The G20 to phase-out fossil-fuel subsidies - a breakthrough

Guest Contributor: Dr. David Runnalls, President of IISD

Summits of world leaders produce multiple photo opportunities, snarled traffic, and endless fodder for pundits. They also, on occasion, yield pathbreaking initiatives. A case in point is the recent announcement by the leaders of the Group of Twenty (G20), meeting on 24-25 September 2009 in Pittsburgh, Pennsylvania, to:

rationalize and phase out over the medium term inefficient fossil-fuel subsidies that encourage wasteful consumption.

Getting nations at such different levels of development to agree to phasing out such subsidies is itself a major accomplishment. Having obtained consensus, now comes the challenge of implementation. Bringing the project to fruition will require a strategic vision, careful planning and deployment of scarce research and political resources, as well as a long-term commitment and political will.

Explaining the vision behind the G20 Leaders’ initiative is the first order of business. Analysts have been pointing out for two decades what the G20 statement emphasizes—that fossil-fuel subsidies encourage wasteful consumption, distort markets, impede investment in clean energy sources and fundamentally undermine efforts to deal with climate change. In their communiqué, the G20 leaders refer to a recent study by the the Organisation for Economic Co-operation and Development (OECD) and the International Energy Agency (IEA), which found that eliminating certain fossil-fuel subsidies by 2020 would reduce global greenhouse-gas emissions in 2050 by ten percent.

“Many countries are reducing fossil-fuel subsidies while preventing adverse impact[s] on the poorest,” the OECD and the IEA add. Clearly, the G20 statement refers to consumption subsidies, provided through regulated or subsidized prices, common in many developing and transition countries. But, to focus only on consumption subsidies in developing countries and countries in transition would, in my opinion, doom the initiative from the outset. To be seen as fair and equitable, all G20 countries need to show that they are serious about phasing out subsidies to fossil fuels, whether those subsidies are provided through artificially reduced prices or, as is more common in OECD countries, through subsidies for consuming activities, or to fossil-fuel production. This is especially important given that the G20 leaders have called “on all nations to adopt policies that will phase out such subsidies worldwide.”

The G20 Leaders communiqué states that their Energy and Finance Ministers are to develop implementation strategies and timeframes and report back at the next Summit to be held in Huntsville, Canada, in June 2010. G20 leaders have also asked international financial institutions, the IEA, OPEC, OECD, and World Bank to offer support in this process. It is crucial that we all work from a common set of definitions and estimation methods, or the results will be hard to compare, and possibly contentious. Setting a methodology in place is part of my organisation’s contribution to this effort. In designing its program of work on fossil-fuel subsidies, which includes individual country studies, the Global Subsidies Initiative (GSI) anticipated this problem, and is already developing guidelines for researchers on how to measure the multitude of subsidies that are provided to fossil fuels around the world.

Globally, subsidies to fossil fuels may be of the order of half a trillion dollars a year, depending on the year, of which about $100 billion in subsidies to producers. Nobody knows the real number, however, because there is still no international framework for monitoring fossil-fuel subsidies. It is essential that the world establish one. But this would only be the first step. The bigger challenge will be the political one, notably at the domestic level. As explained by Stanford University Professor David Victor in a study commissioned by the GSI, the political logic that keeps subsidies to fossil fuels in place differs according to circumstance: whereas producer subsidies’ main effect is to boost local production, consumer subsidies are broad-based and popular, making them hard to reform without provoking violent protests. Yet, despite the political hurdles, raising consumer prices where they are below the world market price is plainly critical to moderating use, and phasing out special tax breaks and other forms of support for the production of fossil fuels is fundamental for any country claiming to have a coherent set of policies to address climate change.

Although overcoming entrenched interests will be difficult, we can simply not afford not to try. Political leaders worldwide need to show G20-style leadership, act in concert, and find innovative ways to help those poorer members of society adversely affected by price changes. Such reforms have already been attempted unilaterally by a number of countries – some successfully, others less. But clearly we can learn from these experiences to ensure that this new reform process stays on the rails.

The Global Subsidies Initiative (GSI) of the International Institute for Sustainable Development (IISD), already one year into a major project supporting research, communication and political outreach activities relating to fossil-fuel-subsidies reforms, endorses this initiative and looks forward to working with the G20 and the institutions that it calls upon to carry out the hard work ahead.

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.