multinational insurance firm Allianz, which published a report on eliminating subsidies in May. (Nature)
Some define “efficient” pricing of fossil fuels as accounting for the true costs (environmental, social, and actual extraction costs) - but by this definition, when we consider the damage inflicted by this industry, how would “efficient subsidies” of the fossil fuel industry ever exist?
This lack of definition regarding “inefficient fossil fuel subsidies” has very real implications: for example, the UK government says it has none:
“They reject the idea that they have any inefficient fossil-fuel subsidies, so it’s quite hard to engage with them on this.”
(Angela Picciariello, senior research officer in climate and sustainability at the Overseas Development Institute. )
Britain currently supports the fossil fuel industry through tax breaks and subsidies for exploration and research and development by around £10 billion a year, according to latest figures from the OECD.
Can fossil fuel subsidies be eliminated?
Absolutely, change is possible. Indeed, “Ending subsidies is something that can be won right now,” according to Bronwen Tucker, an analyst at Oil Change International.
What is most important is that eliminating fossil fuel subsidies is done in a way which supports a just transition. For example, consumption subsidies cut fuel prices for the consumer, such as by fixing the price at the petrol pump. These are more common in lower-income countries — in some, they help people to get clean cooking fuel they couldn’t otherwise afford. A just transition also requires that governments implement plans to help fossil-fuel workers find different employment.
“Many people oppose subsidy reform because they see it solely as governments taking something away, and not giving back.”
(Ipek Gençsü, Overseas Development Institute)
It is crucial that ending subsidies to fossil-fuel firms means that money is redistributed to offset the effects of rising energy prices and also invested in renewable energy to establish ‘green jobs’. The capability of this just transition from consumption subsidies has already been demonstrated in the Philippines, Indonesia, Ghana and Morocco, according to the GSI: each of these countries introduced cash transfers and social support, such as education funds and health insurance for poor families, to compensate for the removal of subsidies.
“[Subsidy reform] requires support for vulnerable consumers who will be impacted by rising costs, as well for workers in industries which simply have to shut down. It also requires information campaigns, showing how the savings will be redistributed to society in the form of healthcare, education and other social services.”
(Ipek Gençsü, Overseas Development Institute)
Overall, much more needs to be done: “In the next few years, all governments need to eliminate fossil fuel subsidies,” the International Energy Agency (IEA) says in a 2021 report. Not only would this allow a significant drop in carbon emissions and save millions of lives, but we can channel this money and energy towards initiatives which will help develop renewable energy, and focus on building resilient communities, ones not dependent on fossil fuels, or the “insanity” of fossil fuel subsidies.
Resources and References
Why fossil fuel subsidies are so hard to kill (Nature 2021)
Fossil fuel industry gets subsidies of $11m a minute, IMF finds (Guardian 2021)
Still Not Getting Energy Prices Right: A Global and Country Update of Fossil Fuel Subsidies (IMF 2021)
Doubling Back and Doubling Down: G20 Scorecard on Fossil Fuel Funding (IISD 2020)
Abolishing Fuel Subsidies in a Green and Just Transition (Allianz 2021)
Emissions Gap Report 2018 (UN 2018)
Net Zero by 2050: A Roadmap for the Global Energy Sector (IEA 2021)
COP26 talks spill over into extra time amid disagreement over wording on fossil fuels (Sky News 2021)
John Kerry says fossil fuel subsidies are the ‘definition of insanity.’ (New York Times 2021)
COP26: How much is spent supporting fossil fuels and green energy? (BBC News 2021)
