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MEA Bulletin - Guest Article No. 86 - Thursday, 18 February 2010
Building Fossil-Fuel Subsidy Reform: Have we got all the blocks?
By Kerryn Lang, IISD’s Global Subsidies Initiative
In the absence of a multilaterally-agreed outcome from Copenhagen, coordinated national efforts to eliminate subsidies to fossil fuels may provide an opportunity to significantly reduce global greenhouse gas emissions. It is increasingly recognized that taxing carbon with one hand while with other continuing to subsidize the production and consumption of fossil fuels makes no sense. A recent Organisation for Economic Co-operation and Development (OECD) study found that removing consumer subsidies to energy in 20 non-OECD countries would reduce global greenhouse gas emissions by 10 per cent in 2050.1 The impact could be much higher if subsidies in OECD countries, and subsidies provided for the production of fossil fuels, were to be included.

The Group of Twenty largest industrialized and emerging nations (G-20) are leading efforts to reform energy subsidies as part of their Energy Security and Climate Change agenda. Last September, G-20 Leaders announced a commitment to rationalize and phase out inefficient fossil fuel subsidies that encourage wasteful consumption, and called on other nations to follow suit. 

Picking up the G-20’s call for action, APEC Leaders similarly announced, in November 2009, a commitment to phase out subsidies to fossil fuels that encourage wasteful consumption.

Having garnered the necessary political support for fossil-fuel subsidy reform, the challenge now lies in turning the announcements into coherent action. The International Energy Agency (IEA), OECD, Organization of Petroleum-Exporting Countries (OPEC), and the World Bank are working with others such as the Global Subsidies Initiative (GSI) to provide support to G-20 governments in preparing their implementation plans and timeframes.

The GSI’s policy brief Building Fossil-Fuel Subsidy Reform: Have we got all the blocks? presents an overview of the status of the six blocks needed to undertake reform of fossil-fuel subsidies at a global scale, with reference to the GSI’s research in this area:

Mapping the Characteristics: Consumer subsidies are relatively easy to identify, but lack of information on producer subsidies is an impediment to reform. Research is underway to investigate the types of producer subsidies that are prevalent across a range of countries such as the United States, China, Germany and Indonesia. In order to produce comprehensive and internationally comparable data, an agreed-upon methodology for defining and calculating subsidies is needed.

Assessing the Impacts: In the last 20 years, six studies have attempted to analyze the global impacts of subsidy reform for all fuels. Most considered effects on greenhouse-gas emissions and gross domestic product (GDP) but very little of the work considered other environmental or social impacts.

Understanding the Politics: Subsidies exist, not simply due to demand for them, but because the supply mechanisms require little administrative capability and policymakers the world over find them politically difficult to resist.

Developing Reform Strategies: There is no set formula or model for developing national strategies for subsidy reform, although experience provides important guidance for other policy-makers.

Improving Transparency: In the absence of an effective international framework, including a widely-agreed definition of ‘subsidy’, data collection and reporting on fossil-fuels subsidies remains fragmented, incomplete and inconsistent.

International Agreement: An international agreement on energy subsidies could provide the basis for establishing the necessary reporting and monitoring framework for fossil-fuel subsidies and bind governments into subsidy-reduction commitments. Alternatives including the WTO and the UN Framework Convention on Climate Change are explored.

For more information on the Global Subsidies Initiative, visit http://www.globalsubsidies.org/en
1 Burniaux et al., The Economics of Climate Change Mitigation: How to Build the Necessary Global Action in a Cost-Effective Manner, OECD, 2009.
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