The International Institute for Sustainable Development’s Geneva-based Global Subsidies Initiative (GSI) has issued a five-part series of reports into how nations might remove fossil-fuel subsidies, on the eve of a meeting of G20 finance ministers in Washington this week.
GSI estimates subsidies to fossil fuels account for roughly US$500 billion per year, of which about US$100 billion is provided to producers. This figure includes subsidies to lower the prices of petroleum products, kerosene or liquefied petroleum gas (LPG), typically in developing countries, as well as subsidies to the oil, gas or coal industries, provided by many governments in both developing and developed countries.
GSI’s series—Untold Billions: Fossil-fuel subsidies, their impacts and the path to reform—provides research and analysis to support the commitment by the G20 and the Asia-Pacific Economic Cooperation (APEC) forum to phase out inefficient fossil-fuel subsidies.
This will be easier said than done. Subsidies are notoriously difficult to remove. The issue of fossil-fuel subsidies drives right to the heart of climate change and sustainable development and must be addressed urgently. The G20 should be commended for their early leadership but they can’t afford to let that leadership lag.
—David Runnalls, president of IISD
The five core research papers in Untold Billions are:
- Mapping the Characteristics of Producer Subsidies: A review of pilot country studies (Koplow, Lin, Jung & Thoene, forthcoming)
- The Effects of Fossil-Fuel Subsidy Reform: A review of modelling and empirical studies (Ellis, 2010)
- The Politics of Fossil-Fuel Subsidies (Victor, 2009)
- Strategies for Reforming Fossil-Fuel Subsidies: Practical lessons from three countries (Laan, Beaton & Presta, 2010)
- Gaining Traction: The importance of transparency in accelerating the reform of fossil-fuel subsidies (Laan, 2010)
Mapping the Characteristics of Producer Subsidies. This paper evaluates the state of information on fossil-fuel subsidies in a cross-section of countries that represent a range of governance systems, fossil-fuel markets and stages of economic growth. The investigation focuses on subsidies to producers of fossil fuels, which are often not well understood.
Pilot studies have been completed for China, Germany and the United States using a matrix that sets out the main subsidy types, the kinds of fuel they support and major national data sources about them. The report reviews these in order to lay the groundwork for characterizing the most important types of subsidies and key data sources, as well as summarizing data quality issues and important patterns or gaps in data availability.
The authors note that the US is an important test case for the idea that price-gap evaluations alone are not sufficient to capture the many ways that fossil energy is subsidized. Some data exist on most types of fossil fuel subsidies.
The full report will also cover Nigeria and Indonesia and will be released later in 2010. It will synthesize the main findings from the five country studies, discuss cross-cutting trends in terms of data availability for fossil-fuel subsidies, forecast some of the emerging issues that are likely to become more prominent over time, and include a set of policy recommendations to improve the availability of data and information going forward.
The Effects of Fossil-Fuel Subsidy Reform. This paper reviews the literature on fossil-fuel subsidy reform to establish what common conclusions can be drawn about its economic, environmental and social impacts and to identify where further research is needed. It focuses on six major multi-country, multi-fuel studies undertaken since the early 1990s, each of which has assessed the economic and environmental impacts of reform at a global level.
All six of the major studies found that reform would result in aggregate increases in GDP in both OECD (Organization for Economic Co-operation and Development) and non-OECD countries, although predictions of how large this increase would be varied significantly, from 0.1% in total by 2010 to 0.7% per year to 2050.
Those that broke down results into OECD and non-OECD blocks of countries predicted similar GDP increases for both groups (less than 1% difference), although in the most recent study, this aggregation masks some significant GDP or real-income declines in some non-OECD countries. These conclusions were generally supported by single-country modelled and empirical results.
All six of the major studies concluded that reform would lead to reductions in CO2 emissions, although predictions of the magnitude of reductions varied significantly, from 1.1% by 2010 to 18% by 2050. Because all six studies estimated the current scale of fossil-fuel subsidies using a method that produces a conservative estimate—the “price-gap approach”—all are likely to have under-predicted the true scale of achievable reductions.
The six major studies concluded very little from a social-impact perspective, although they generally suggested on a qualitative basis that the impact of reform on the poorest would likely be neutral or positive. A considerable body of work advanced by the World Bank and others, however, generally concludes that fossil-fuel subsidy reform would be associated with negative social impacts, but that these impacts could potentially be offset by re-targeting some of the saved subsidy expenditure toward social programs.
The review concludes that further research could also be conducted on producer subsidies, demand and supply elasticities for fossil fuels and methods for more effectively incorporating social-impact analysis and environmental policies into general-equilibrium models. Consistent definitions of key variables and standards for reporting results could also make it easier to compare different studies on reform.
Despite the fact that further research can and should be undertaken, the analysis strongly supports the conclusion that there are significant environmental and economic benefits that would result from the reform of fossil-fuel subsidies and that it should be considered a key element of a larger overall package for global climate change mitigation.
The Politics of Fossil-Fuel Subsidies. This paper argues that the failure to fully reform subsidies lies in a failure to appreciate the politics behind such policies. Channelling resources to interest groups can be a tool to promote government survival, such as by influencing voting decisions or donations to political campaigns. Once subsidies have been created, the groups who benefit are usually well organized and poised to block reform.
The study suggests four lessons for reformers:
- Reform must begin with an appreciation of the political logic that led to the subsidy’s creation.
- An effective political strategy for subsidy reform usually benefits from transparency in the cost and purpose of the subsidy.
- Better subsidy design can usually help reduce any negative effects and also ease the task of reform in the future.
- Subsidy reformers can have more success when governments have better administrative tools in their arsenals.
Strategies for Reforming Fossil-Fuel Subsidies. This paper analyzes the experiences of countries that have undertaken reform of their fossil-fuel subsidies and establishes what lessons can be learned. It focuses in particular on France, Ghana and Senegal, as well as drawing from case studies of other countries and previous work that examines the reform of energy subsidies and price subsidies.The paper finds that, once in place, fossil-fuel subsidies are extremely difficult to remove. There is no single formula for success, and country circumstances and changing global conditions must be taken into account; however, strategies can be identified that contribute to successful reform and respond to individual country circumstances. There are six important strategies that appear to improve the chances of lasting change:
- Establishment of reform objectives and parameters;
- Construction of a coherent reform policy;
- Monitoring, evaluation and adjustment; and
- Forward movement.
Gaining Traction. This paper addresses the role that increased transparency could play in fossil-fuel subsidy reform and specifically asks what information is needed to support the G20 and APEC calls for reform and what mechanisms can ensure that transparency is produced in an accurate and timely manner.
The paper concludes that improving transparency requires a two-track approach: better reporting within countries and a new international regime.