Why we need to abolish fossil fuel subsidies

Five years ago, the G-20 pledged to phase out “inefficient fossil fuel subsidies” as part of a wider strategy for combating climate change. Yet the subsidies have continued to grow. Globally, some $600 billion is spent to support carbon-intensive energy, compared to just $90 billion for clean energy.

That makes no sense. Fossil-fuel subsidies encourage investors to put resources into the fuels that are driving climate change. They generate the terrible local pollution that blights cities in China and India. And most of the benefits of the subsidies are captured by the middle class, not the poor.

Subsidies directed toward discovering and exploiting new fossil-fuel reserves are among the most wasteful – and the most damaging. Along with the rest of the international community, G-20 governments are committed to the target of limiting global warming to less than 2ºC above the planet’s pre-industrial level. According to the International Energy Agency, no more than one-third of known reserves can be exploited if this goal is to be achieved.

So why throw public finance at discovering more unburnable carbon? That is a question that G-20 taxpayers might want to ask their political leaders.

The Overseas Development Institute and Oil Change International have provided the first financial audit of subsidies allocated specifically to the discovery of new fossil-fuel reserves by G-20 countries. Their report, published this week, identifies around $88 billion in public financial support provided through an assortment of tax breaks, spending by state-owned enterprises, and transfers mediated through financial institutions such as the World Bank.

Every G-20 country is participating in the exploration subsidy fest. The host government for the Brisbane summit spends some $3 billion annually. The US has doubled funding for fossil-fuel exploration – to more than $5 billion – since 2009. Britain provides around $1.2 billion, principally in the form of tax breaks for North Sea oil exploration, generating windfall transfers for companies like Total and Chevron.

State-owned energy companies in Brazil, China, and India are at the forefront of high-carbon exploration. Russia’s Gazprom gets tax breaks to support investment in ecologically fragile Arctic areas.

Subsidies for fossil-fuel exploration are where the politics of the greenhouse meets the economics of the madhouse. Consider, first, the climate-change effects. If current fossil-fuel reserves are exploited, we will be faced with potentially catastrophic global warming of 4ºC over the course of the twenty-first century. Governments are using public money to discover new reserves that, if exploited, will drive the world to climate disaster even faster.

The economic case for exploration subsidies is weak and getting weaker. Public money is being used to boost private profit and bail out a failing industry. Taken collectively, G-20 governments are spending twice as much on exploration as the 20 largest private energy companies. In other words, they are putting taxpayer money where commercial companies fear to tread. With prices for oil, coal, and gas declining, and the cost of new discoveries rising, much fossil-fuel exploration is commercially unviable.

The wider damage associated with fossil-fuel subsidies is insufficiently recognized. If we are to keep within the 2ºC threshold, governments should be putting a high and escalating price on carbon, linked to emission-reduction targets. As the Global Commission on Economy and Climate has shown, plummeting renewable-energy costs have created new opportunities to avoid dangerous climate change without sacrificing economic growth.

Indeed, several major pension funds and institutional investors are now divesting from fossil-fuel companies. But the absence of credible carbon price signals, along with the perverse incentives created by fossil-fuel subsidies, continues to hold back the investments and technologies needed to drive a low-carbon transition.

Nowhere is this more evident than in the European Union. Political leaders have set the ambitious target of achieving a 40% cut in CO2 emissions by 2030. Yet prices set by the EU’s emissions trading scheme, the largest in the world, are languishing at around $7 a ton – and (subsidized) coal is making a comeback. Surely it is time for EU leaders to align climate targets with carbon prices – and to cut the carbon subsidies.

It is easy to be cynical about the G-20 Brisbane Summit. The host government has been actively rolling back legislation aimed at addressing climate change. Indeed, the Australian authorities have tried to keep the issue off the agenda altogether. Moreover, the G-20 itself is short on credibility; what was once considered a workshop for a new system of global economic governance is now widely regarded as an increasingly irrelevant talk shop.

Yet when it comes to climate change, cynicism is a luxury that we cannot afford. Decisive action by the G-20 would help to galvanize international cooperation ahead of the key negotiations leading to next year’s United Nations climate summit in Paris. Redeeming the pledge to phase out fossil-fuel subsidies would also help to restore the reputation of the G-20 itself. An agreement to eliminate financial support for exploration would be a significant step in the right direction – and it would save taxpayers money, too.

Published in collaboration with Project Syndicate

Author: Kevin Watkins is Executive Director of the Overseas Development Institute (ODI), a leading UK think tank on international development and humanitarian issues.

Image: The sun is seen behind smoke billowing from a chimney of a heating plant in Taiyuan, Shanxi province December 9, 2013. REUTERS.