At the G20 meeting in Pittsburgh in 2009, the United States surprised everyone by calling for the elimination of subsidies to the fossil fuel industry. The Global Subsidies Initiative of the International Institute for Sustainable Development and the International Energy Agency (often thought of as friendly to the oil and gas industry) estimated the value of these subsidies at roughly US$500 billion per year, depending upon the price of oil. Many of these subsidies are in developing countries where they can take up a large proportion of the national budget. At one point, Indonesia was spending more on subsidizing energy than it was on health and education combined. The G20 members committed to phasing out these subsidies.

Following Pittsburgh, there was a flurry of activity as many countries tried to at least measure the extent of their subsidies, and hopes were high for the Toronto G20 Summit the next year. And, for a time, it looked as if Canada might even take the lead. Michael Horgan, the Deputy Minister of Finance recommended to Minister Jim Flaherty that Canada should announce the phase out of its subsidies as an expression of support. That note was mysteriously leaked to the press and the idea was promptly dropped. The G20 communiqué contained some pablum-like language about subsidies and simply urged further action.

The Cannes summit in 2012 urged governments to set up some peer review mechanisms at the national level to assess subsidies to the fossil fuel industry. There is little indication that anything at all will happen at the St. Petersburg summit.

While the governments dithered in the face of determined opposition, the International Monetary Fund (IMF) took up the challenge. IMF Managing Director Christine Lagarde described climate change as “the greatest economic challenge of the twenty-first century” in her annual appearance at the World Economic Forum. She went on to say that “Unless we take action on climate change, future generations will be roasted, toasted, fried and grilled.”[1]

The IMF put its formidable analytical capacity behind a report on subsidies to the energy industry. Released earlier this year, the report, Energy Subsidy Reform: Lessons and Implications, puts the cost of energy subsidies at an astonishing US$1.9 trillion per year.[2] This total was reached by adding the familiar producer and consumer subsidies previously cited by the G20 and the International Energy Agency (IEA), and then by estimating the costs of climate change caused by burning fossil fuels. In order to arrive at this estimate, the IMF used a cost of US$25 per ton developed by a prestigious committee of American economists convened by the US government (they have since raised their number to US$35 per tone, which many think is still too low).

The IMF pointed out that the elimination of these subsidies could reduce greenhouse gases by up to 13 percent and dramatically increase energy efficiency, contributing to economic growth. The IMF also demonstrated conclusively that these subsidies do not greatly benefit the poor, as the defenders of developing country subsidies usually do. The IMF point out that the poor receive, on average, 20 percent of the subsidies, whose beneficiaries are largely the middle class and the well to do, who are also the eventual beneficiaries of many other subsidies. The report highlights a number of cases where subsidies have been successfully reduced and replaced with various kinds of cash and other transfers to the poor.

One of the major failings of the climate debate and of climate negotiations is that they have been dominated by environmentalists and environment departments. UN discussions are still mainly conducted by diplomats and “envirocrats.” The economic heavy hitters are left to concern themselves with issues of growth, imbalances, financial stability and the like, while energy and climate issues are sent to the environmental sandbox.

But the scope of energy subsidies and the costs of the necessary transition to lower carbon economies (variously estimated at between one and 2.5 percent of global GDP) make climate change a top-drawer economic issue. Christine Lagarde understands that. The president of the World Bank, speaking after Lagarde in Davos, understands that. The IEA also understands. In a report issued earlier, the IEA’s director general pointed out how urgent the problem has become. The IEA calculates that US$1.5 trillion needs to be spent on elements of the transition to a low-carbon economy between 2013 and 2020. If we fail to make those expenditures, the costs of these measures rises to US$5 trillion to meet the Copenhagen goal of keeping the average increase in global temperatures to 2ºC.

These are serious numbers that deserve consideration by G20 leaders during their economic discussions, not in a subcommittee that talks about sustainable development or the environment. When will the G20 understand that the environment and the economy are now almost entirely integrated?

 

Endnotes:


[1] Reported on Thomson Reuters “Heard (and seen) around Davos,” blog, January 23, 2013, available at: http://blog.thomsonreuters.com/index.php/heard-and-seen-around-davos/.

[2] IMF (2013), Energy Subsidy Reform: Lessons and Implications, January 28, available at: www.imf.org/external/np/pp/eng/2013/012813.pdf.

One of the major failings of the climate debate and of climate negotiations is that they have been dominated by environmentalists and environment departments.