Is it time to stop fossil fuel subsidies?

If we are serious about reducing the use of fossil fuels, why would we make them artificially cheaper? But, that is what we are doing through inefficient fossil fuel subsidies. Many industrialized countries, for example, still support their coal mining industries to the tune of several billion euros a year while developing countries often spend considerable resources to keep domestic fuel prices below world prices. Eliminating such measures and inefficient fossil fuel subsidies more generally would help reduce fiscal imbalances, increase real incomes, and reduce greenhouse gas emissions and the overall cost of climate change mitigation. It would thus eliminate a key barrier to the faster deployment of clean energy. A portion of the funds saved from ending such subsidies could also be redirected to support access to energy by all and other policy priorities.

Almost four years ago, G20 leaders committed in Pittsburgh “to rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption”. Progress since then has, however, been slow. OECD and IEA estimates suggest that at least US$ 500 billion is spent annually supporting fossil fuel production and consumption worldwide. In the context of the current crisis, countries can no longer afford this inefficient use of scarce public resources.

We, together with 26 other leaders from industry, finance, development banks, academia and international organizations, have been part of a B20 Task Force on Green Growth that submitted this year five recommendations to G20 leaders who will gather for their Summit in Mexico next week. One key recommendation is that they should end subsidies and other inefficient forms of support for fossil fuel exploration, production and consumption within the next four years.

Of course, we recognize that phasing out existing subsidies is not easy. While these subsidies primarily benefit upper- and middle-class families, their removal may still have adverse effects on poorer households.  Steps must be taken to address these impacts; countries should use some of the resources saved from phasing out fossil fuel subsidies to support the poor. This could be through the provision of access to energy and the funding of other public priorities such as public transport.

What’s the bottom line? If governments are serious about reducing carbon emissions, strengthening fiscal stability and accelerating deployment of clean energy technologies, a good place to start would be eliminating the subsidies and other inefficient forms of support that encourage wasteful production and consumption. A first key step is full disclosure – who benefits from the subsidies and by how much?  That’s why the B20 Green Growth Task Force urges G20 leaders to annually disclose the full measure of support for fossil fuel exploration, production and consumption, as well as support for other technologies.

The Task Force also urges G20 leaders to develop national transition plans to phase out these subsidies and to annually disclose steps taken to achieve these goals. Another good idea from the Task Force is to redirect a portion of these fossil fuel subsidies to ensure access to energy for the poorest and other public priorities, including green infrastructure investments.

Author: Ditlev Engel, CEO, Vestas Wind Systems and Simon Upton, Director Environment, Organisation for Economic Co-operation and Development (OECD)

Pictured: Blades for wind-turbines can be seen in the grounds of the Vestas Wind Technology company’s factory, located in the northern Chinese city of Tianjin. The factory, one of five that the Danish company has in Tianjin, produces more than 1,000 wind-turbines per year. REUTERS/David Gray