Careful phasing-out of fossil fuel subsidies can be a low-cost way to meet part of the targets announced following the U.N. climate conference in Copenhagen. According to new OECD analysis based on data from the International Energy Agency (IEA), ending fossil fuel subsidies could cut global greenhouse gas emissions by 10% from the levels they would otherwise reach in 2050 under “business as usual.
This would make economic sense as governments strive to cut budget deficits in the wake of the financial and economic crisis. That is why G20 leaders agreed when they met in Pittsburgh in September 2009 to “rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption” and requested the OECD, along with the IEA, OPEC, and the World Bank, to prepare a joint report for the G20 Summit later this month in Toronto.
“Many governments are giving subsidies to fossil fuel production and consumption that encourage greenhouse gas emissions, at the same time as they are spending on projects to promote clean energy,” said Angel Gurría, OECD Secretary-General. “This is a wasteful use of scarce budget resources.”
The IEA has estimated that subsidies to fossil fuel consumption in emerging and developing countries amounted to USD 557 billion in 2008. Some estimates suggest that fossil-fuel producer subsidies could amount to as much as USD 100 billion per year. However, estimates in developed countries are harder to obtain because they are often transferred in indirect ways, which makes them no less important. The OECD is working to fill these data gaps, and also to develop an accounting framework and agreed methods for estimating different support elements.
Preferential tax treatment for oil and gas production, special loan guarantees and tax exemptions for fuel use in some sectors or to some consumer groups are some of the ways in which governments subsidise fossil fuels. New OECD analysis on these subsidies will be reflected in a Joint Report prepared by the IEA, OPEC, the OECD and the World Bank for the G20 Summit later this month in Toronto.
Tax exemptions for diesel fuel use in mining, agriculture and fisheries are common in many countries. In OECD countries alone the value of these tax preferences amount to approximately USD 8 billion each year for farmers and a further USD 1.1 billion each year for the fishing industry.
Many subsidies to fossil fuels are also inefficient in achieving their intended objectives of supporting the poor in countries without adequate social security systems. They typically benefit richer rather than poorer households, as poor people, for example, often cannot afford cars. Better targeting these subsidies to those who most need them can improve welfare of the poor and benefit the environment at a lower budgetary cost.
Reforming fossil fuel subsidies is politically challenging, but some key lessons can be drawn from experiences in countries like Poland, France and the UK, which have successfully reformed their subsidies for coal production, or Indonesia which is reforming its subsidies for fossil fuel consumption.
Key elements in successful reform include: announcing subsidy phase-out plans early; phasing them in gradually; ensuring transparency and raised awareness by publicly circulating information on who pays and who benefits from reform; and accompanying reforms with measures to limit negative impacts on poorer households.
For comment and further information, journalists are invited to contact:
• On tax expenditures, Jens Lundsgaard (Tel.: +(33-6) 10 11 21 30, e-mail: Jens.Lundsgaard@oecd.org)
• On OECD work on fossil fuel subsidies in general, Ron Steenblik (Tel.: +(33-1) 45 24 95 29, e-mail: Ronald.Steenblik@oecd.org) or Helen Mountford (Tel.: +(33-1) 45 24 79 13, e-mail: Helen.Mountford@oecd.org).
For more information on fossil fuels see www.oecd.org/g20/fossilfuelsubsidies.